[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Rules and Regulations]
[Pages 79768-80080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-31715]
[[Page 79767]]
Vol. 76
Thursday,
No. 246
December 22, 2011
Part II
Bureau of Consumer Financial Protection
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12 CFR Part 1026
Truth in Lending (Regulation Z); Interim Final Rule
Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 /
Rules and Regulations
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2011-0031]
RIN 3170-AA06
Truth in Lending (Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Interim final rule with request for public comment.
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SUMMARY: Title X of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) transferred rulemaking authority for a
number of consumer financial protection laws from seven Federal
agencies to the Bureau of Consumer Financial Protection (Bureau) as of
July 21, 2011. The Bureau is in the process of republishing the
regulations implementing those laws with technical and conforming
changes to reflect the transfer of authority and certain other changes
made by the Dodd-Frank Act. In light of the transfer of the Board of
Governors of the Federal Reserve System's (Board's) rulemaking
authority for the Truth in Lending Act (TILA) to the Bureau, the Bureau
is publishing for public comment an interim final rule establishing a
new Regulation Z (Truth in Lending). This interim final rule does not
impose any new substantive obligations on persons subject to the
existing Regulation Z, previously published by the Board.
DATES: This interim final rule is effective December 30, 2011. Comments
must be received on or before February 21, 2012.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2011-
0031 or RIN 3170-AA06, by any of the following methods:
Electronic: http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Monica Jackson, Office of the Executive Secretary,
Bureau of Consumer Financial Protection, 1500 Pennsylvania Avenue NW.,
(Attn: 1801 L Street), Washington, DC 20220.
Hand Delivery/Courier in Lieu of Mail: Monica Jackson,
Office of the Executive Secretary, Bureau of Consumer Financial
Protection, 1700 G Street NW., Washington, DC 20006.
All submissions must include the agency name and docket number or
Regulatory Information Number (RIN) for this rulemaking. In general,
all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public
inspection and copying at 1700 G Street NW., Washington, DC 20006, on
official business days between the hours of 10 a.m. and 5 p.m. Eastern
Time. You can make an appointment to inspect the documents by
telephoning (202) 435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
You should not include sensitive personal information, such as account
numbers or social security numbers. The Bureau will not edit comments
to remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Catherine Henderson or Paul Mondor,
Office of Regulations, at (202) 435-7700.
SUPPLEMENTARY INFORMATION:
I. Background
Congress enacted the Truth in Lending Act (TILA) based on findings
that the informed use of credit resulting from consumers' awareness of
the cost of credit would enhance economic stability and would
strengthen competition among consumer credit providers. One of the
purposes of TILA is to provide meaningful disclosure of credit terms to
enable consumers to compare credit terms available in the marketplace
more readily and avoid the uninformed use of credit. TILA's disclosures
differ depending on whether credit is an open-end (revolving) plan or a
closed-end (installment) loan. TILA also contains procedural and
substantive protections for consumers.
Historically, Regulation Z of the Board of Governors of the Federal
Reserve System (Board), 12 CFR part 226, has implemented TILA. The
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) \1\ amended a number of consumer financial protection laws,
including TILA. In addition to various substantive amendments, the
Dodd-Frank Act transferred rulemaking authority for TILA to the Bureau
of Consumer Financial Protection (Bureau), effective July 21, 2011.\2\
See sections 1061 and 1100A of the Dodd-Frank Act. Pursuant to the
Dodd-Frank Act and TILA, as amended, the Bureau is publishing for
public comment an interim final rule establishing a new Regulation Z
(Truth in Lending), 12 CFR Part 1026, implementing TILA (except with
respect to persons excluded from the Bureau's rulemaking authority by
section 1029 of the Dodd-Frank Act).
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ Section 1029 of the Dodd-Frank Act excludes from this
transfer of authority, subject to certain exceptions, any rulemaking
authority over a motor vehicle dealer that is predominantly engaged
in the sale and servicing of motor vehicles, the leasing and
servicing of motor vehicles, or both.
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II. Summary of the Interim Final Rule
A. General
The interim final rule substantially duplicates the Board's
Regulation Z as the Bureau's new Regulation Z, 12 CFR part 1026, making
only certain non-substantive, technical, formatting, and stylistic
changes. To minimize any potential confusion, the Bureau is preserving
the numbering system of the Board's Regulation Z, other than the new
part number. While this interim final rule generally incorporates the
Board's existing regulatory text, appendices (including model forms and
clauses), and supplements, the rule has been edited as necessary to
reflect nomenclature and other technical amendments required by the
Dodd-Frank Act. Notably, this interim final rule does not impose any
new substantive obligations on regulated entities.
B. Specific Changes
References to the Board and its administrative structure have been
replaced with references to the Bureau. In particular, certain model
and sample forms in Appendix G (Open-End Model Forms and Clauses) have
been revised to change references to the Board (and its Web site) to
the Bureau (and its Web site). The revised forms are the Applications
and Solicitations model and samples for credit cards, G-10(A) through
G-10(C), and the Account-Opening model and samples for credit cards, G-
17(A) through G-17(C). Similarly, references to other agencies that no
longer exist (e.g., the Office of Thrift Supervision and the Federal
Home Loan Bank Board) have been updated as appropriate.
Conforming edits have been made to internal cross-references and
addresses for filing applications and notices. Certain comments
reflecting the Board's past state law preemption and exemption
determinations have been amended to clarify that these determinations
continue in effect pending Bureau action to the contrary. Appendix I,
entitled ``Federal Enforcement Agencies,'' is being removed and
reserved because it was designed to be informational only and is
unnecessary for purposes of implementing the TILA, as amended.
Conforming edits have also been made to reflect the scope of the
Bureau's authority pursuant to TILA, as amended by the Dodd-Frank Act.
Historical references that are no longer applicable,
[[Page 79769]]
and references to effective dates that have passed, have been removed
as appropriate.
In addition, certain changes have been made to the text of the
Board's Regulation Z to conform to current codification standards of
the Code of Federal Regulations. For example, previously undesignated
paragraphs in the regulation and the official commentary have been
enumerated, and footnotes have been eliminated and their substance
moved to the body of the regulation as appropriate. Other provisions
have been redesignated as necessary to accommodate these changes.
Most significantly, the Board's Sec. Sec. 226.5a and 226.5b have
been renumbered as Sec. Sec. 1026.60 and 1026.40, respectively. These
two sections, as numbered in the Board's existing Regulation Z, do not
meet the current requirements for section numbering for publication in
the Code of Federal Regulations. See 1 CFR 21.11(g). Because existing
Sec. 226.5a relates to credit card disclosures, the Bureau is
codifying it as Sec. 1026.60 so that it will appear in subpart G,
Special Rules Applicable to Credit Card Accounts and Open-End Credit
Offered to College Students. Because existing Sec. 226.5b relates to
home-equity plans, the Bureau is codifying it as Sec. 1026.40 so that
it will appear in subpart E, Special Rules for Certain Home Mortgage
Transactions. All existing cross-references to these two sections are
changed accordingly throughout the Bureau's new Regulation Z.
In addition, existing Sec. Sec. 226.5a(b)(15) and 226.6(b)(2)(xiv)
require card issuers to include in their applications and solicitations
disclosures and their account opening disclosures, respectively, a
reference to the Web site established by the Board and a statement that
consumers may obtain on the Web site information about shopping for and
using credit cards. This interim final rule revises those provisions to
require a reference to the Bureau in Sec. Sec. 1026.60(b)(15) and
1026.6(b)(2)(xiv). As noted above, the affected model forms in Appendix
G are revised accordingly. The Bureau recognizes that this change to
the disclosure requirements will require card issuers that maintain
standardized disclosure forms in their systems to make modifications to
those systems. To afford adequate time to make such modifications, the
Bureau is also adding to Sec. Sec. 1026.60(b)(15) and
1026.6(b)(2)(xiv) a provision that, until January 1, 2013, issuers may
substitute for the required reference a reference to the Web site
established by the Board of Governors of the Federal Reserve System.
Similarly, the Bureau is adding to comment app. G-5 a new paragraph
viii to clarify that, until January 1, 2013, issuers using model forms
G-10(A) and G-17(A) may substitute references to the Board and its Web
site for the references to the Bureau and its Web site contained in
those models. This provision preserves the safe harbor for card issuers
using the old version of these models until they have modified their
systems as necessary, provided they do so by January 1, 2013.
Finally, the Bureau is correcting two typographical errors in the
Board's existing Regulation Z in conjunction with its republication as
the Bureau's Regulation Z. Following is a discussion of each
correction, in order by section of the regulation.
Section 1026.36 Prohibited Acts or Practices in Connection With Credit
Secured by a Dwelling
36(a) Loan Originator and Mortgage Broker Defined
The Board's existing comment 36(a)-4 contains a typographical error
that inadvertently misstates the test for whether a person is a loan
originator subject to the rules governing compensation paid to loan
originators. Under existing Sec. 226.36(a)(1), a loan originator is
defined as a person who, for compensation or other monetary gain, or in
expectation of compensation or other monetary gain, arranges,
negotiates, or otherwise obtains an extension of consumer credit for
another person. Thus, the test essentially has two components, both of
which must be present for a person to be a loan originator: (i)
compensation or monetary gain; and (ii) the arranging, negotiating, or
otherwise obtaining of consumer credit.
The comment discusses this test in the context of managers and
administrative staff, who generally are not loan originators under the
definition, but it frames the discussion in the negative. The comment
provides that such persons are not loan originators if they do not
arrange, negotiate, or otherwise obtain an extension of credit for a
consumer, and their compensation is not based on whether any particular
loan is originated. Thus, as written, the comment could be read to
require that, to be excluded from coverage as loan originators,
managers and administrative staff must both not arrange extensions of
consumer credit and not receive compensation that depends on a
particular loan being originated. Such a reading would be contrary to
the definition in the regulation, which covers a person only if both
components are present. For this reason, the Bureau's comment 36(a)-4
reads ``or'' where the Board's existing comment reads ``and,'' thus
ensuring that the comment is consistent with the regulatory provision.
Section 1026.46 Special Disclosure Requirements for Private Education
Loans
46(b) Definitions
46(b)(5) Private Education Loan
46(b)(5)(iii)
The Board's existing Sec. 226.46(b)(5)(iii) provides that the term
``private education loan'' does not include ``open-end credit any loan
that is secured by real property or a dwelling.'' As adopted by the
Board, this provision inadvertently omitted the word ``or'' between
``open-end credit'' and ``any loan that is secured by real property or
a dwelling.'' Thus, as written, the provision is unclear but could be
interpreted to exclude from ``private education loan'' only open-end
credit that is secured by real property or a dwelling, whereas it was
intended to exclude all open-end credit, regardless of whether secured,
and all loans that are secured by real property or a dwelling, whether
open- or closed-end. In the SUPPLEMENTARY INFORMATION to the final rule
that adopted Sec. 226.46(b)(5)(iii), the Board stated that the term
``private education loan'' was being adopted substantially as proposed
and noted that under the proposal ``[a] private education loan excluded
any credit otherwise made under an open-end credit plan. It also
excluded any closed-end loan secured by real property or a dwelling.''
74 FR 41194, 41203 (Aug. 14, 2009). To correct this error, the Bureau's
Sec. 1026.46(b)(5)(iii) inserts the word ``or'' in the appropriate
place.
III. Legal Authority
A. Rulemaking Authority
The Bureau is issuing this interim final rule pursuant to its
authority under TILA and the Dodd-Frank Act. Effective July 21, 2011,
section 1061 of the Dodd-Frank Act transferred to the Bureau the
``consumer financial protection functions'' previously vested in
certain other Federal agencies. The term ``consumer financial
protection function'' is defined to include ``all authority to
prescribe rules or issue orders or guidelines pursuant to any Federal
consumer financial law, including performing appropriate functions to
promulgate and review
[[Page 79770]]
such rules, orders, and guidelines.'' \3\ TILA is a Federal consumer
financial law.\4\ Accordingly, effective July 21, 2011, except with
respect to persons excluded from the Bureau's rulemaking authority by
section 1029 of the Dodd-Frank Act, the authority of the Board to issue
regulations pursuant to TILA transferred to the Bureau.\5\
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\3\ Public Law 111-203, section 1061(a)(1). Effective on the
designated transfer date, the Bureau is also granted ``all powers
and duties'' vested in each of the Federal agencies, relating to the
consumer financial protection functions, on the day before the
designated transfer date. Until this and other interim final rules
take effect, existing regulations for which rulemaking authority
transferred to the Bureau continue to govern persons covered by this
rule. See 76 FR 43569 (July 21, 2011).
\4\ Public Law 111-203, section 1002(14) (defining ``Federal
consumer financial law'' to include the ``enumerated consumer
laws''); id. Section 1002(12) (defining ``enumerated consumer laws''
to include TILA).
\5\ Section 1066 of the Dodd-Frank Act grants the Secretary of
the Treasury interim authority to perform certain functions of the
Bureau. Pursuant to that authority, Treasury is publishing this
interim final rule on behalf of the Bureau.
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The TILA, as amended, authorizes the Bureau to ``prescribe
regulations to carry out the purposes of [TILA].'' \6\ These
regulations may contain such classifications, differentiations, or
other provisions, and may provide for such adjustments and exceptions
for any class of transactions, that in the Bureau's judgment are
necessary or proper to effectuate the purpose of TILA, facilitate
compliance with TILA, or prevent circumvention or evasion of TILA.\7\
Numerous other provisions of TILA, as amended, also authorize the
Bureau to issue regulations, including model forms and changes.\8\ In
its existing regulation, the Board used this TILA authority to
establish extensive rules that promote the informed use of credit by
mandating disclosures and to regulate substantively certain credit
practices.\9\
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\6\ Public Law 111-203, section 1100A(2); 15 U.S.C. 1604(a).
\7\ Id.
\8\ See, generally, 15 U.S.C. 1601 et seq.
\9\ See the Board's Regulation Z, 12 CFR Part 226.
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B. Authority To Issue an Interim Final Rule Without Prior Notice and
Comment
The Administrative Procedure Act (APA) \10\ generally requires
public notice and an opportunity to comment before promulgation of
regulations.\11\ The APA provides exceptions to notice-and-comment
procedures, however, where an agency for good cause finds that such
procedures are impracticable, unnecessary, or contrary to the public
interest or when a rulemaking relates to agency organization,
procedure, and practice.\12\ The Bureau finds that there is good cause
to conclude that providing notice and opportunity for comment would be
unnecessary and contrary to the public interest under these
circumstances. In addition, substantially all the changes made by this
interim final rule, which were necessitated by the Dodd-Frank Act's
transfer of TILA authority from the Board to the Bureau, relate to
agency organization, procedure, and practice and are thus exempt from
the APA's notice-and-comment requirements.
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\10\ 5 U.S.C. 551 et seq.
\11\ 5 U.S.C. 553(b), (c).
\12\ 5 U.S.C. 553(b)(3)(A), (B).
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The Bureau's good cause findings are based on the following
considerations. As an initial matter, the Board's existing regulation
was a result of notice-and-comment rulemaking to the extent required.
Moreover, the interim final rule published today does not impose any
new, substantive obligations on regulated entities. Rather, the interim
final rule makes only non-substantive, technical changes to the
existing text of the regulation, such as renumbering, changing internal
cross-references, replacing appropriate nomenclature to reflect the
transfer of authority to the Bureau, and changing certain addresses.
Given the technical nature of these changes, and the fact that the
interim final rule does not impose any additional substantive
requirements on covered entities, an opportunity for prior public
comment is unnecessary. In addition, recodifying the Board's
regulations to reflect the transfer of authority to the Bureau will
help facilitate compliance with TILA and its implementing regulations,
and the new regulations will help reduce uncertainty regarding the
applicable regulatory framework. Using notice-and-comment procedures
would delay this process and thus be contrary to the public interest.
The APA generally requires that rules be published not less than 30
days before their effective dates. See 5 U.S.C. 553(d). As with the
notice and comment requirement, however, the APA allows an exception
when ``otherwise provided by the agency for good cause found and
published with the rule.'' 5 U.S.C. 553(d)(3). The Bureau finds that
there is good cause for providing less than 30 days notice here. A
delayed effective date would harm consumers and regulated entities by
needlessly perpetuating discrepancies between the amended statutory
text and the implementing regulation, thereby hindering compliance and
prolonging uncertainty regarding the applicable regulatory
framework.\13\
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\13\ This interim final rule is one of 14 companion rulemakings
that together restate and recodify the implementing regulations
under 14 existing consumer financial laws (part III.C, below, lists
the 14 laws involved). In the interest of proper coordination of
this overall regulatory framework, which includes numerous cross-
references among some of the regulations, the Bureau is establishing
the same effective date of December 30, 2011 for those rules
published on or before that date and making those published
thereafter (if any) effective immediately.
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In addition, delaying the effective date of the interim final rule
for 30 days would provide no practical benefit to regulated entities in
this context and in fact could operate to their detriment. As discussed
above, the interim final rule published today does not impose any new,
substantive obligations on regulated entities. Instead, the rule makes
only non-substantive, technical changes to the existing text of the
regulation. Thus, regulated entities that are already in compliance
with the existing rules will not need to modify business practices as a
result of this rule. To the extent that one-time modifications to forms
are required, the Bureau has provided an ample implementation period to
allow appropriate advance notice and facilitate compliance without
suspending the benefits of the interim final rule during the
intervening period.
C. Section 1022(b)(2) of the Dodd-Frank Act
In developing the interim final rule, the Bureau has conducted an
analysis of potential benefits, costs, and impacts.\14\ The Bureau
believes that the interim final rule will benefit consumers and covered
persons by updating and recodifying Regulation Z to reflect the
transfer of authority to the Bureau and certain other changes mandated
by the Dodd-Frank Act. This will help facilitate compliance with TILA
and its implementing regulations and help
[[Page 79771]]
reduce any uncertainty regarding the applicable regulatory framework.
Although the interim final rule will require certain creditors to
modify certain credit and charge card disclosures to reflect the
transfer of authority to the Bureau, as discussed below, the interim
final rule will not impose any new substantive obligations on consumers
or covered persons and is not expected to have any impact on consumers'
access to consumer financial products and services.
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\14\ Section 1022(b)(2)(A) of the Dodd-Frank Act addresses the
consideration of the potential benefits and costs of regulation to
consumers and covered persons, including the potential reduction of
access by consumers to consumer financial products or services; the
impact on depository institutions and credit unions with $10 billion
or less in total assets as described in section 1026 of the Dodd-
Frank Act; and the impact on consumers in rural areas. Section
1022(b)(2)(B) requires that the Bureau ``consult with the
appropriate prudential regulators or other Federal agencies prior to
proposing a rule and during the comment process regarding
consistency with prudential, market, or systemic objectives
administered by such agencies.'' The manner and extent to which
these provisions apply to interim final rules and to costs,
benefits, and impacts that are compelled by statutory changes rather
than discretionary Bureau action is unclear. Nevertheless, to inform
this rulemaking more fully, the Bureau performed the described
analyses and consultations.
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As discussed above in part II of this SUPPLEMENTARY INFORMATION,
consistent with the existing regulation, the Bureau's Sec. Sec.
1026.6(b)(2)(xiv) and 1026.60(b)(15) require creditors to include in
certain disclosures for credit and charge cards a reference to the
Bureau and its Web site. The Bureau's new Model Forms G-10(A) and G-
17(A) reflect that requirement. To afford creditors sufficient time to
modify their existing forms, Sec. Sec. 1026.6(b)(2)(xiv) and
1026.60(b)(15) provide that, until January 1, 2013, issuers may
substitute for the required Bureau reference the existing reference to
the Web site established by the Board of Governors of the Federal
Reserve System. Similarly, comment app. G-5.viii provides that, until
January 1, 2013, issuers using model forms G-10(A) and G-17(A) may use
existing references to the Board and its Web site instead of the
references to the Bureau and its Web site contained in those models.
Thus, by January 1, 2013, certain categories of creditors will need
to make one-time revisions to certain credit and charge card disclosure
forms. The Bureau estimates, assuming approximately four hours per
creditor for the systems updates, that the roughly 102,410 affected
creditors will incur costs of approximately $25,832,636. These costs
may be overstated to the extent that multiple firms use the same
software vendors, who are able to spread any costs over all of their
affected clients. These estimates may also be overstated because the
Bureau is giving creditors one year to effect the changes, thus
allowing creditors to include the changes in routine, scheduled systems
updates during the next year. These one-time changes to the affected
disclosures ultimately will provide ongoing benefits to consumers by
providing them with accurate information on where on the Internet to
look for helpful information on credit card accounts.
Although not required by the interim final rule, creditors may
incur some costs in updating compliance manuals and related materials
to reflect the new numbering and other technical changes reflected in
the new Regulation Z, including the renumbering of the Board's
Sec. Sec. 226.5a and 226.5b as new Sec. Sec. 1026.60 and 1026.40,
respectively. The Bureau has worked to reduce any such burden by
preserving the existing numbering to the extent possible, and believes
that such costs will likely be minimal. These changes could be handled
in the short term by providing a short, standalone summary alerting
users to the changes and in the long term could be combined with other
updates at the firm's convenience. The Bureau intends to continue
investigating the possible costs to affected firms of updating manuals
and related materials to reflect these changes and solicits comments on
this and other issues discussed in this section.
The interim final rule will have no unique impact on depository
institutions or credit unions with $10 billion or less in assets as
described in section 1026(a) of the Dodd-Frank Act. Also, the interim
final rule will have no unique impact on rural consumers.
In undertaking the process of recodifying Regulation Z, as well as
regulations implementing thirteen other existing consumer financial
laws,\15\ the Bureau consulted the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency, the
National Credit Union Administration, the Board of Governors of the
Federal Reserve System, the Federal Trade Commission, and the
Department of Housing and Urban Development, including with respect to
consistency with any prudential, market, or systemic objectives that
may be administered by such agencies.\16\ The Bureau also has consulted
with the Office of Management and Budget for technical assistance. The
Bureau expects to have further consultations with the appropriate
Federal agencies during the comment period.
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\15\ The fourteen laws implemented by this and its companion
rulemakings are: The Consumer Leasing Act, the Electronic Fund
Transfer Act (except with respect to section 920 of that Act), the
Equal Credit Opportunity Act, the Fair Credit Reporting Act (except
with respect to sections 615(e) and 628 of that act), the Fair Debt
Collection Practices Act, Subsections (b) through (f) of section 43
of the Federal Deposit Insurance Act, sections 502 through 509 of
the Gramm-Leach-Bliley Act (except for section 505 as it applies to
section 501(b)), the Home Mortgage Disclosure Act, the Real Estate
Settlement Procedures Act, the S.A.F.E. Mortgage Licensing Act, the
Truth in Lending Act, the Truth in Savings Act, section 626 of the
Omnibus Appropriations Act, 2009, and the Interstate Land Sales Full
Disclosure Act.
\16\ In light of the technical but voluminous nature of this
recodification project, the Bureau focused the consultation process
on a representative sample of the recodified regulations, while
making information on the other regulations available. The Bureau
expects to conduct differently its future consultations regarding
substantive rulemakings.
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IV. Request for Comment
Although notice and comment rulemaking procedures are not required,
the Bureau invites comments on this notice. Commenters are specifically
encouraged to identify any technical issues raised by the rule. The
Bureau is also seeking comment in response to a notice published at 76
FR 75825 (Dec. 5, 2011) concerning its efforts to identify priorities
for streamlining regulations that it has inherited from other Federal
agencies to address provisions that are outdated, unduly burdensome, or
unnecessary.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, requires each
agency to consider the potential impact of its regulations on small
entities, including small businesses, small governmental units, and
small not-for-profit organizations.\17\ The RFA generally requires an
agency to conduct an initial regulatory flexibility analysis (IRFA) and
a final regulatory flexibility analysis (FRFA) of any rule subject to
notice-and-comment rulemaking requirements, unless the agency certifies
that the rule will not have a significant economic impact on a
substantial number of small entities.\18\ The Bureau also is subject to
certain additional procedures under the RFA involving the convening of
a panel to consult with small business representatives prior to
proposing a rule for which an IRFA is required.\19\
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\17\ 5 U.S.C. 601 et seq.
\18\ 5 U.S.C. 603, 604.
\19\ 5 U.S.C. 609.
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The IRFA and FRFA requirements described above apply only where a
notice of proposed rulemaking is required,\20\ and the panel
requirement applies only when a rulemaking requires an IRFA.\21\ As
discussed above in part III, a notice of proposed rulemaking is not
required for this rulemaking.
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\20\ 5 U.S.C. 603(a), 604(a); 5 U.S.C. 553(b)(B).
\21\ 5 U.S.C. 609(b).
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In addition, as discussed above, this interim final rule has only a
minor impact on entities subject to Regulation Z. Accordingly, the
undersigned certifies that this interim final rule will not have a
significant economic impact on a substantial number of small entities.
The rule imposes no new, substantive obligations on covered entities
and will require only minor, one-time adjustments to certain model
[[Page 79772]]
forms, as discussed in part III above. Moreover, as noted, the per-firm
cost estimate discussed above may be overstated to the extent that
multiple firms use the same software vendors, who are able to spread
costs over all of their affected clients. Small entities, in
particular, are especially likely to rely on outside vendors for
disclosure compliance systems and therefore may have even less burden
in complying with the one-time changes required by this interim final
rule.
VI. Paperwork Reduction Act
The Bureau may not conduct or sponsor, and a respondent is not
required to respond to, an information collection unless it displays a
currently valid Office of Management and Budget (OMB) control number.
This rule contains information collection requirements under the
Paperwork Reduction Act (PRA), which have been previously approved by
OMB, and the ongoing PRA burden for which is unchanged by this rule.
There are no new information collection requirements in this interim
final rule. The Bureau's OMB control number for this information
collection is: 3170-0015.
List of Subjects in 12 CFR Part 1026
Advertising, Consumer protection, Credit, Credit unions, Mortgages,
National banks, Reporting and recordkeeping requirements, Savings
associations, Truth in lending.
Authority and Issuance
For the reasons set forth above, the Bureau of Consumer Financial
Protection adds Part 1026 to Chapter X in Title 12 of the Code of
Federal Regulations to read as follows:
PART 1026--TRUTH IN LENDING (REGULATION Z)
Subpart A--General
Sec.
1026.1 Authority, purpose, coverage, organization, enforcement, and
liability.
1026.2 Definitions and rules of construction.
1026.3 Exempt transactions.
1026.4 Finance charge.
Subpart B--Open-End Credit
1026.5 General disclosure requirements.
1026.6 Account-opening disclosures.
1026.7 Periodic statement.
1026.8 Identifying transactions on periodic statements.
1026.9 Subsequent disclosure requirements.
1026.10 Payments.
1026.11 Treatment of credit balances; account termination.
1026.12 Special credit card provisions.
1026.13 Billing error resolution.
1026.14 Determination of annual percentage rate.
1026.15 Right of rescission.
1026.16 Advertising.
Subpart C--Closed-End Credit
1026.17 General disclosure requirements.
1026.18 Content of disclosures.
1026.19 Certain mortgage and variable-rate transactions.
1026.20 Subsequent disclosure requirements.
1026.21 Treatment of credit balances.
1026.22 Determination of annual percentage rate.
1026.23 Right of rescission.
1026.24 Advertising.
Subpart D--Miscellaneous
1026.25 Record retention.
1026.26 Use of annual percentage rate in oral disclosures.
1026.27 Language of disclosures.
1026.28 Effect on state laws.
1026.29 State exemptions.
1026.30 Limitation on rates.
Subpart E--Special Rules for Certain Home Mortgage Transactions
1026.31 General rules.
1026.32 Requirements for certain closed-end home mortgages.
1026.33 Requirements for reverse mortgages.
1026.34 Prohibited acts or practices in connection with high-cost
mortgages.
1026.35 Prohibited acts or practices in connection with higher-
priced mortgage loans.
1026.36 Prohibited acts or practices in connection with credit
secured by a dwelling.
1026.37-1026.38 [Reserved]
1026.39 Mortgage transfer disclosures.
1026.40 Requirements for home equity plans.
1026.41 [Reserved]
1026.42 Valuation independence.
1026.43-1026.45 [Reserved]
Subpart F--Special Rules for Private Education Loans
1026.46 Special disclosure requirements for private education loans.
1026.47 Content of disclosures.
1026.48 Limitations on private education loans.
Subpart G--Special Rules Applicable to Credit Card Accounts and Open-
End Credit Offered to College Students
1026.51 Ability to Pay.
1026.52 Limitations on fees.
1026.53 Allocation of payments.
1026.54 Limitations on the imposition of finance charges.
1026.55 Limitations on increasing annual percentage rates, fees, and
charges.
1026.56 Requirements for over-the-limit transactions.
1026.57 Reporting and marketing rules for college student open-end
credit.
1026.58 Internet posting of credit card agreements.
1026.59 Reevaluation of rate increases.
1026.60 Credit and charge card applications and solicitations.
Appendix A to Part 1026--Effect on State Laws
Appendix B to Part 1026--State Exemptions
Appendix C to Part 1026--Issuance of Official Interpretations
Appendix D to Part 1026--Multiple Advance Construction Loans
Appendix E to Part 1026--Rules for Card Issuers That Bill on a
Transaction-by-Transaction Basis
Appendix F to Part 1026--Optional Annual Percentage Rate
Computations for Creditors Offering Open-End Credit Plans Secured by
a Consumer's Dwelling
Appendix G to Part 1026--Open-End Model Forms and Clauses
Appendix H to Part 1026-- Closed-End Model Forms and Clauses
Appendix I to Part 1026--[Reserved]
Appendix J to Part 1026--Annual Percentage Rate Computations for
Closed-End Credit Transactions
Appendix K to Part 1026--Total Annual Loan Cost Rate Computations
for Reverse Mortgage Transactions
Appendix L to Part 1026--Assumed Loan Periods for Computations of
Total Annual Loan Cost Rates
Appendix M1 to Part 1026--Repayment Disclosures
Appendix M2 to Part 1026--Sample Calculations of Repayment
Disclosures
Supplement I to Part 1026--Official Interpretations
Authority: 12 U.S.C. 5512, 5581; 15 U.S.C. 1601 et seq.
Subpart A--General
Sec. 1026.1 Authority, purpose, coverage, organization, enforcement,
and liability.
(a) Authority. This part, known as Regulation Z, is issued by the
Bureau of Consumer Financial Protection to implement the Federal Truth
in Lending Act, which is contained in Title I of the Consumer Credit
Protection Act, as amended (15 U.S.C. 1601 et seq.). This part also
implements Title XII, section 1204 of the Competitive Equality Banking
Act of 1987 (Pub. L. 100-86, 101 Stat. 552). Information-collection
requirements contained in this part have been approved by the Office of
Management and Budget under the provisions of 44 U.S.C. 3501 et seq.
and have been assigned OMB No. 3170-0015.
(b) Purpose. The purpose of this part is to promote the informed
use of consumer credit by requiring disclosures about its terms and
cost. The regulation also includes substantive protections. It gives
consumers the right to cancel certain credit transactions that involve
a lien on a consumer's principal dwelling, regulates certain credit
card practices, and provides a means for fair and timely resolution of
credit billing disputes. The regulation does not generally govern
charges for consumer credit, except that several provisions in
[[Page 79773]]
Subpart G set forth special rules addressing certain charges applicable
to credit card accounts under an open-end (not home-secured) consumer
credit plan. The regulation requires a maximum interest rate to be
stated in variable-rate contracts secured by the consumer's dwelling.
It also imposes limitations on home-equity plans that are subject to
the requirements of Sec. 1026.40 and mortgages that are subject to the
requirements of Sec. 1026.32. The regulation prohibits certain acts or
practices in connection with credit secured by a dwelling in Sec.
1026.36, and credit secured by a consumer's principal dwelling in Sec.
1026.35. The regulation also regulates certain practices of creditors
who extend private education loans as defined in Sec. 1026.46(b)(5).
(c) Coverage. (1) In general, this part applies to each individual
or business that offers or extends credit, other than a person excluded
from coverage of this part by section 1029 of the Consumer Financial
Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, when
four conditions are met:
(i) The credit is offered or extended to consumers;
(ii) The offering or extension of credit is done regularly;
(iii) The credit is subject to a finance charge or is payable by a
written agreement in more than four installments; and
(iv) The credit is primarily for personal, family, or household
purposes.
(2) If a credit card is involved, however, certain provisions apply
even if the credit is not subject to a finance charge, or is not
payable by a written agreement in more than four installments, or if
the credit card is to be used for business purposes.
(3) In addition, certain requirements of Sec. 1026.40 apply to
persons who are not creditors but who provide applications for home-
equity plans to consumers.
(4) Furthermore, certain requirements of Sec. 1026.57 apply to
institutions of higher education.
(d) Organization. The regulation is divided into subparts and
appendices as follows:
(1) Subpart A contains general information. It sets forth:
(i) The authority, purpose, coverage, and organization of the
regulation;
(ii) The definitions of basic terms;
(iii) The transactions that are exempt from coverage; and
(iv) The method of determining the finance charge.
(2) Subpart B contains the rules for open-end credit. It requires
that account-opening disclosures and periodic statements be provided,
as well as additional disclosures for credit and charge card
applications and solicitations and for home-equity plans subject to the
requirements of Sec. 1026.60 and Sec. 1026.40, respectively. It also
describes special rules that apply to credit card transactions,
treatment of payments and credit balances, procedures for resolving
credit billing errors, annual percentage rate calculations, rescission
requirements, and advertising.
(3) Subpart C relates to closed-end credit. It contains rules on
disclosures, treatment of credit balances, annual percentage rate
calculations, rescission requirements, and advertising.
(4) Subpart D contains rules on oral disclosures, disclosures in
languages other than English, record retention, effect on state laws,
state exemptions, and rate limitations.
(5) Subpart E contains special rules for mortgage transactions.
Section 1026.32 requires certain disclosures and provides limitations
for closed-end loans that have rates or fees above specified amounts.
Section 1026.33 requires special disclosures, including the total
annual loan cost rate, for reverse mortgage transactions. Section
1026.34 prohibits specific acts and practices in connection with
closed-end mortgage transactions that are subject to Sec. 1026.32.
Section 1026.35 prohibits specific acts and practices in connection
with closed-end higher-priced mortgage loans, as defined in Sec.
1026.35(a). Section 1026.36 prohibits specific acts and practices in
connection with an extension of credit secured by a dwelling.
(6) Subpart F relates to private education loans. It contains rules
on disclosures, limitations on changes in terms after approval, the
right to cancel the loan, and limitations on co-branding in the
marketing of private education loans.
(7) Subpart G relates to credit card accounts under an open-end
(not home-secured) consumer credit plan (except for Sec. 1026.57(c),
which applies to all open-end credit plans). Section 1026.51 contains
rules on evaluation of a consumer's ability to make the required
payments under the terms of an account. Section 1026.52 limits the fees
that a consumer can be required to pay with respect to an open-end (not
home-secured) consumer credit plan during the first year after account
opening. Section 1026.53 contains rules on allocation of payments in
excess of the minimum payment. Section 1026.54 sets forth certain
limitations on the imposition of finance charges as the result of a
loss of a grace period. Section 1026.55 contains limitations on
increases in annual percentage rates, fees, and charges for credit card
accounts. Section 1026.56 prohibits the assessment of fees or charges
for over-the-limit transactions unless the consumer affirmatively
consents to the creditor's payment of over-the-limit transactions.
Section 1026.57 sets forth rules for reporting and marketing of college
student open-end credit. Section 1026.58 sets forth requirements for
the Internet posting of credit card accounts under an open-end (not
home-secured) consumer credit plan.
(8) Several appendices contain information such as the procedures
for determinations about state laws, state exemptions and issuance of
official interpretations, special rules for certain kinds of credit
plans, and the rules for computing annual percentage rates in closed-
end credit transactions and total-annual-loan-cost rates for reverse
mortgage transactions.
(e) Enforcement and liability. Section 108 of the Act contains the
administrative enforcement provisions. Sections 112, 113, 130, 131, and
134 contain provisions relating to liability for failure to comply with
the requirements of the Act and the regulation. Section 1204(c) of
Title XII of the Competitive Equality Banking Act of 1987, Public Law
100-86, 101 Stat. 552, incorporates by reference administrative
enforcement and civil liability provisions of sections 108 and 130 of
the Act.
Sec. 1026.2 Definitions and rules of construction.
(a) Definitions. For purposes of this part, the following
definitions apply:
(1) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.).
(2) Advertisement means a commercial message in any medium that
promotes, directly or indirectly, a credit transaction.
(3) [Reserved]
(4) Billing cycle or cycle means the interval between the days or
dates of regular periodic statements. These intervals shall be equal
and no longer than a quarter of a year. An interval will be considered
equal if the number of days in the cycle does not vary more than four
days from the regular day or date of the periodic statement.
(5) Bureau means the Bureau of Consumer Financial Protection.
(6) Business day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However,
[[Page 79774]]
for purposes of rescission under Sec. Sec. 1026.15 and 1026.23, and
for purposes of Sec. Sec. 1026.19(a)(1)(ii), 1026.19(a)(2), 1026.31,
and 1026.46(d)(4), the term means all calendar days except Sundays and
the legal public holidays specified in 5 U.S.C. 6103(a), such as New
Year's Day, the Birthday of Martin Luther King, Jr., Washington's
Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day, and Christmas Day.
(7) Card issuer means a person that issues a credit card or that
person's agent with respect to the card.
(8) Cardholder means a natural person to whom a credit card is
issued for consumer credit purposes, or a natural person who has agreed
with the card issuer to pay consumer credit obligations arising from
the issuance of a credit card to another natural person. For purposes
of Sec. 1026.12(a) and (b), the term includes any person to whom a
credit card is issued for any purpose, including business, commercial
or agricultural use, or a person who has agreed with the card issuer to
pay obligations arising from the issuance of such a credit card to
another person.
(9) Cash price means the price at which a creditor, in the ordinary
course of business, offers to sell for cash property or service that is
the subject of the transaction. At the creditor's option, the term may
include the price of accessories, services related to the sale, service
contracts and taxes and fees for license, title, and registration. The
term does not include any finance charge.
(10) Closed-end credit means consumer credit other than ``open-end
credit'' as defined in this section.
(11) Consumer means a cardholder or natural person to whom consumer
credit is offered or extended. However, for purposes of rescission
under Sec. Sec. 1026.15 and 1026.23, the term also includes a natural
person in whose principal dwelling a security interest is or will be
retained or acquired, if that person's ownership interest in the
dwelling is or will be subject to the security interest.
(12) Consumer credit means credit offered or extended to a consumer
primarily for personal, family, or household purposes.
(13) Consummation means the time that a consumer becomes
contractually obligated on a credit transaction.
(14) Credit means the right to defer payment of debt or to incur
debt and defer its payment.
(15)(i) Credit card means any card, plate, or other single credit
device that may be used from time to time to obtain credit.
(ii) Credit card account under an open-end (not home-secured)
consumer credit plan means any open-end credit account that is accessed
by a credit card, except:
(A) A home-equity plan subject to the requirements of Sec. 1026.40
that is accessed by a credit card; or
(B) An overdraft line of credit that is accessed by a debit card or
an account number.
(iii) Charge card means a credit card on an account for which no
periodic rate is used to compute a finance charge.
(16) Credit sale means a sale in which the seller is a creditor.
The term includes a bailment or lease (unless terminable without
penalty at any time by the consumer) under which the consumer:
(i) Agrees to pay as compensation for use a sum substantially
equivalent to, or in excess of, the total value of the property and
service involved; and
(ii) Will become (or has the option to become), for no additional
consideration or for nominal consideration, the owner of the property
upon compliance with the agreement.
(17) Creditor means:
(i) A person who regularly extends consumer credit that is subject
to a finance charge or is payable by written agreement in more than
four installments (not including a down payment), and to whom the
obligation is initially payable, either on the face of the note or
contract, or by agreement when there is no note or contract.
(ii) For purposes of Sec. Sec. 1026.4(c)(8) (Discounts), 1026.9(d)
(Finance charge imposed at time of transaction), and 1026.12(e) (Prompt
notification of returns and crediting of refunds), a person that honors
a credit card.
(iii) For purposes of subpart B, any card issuer that extends
either open-end credit or credit that is not subject to a finance
charge and is not payable by written agreement in more than four
installments.
(iv) For purposes of subpart B (except for the credit and charge
card disclosures contained in Sec. Sec. 1026.60 and 1026.9(e) and (f),
the finance charge disclosures contained in Sec. 1026.6(a)(1) and
(b)(3)(i) and Sec. 1026.7(a)(4) through (7) and (b)(4) through (6) and
the right of rescission set forth in Sec. 1026.15) and subpart C, any
card issuer that extends closed-end credit that is subject to a finance
charge or is payable by written agreement in more than four
installments.
(v) A person regularly extends consumer credit only if it extended
credit (other than credit subject to the requirements of Sec. 1026.32)
more than 25 times (or more than 5 times for transactions secured by a
dwelling) in the preceding calendar year. If a person did not meet
these numerical standards in the preceding calendar year, the numerical
standards shall be applied to the current calendar year. A person
regularly extends consumer credit if, in any 12-month period, the
person originates more than one credit extension that is subject to the
requirements of Sec. 1026.32 or one or more such credit extensions
through a mortgage broker.
(18) Downpayment means an amount, including the value of property
used as a trade-in, paid to a seller to reduce the cash price of goods
or services purchased in a credit sale transaction. A deferred portion
of a downpayment may be treated as part of the downpayment if it is
payable not later than the due date of the second otherwise regularly
scheduled payment and is not subject to a finance charge.
(19) Dwelling means a residential structure that contains one to
four units, whether or not that structure is attached to real property.
The term includes an individual condominium unit, cooperative unit,
mobile home, and trailer, if it is used as a residence.
(20) Open-end credit means consumer credit extended by a creditor
under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;
(ii) The creditor may impose a finance charge from time to time on
an outstanding unpaid balance; and
(iii) The amount of credit that may be extended to the consumer
during the term of the plan (up to any limit set by the creditor) is
generally made available to the extent that any outstanding balance is
repaid.
(21) Periodic rate means a rate of finance charge that is or may be
imposed by a creditor on a balance for a day, week, month, or other
subdivision of a year.
(22) Person means a natural person or an organization, including a
corporation, partnership, proprietorship, association, cooperative,
estate, trust, or government unit.
(23) Prepaid finance charge means any finance charge paid
separately in cash or by check before or at consummation of a
transaction, or withheld from the proceeds of the credit at any time.
(24) Residential mortgage transaction means a transaction in which
a mortgage, deed of trust, purchase money security interest arising
under an installment sales contract, or equivalent consensual security
interest is created or retained in the consumer's principal
[[Page 79775]]
dwelling to finance the acquisition or initial construction of that
dwelling.
(25) Security interest means an interest in property that secures
performance of a consumer credit obligation and that is recognized by
state or Federal law. It does not include incidental interests such as
interests in proceeds, accessions, additions, fixtures, insurance
proceeds (whether or not the creditor is a loss payee or beneficiary),
premium rebates, or interests in after-acquired property. For purposes
of disclosures under Sec. Sec. 1026.6 and 1026.18, the term does not
include an interest that arises solely by operation of law. However,
for purposes of the right of rescission under Sec. Sec. 1026.15 and
1026.23, the term does include interests that arise solely by operation
of law.
(26) State means any state, the District of Columbia, the
Commonwealth of Puerto Rico, and any territory or possession of the
United States.
(b) Rules of construction. For purposes of this part, the following
rules of construction apply:
(1) Where appropriate, the singular form of a word includes the
plural form and plural includes singular.
(2) Where the words obligation and transaction are used in the
regulation, they refer to a consumer credit obligation or transaction,
depending upon the context. Where the word credit is used in the
regulation, it means consumer credit unless the context clearly
indicates otherwise.
(3) Unless defined in this part, the words used have the meanings
given to them by state law or contract.
(4) Where the word amount is used in this part to describe
disclosure requirements, it refers to a numerical amount.
Sec. 1026.3 Exempt transactions.
This part does not apply to the following:
(a) Business, commercial, agricultural, or organizational credit.
(1) An extension of credit primarily for a business, commercial or
agricultural purpose.
(2) An extension of credit to other than a natural person,
including credit to government agencies or instrumentalities.
(b) Credit over applicable threshold amount. (1) Exemption. (i)
Requirements. An extension of credit in which the amount of credit
extended exceeds the applicable threshold amount or in which there is
an express written commitment to extend credit in excess of the
applicable threshold amount, unless the extension of credit is:
(A) Secured by any real property, or by personal property used or
expected to be used as the principal dwelling of the consumer; or
(B) A private education loan as defined in Sec. 1026.46(b)(5).
(ii) Annual adjustments. The threshold amount in paragraph
(b)(1)(i) of this section is adjusted annually to reflect increases in
the Consumer Price Index for Urban Wage Earners and Clerical Workers,
as applicable. See the official commentary to this paragraph (b) for
the threshold amount applicable to a specific extension of credit or
express written commitment to extend credit.
(2) Transition rule for open-end accounts exempt prior to July 21,
2011. An open-end account that is exempt on July 20, 2011 based on an
express written commitment to extend credit in excess of $25,000
remains exempt until December 31, 2011 unless:
(i) The creditor takes a security interest in any real property, or
in personal property used or expected to be used as the principal
dwelling of the consumer; or
(ii) The creditor reduces the express written commitment to extend
credit to $25,000 or less.
(c) Public utility credit. An extension of credit that involves
public utility services provided through pipe, wire, other connected
facilities, or radio or similar transmission (including extensions of
such facilities), if the charges for service, delayed payment, or any
discounts for prompt payment are filed with or regulated by any
government unit. The financing of durable goods or home improvements by
a public utility is not exempt.
(d) Securities or commodities accounts. Transactions in securities
or commodities accounts in which credit is extended by a broker-dealer
registered with the Securities and Exchange Commission or the Commodity
Futures Trading Commission.
(e) Home fuel budget plans. An installment agreement for the
purchase of home fuels in which no finance charge is imposed.
(f) Student loan programs. Loans made, insured, or guaranteed
pursuant to a program authorized by Title IV of the Higher Education
Act of 1965 (20 U.S.C. 1070 et seq.).
(g) Employer-sponsored retirement plans. An extension of credit to
a participant in an employer-sponsored retirement plan qualified under
section 401(a) of the Internal Revenue Code, a tax-sheltered annuity
under section 403(b) of the Internal Revenue Code, or an eligible
governmental deferred compensation plan under section 457(b) of the
Internal Revenue Code (26 U.S.C. 401(a); 26 U.S.C. 403(b); 26 U.S.C.
457(b)), provided that the extension of credit is comprised of fully
vested funds from such participant's account and is made in compliance
with the Internal Revenue Code (26 U.S.C. 1 et seq.).
Sec. 1026.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit
as a dollar amount. It includes any charge payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of credit.
It does not include any charge of a type payable in a comparable cash
transaction.
(1) Charges by third parties. The finance charge includes fees and
amounts charged by someone other than the creditor, unless otherwise
excluded under this section, if the creditor:
(i) Requires the use of a third party as a condition of or an
incident to the extension of credit, even if the consumer can choose
the third party; or
(ii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(2) Special rule; closing agent charges. Fees charged by a third
party that conducts the loan closing (such as a settlement agent,
attorney, or escrow or title company) are finance charges only if the
creditor:
(i) Requires the particular services for which the consumer is
charged;
(ii) Requires the imposition of the charge; or
(iii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(3) Special rule; mortgage broker fees. Fees charged by a mortgage
broker (including fees paid by the consumer directly to the broker or
to the creditor for delivery to the broker) are finance charges even if
the creditor does not require the consumer to use a mortgage broker and
even if the creditor does not retain any portion of the charge.
(b) Examples of finance charges. The finance charge includes the
following types of charges, except for charges specifically excluded by
paragraphs (c) through (e) of this section:
(1) Interest, time price differential, and any amount payable under
an add-on or discount system of additional charges.
(2) Service, transaction, activity, and carrying charges, including
any charge imposed on a checking or other transaction account to the
extent that the charge exceeds the charge for a similar account without
a credit feature.
(3) Points, loan fees, assumption fees, finder's fees, and similar
charges.
[[Page 79776]]
(4) Appraisal, investigation, and credit report fees.
(5) Premiums or other charges for any guarantee or insurance
protecting the creditor against the consumer's default or other credit
loss.
(6) Charges imposed on a creditor by another person for purchasing
or accepting a consumer's obligation, if the consumer is required to
pay the charges in cash, as an addition to the obligation, or as a
deduction from the proceeds of the obligation.
(7) Premiums or other charges for credit life, accident, health, or
loss-of-income insurance, written in connection with a credit
transaction.
(8) Premiums or other charges for insurance against loss of or
damage to property, or against liability arising out of the ownership
or use of property, written in connection with a credit transaction.
(9) Discounts for the purpose of inducing payment by a means other
than the use of credit.
(10) Charges or premiums paid for debt cancellation or debt
suspension coverage written in connection with a credit transaction,
whether or not the coverage is insurance under applicable law.
(c) Charges excluded from the finance charge. The following charges
are not finance charges:
(1) Application fees charged to all applicants for credit, whether
or not credit is actually extended.
(2) Charges for actual unanticipated late payment, for exceeding a
credit limit, or for delinquency, default, or a similar occurrence.
(3) Charges imposed by a financial institution for paying items
that overdraw an account, unless the payment of such items and the
imposition of the charge were previously agreed upon in writing.
(4) Fees charged for participation in a credit plan, whether
assessed on an annual or other periodic basis.
(5) Seller's points.
(6) Interest forfeited as a result of an interest reduction
required by law on a time deposit used as security for an extension of
credit.
(7) Real-estate related fees. The following fees in a transaction
secured by real property or in a residential mortgage transaction, if
the fees are bona fide and reasonable in amount:
(i) Fees for title examination, abstract of title, title insurance,
property survey, and similar purposes.
(ii) Fees for preparing loan-related documents, such as deeds,
mortgages, and reconveyance or settlement documents.
(iii) Notary and credit-report fees.
(iv) Property appraisal fees or fees for inspections to assess the
value or condition of the property if the service is performed prior to
closing, including fees related to pest-infestation or flood-hazard
determinations.
(v) Amounts required to be paid into escrow or trustee accounts if
the amounts would not otherwise be included in the finance charge.
(8) Discounts offered to induce payment for a purchase by cash,
check, or other means, as provided in section 167(b) of the Act.
(d) Insurance and debt cancellation and debt suspension coverage.
(1) Voluntary credit insurance premiums. Premiums for credit life,
accident, health, or loss-of-income insurance may be excluded from the
finance charge if the following conditions are met:
(i) The insurance coverage is not required by the creditor, and
this fact is disclosed in writing.
(ii) The premium for the initial term of insurance coverage is
disclosed in writing. If the term of insurance is less than the term of
the transaction, the term of insurance also shall be disclosed. The
premium may be disclosed on a unit-cost basis only in open-end credit
transactions, closed-end credit transactions by mail or telephone under
Sec. 1026.17(g), and certain closed-end credit transactions involving
an insurance plan that limits the total amount of indebtedness subject
to coverage.
(iii) The consumer signs or initials an affirmative written request
for the insurance after receiving the disclosures specified in this
paragraph, except as provided in paragraph (d)(4) of this section. Any
consumer in the transaction may sign or initial the request.
(2) Property insurance premiums. Premiums for insurance against
loss of or damage to property, or against liability arising out of the
ownership or use of property, including single interest insurance if
the insurer waives all right of subrogation against the consumer, may
be excluded from the finance charge if the following conditions are
met:
(i) The insurance coverage may be obtained from a person of the
consumer's choice, and this fact is disclosed. (A creditor may reserve
the right to refuse to accept, for reasonable cause, an insurer offered
by the consumer.)
(ii) If the coverage is obtained from or through the creditor, the
premium for the initial term of insurance coverage shall be disclosed.
If the term of insurance is less than the term of the transaction, the
term of insurance shall also be disclosed. The premium may be disclosed
on a unit-cost basis only in open-end credit transactions, closed-end
credit transactions by mail or telephone under Sec. 1026.17(g), and
certain closed-end credit transactions involving an insurance plan that
limits the total amount of indebtedness subject to coverage.
(3) Voluntary debt cancellation or debt suspension fees. Charges or
premiums paid for debt cancellation coverage for amounts exceeding the
value of the collateral securing the obligation or for debt
cancellation or debt suspension coverage in the event of the loss of
life, health, or income or in case of accident may be excluded from the
finance charge, whether or not the coverage is insurance, if the
following conditions are met:
(i) The debt cancellation or debt suspension agreement or coverage
is not required by the creditor, and this fact is disclosed in writing;
(ii) The fee or premium for the initial term of coverage is
disclosed in writing. If the term of coverage is less than the term of
the credit transaction, the term of coverage also shall be disclosed.
The fee or premium may be disclosed on a unit-cost basis only in open-
end credit transactions, closed-end credit transactions by mail or
telephone under Sec. 1026.17(g), and certain closed-end credit
transactions involving a debt cancellation agreement that limits the
total amount of indebtedness subject to coverage;
(iii) The following are disclosed, as applicable, for debt
suspension coverage: That the obligation to pay loan principal and
interest is only suspended, and that interest will continue to accrue
during the period of suspension.
(iv) The consumer signs or initials an affirmative written request
for coverage after receiving the disclosures specified in this
paragraph, except as provided in paragraph (d)(4) of this section. Any
consumer in the transaction may sign or initial the request.
(4) Telephone purchases. If a consumer purchases credit insurance
or debt cancellation or debt suspension coverage for an open-end (not
home-secured) plan by telephone, the creditor must make the disclosures
under paragraphs (d)(1)(i) and (ii) or (d)(3)(i) through (iii) of this
section, as applicable, orally. In such a case, the creditor shall:
(i) Maintain evidence that the consumer, after being provided the
disclosures orally, affirmatively elected to purchase the insurance or
coverage; and
[[Page 79777]]
(ii) Mail the disclosures under paragraphs (d)(1)(i) and (ii) or
(d)(3)(i) through (iii) of this section, as applicable, within three
business days after the telephone purchase.
(e) Certain security interest charges. If itemized and disclosed,
the following charges may be excluded from the finance charge:
(1) Taxes and fees prescribed by law that actually are or will be
paid to public officials for determining the existence of or for
perfecting, releasing, or satisfying a security interest.
(2) The premium for insurance in lieu of perfecting a security
interest to the extent that the premium does not exceed the fees
described in paragraph (e)(1) of this section that otherwise would be
payable.
(3) Taxes on security instruments. Any tax levied on security
instruments or on documents evidencing indebtedness if the payment of
such taxes is a requirement for recording the instrument securing the
evidence of indebtedness.
(f) Prohibited offsets. Interest, dividends, or other income
received or to be received by the consumer on deposits or investments
shall not be deducted in computing the finance charge.
Subpart B--Open-End Credit
Sec. 1026.5 General disclosure requirements.
(a) Form of disclosures. (1) General. (i) The creditor shall make
the disclosures required by this subpart clearly and conspicuously.
(ii) The creditor shall make the disclosures required by this
subpart in writing, in a form that the consumer may keep, except that:
(A) The following disclosures need not be written: Disclosures
under Sec. 1026.6(b)(3) of charges that are imposed as part of an
open-end (not home-secured) plan that are not required to be disclosed
under Sec. 1026.6(b)(2) and related disclosures of charges under Sec.
1026.9(c)(2)(iii)(B); disclosures under Sec. 1026.9(c)(2)(vi);
disclosures under Sec. 1026.9(d) when a finance charge is imposed at
the time of the transaction; and disclosures under Sec.
1026.56(b)(1)(i).
(B) The following disclosures need not be in a retainable form:
Disclosures that need not be written under paragraph (a)(1)(ii)(A) of
this section; disclosures for credit and charge card applications and
solicitations under Sec. 1026.60; home-equity disclosures under Sec.
1026.40(d); the alternative summary billing-rights statement under
Sec. 1026.9(a)(2); the credit and charge card renewal disclosures
required under Sec. 1026.9(e); and the payment requirements under
Sec. 1026.10(b), except as provided in Sec. 1026.7(b)(13).
(iii) The disclosures required by this subpart may be provided to
the consumer in electronic form, subject to compliance with the
consumer consent and other applicable provisions of the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C.
7001 et seq.). The disclosures required by Sec. Sec. 1026.60, 1026.40,
and 1026.16 may be provided to the consumer in electronic form without
regard to the consumer consent or other provisions of the E-Sign Act in
the circumstances set forth in those sections.
(2) Terminology. (i) Terminology used in providing the disclosures
required by this subpart shall be consistent.
(ii) For home-equity plans subject to Sec. 1026.40, the terms
finance charge and annual percentage rate, when required to be
disclosed with a corresponding amount or percentage rate, shall be more
conspicuous than any other required disclosure. The terms need not be
more conspicuous when used for periodic statement disclosures under
Sec. 1026.7(a)(4) and for advertisements under Sec. 1026.16.
(iii) If disclosures are required to be presented in a tabular
format pursuant to paragraph (a)(3) of this section, the term penalty
APR shall be used, as applicable. The term penalty APR need not be used
in reference to the annual percentage rate that applies with the loss
of a promotional rate, assuming the annual percentage rate that applies
is not greater than the annual percentage rate that would have applied
at the end of the promotional period; or if the annual percentage rate
that applies with the loss of a promotional rate is a variable rate,
the annual percentage rate is calculated using the same index and
margin as would have been used to calculate the annual percentage rate
that would have applied at the end of the promotional period. If credit
insurance or debt cancellation or debt suspension coverage is required
as part of the plan, the term required shall be used and the program
shall be identified by its name. If an annual percentage rate is
required to be presented in a tabular format pursuant to paragraph
(a)(3)(i) or (a)(3)(iii) of this section, the term fixed, or a similar
term, may not be used to describe such rate unless the creditor also
specifies a time period that the rate will be fixed and the rate will
not increase during that period, or if no such time period is provided,
the rate will not increase while the plan is open.
(3) Specific formats. (i) Certain disclosures for credit and charge
card applications and solicitations must be provided in a tabular
format in accordance with the requirements of Sec. 1026.60(a)(2).
(ii) Certain disclosures for home-equity plans must precede other
disclosures and must be given in accordance with the requirements of
Sec. 1026.40(a).
(iii) Certain account-opening disclosures must be provided in a
tabular format in accordance with the requirements of Sec.
1026.6(b)(1).
(iv) Certain disclosures provided on periodic statements must be
grouped together in accordance with the requirements of Sec.
1026.7(b)(6) and (b)(13).
(v) Certain disclosures provided on periodic statements must be
given in accordance with the requirements of Sec. 1026.7(b)(12).
(vi) Certain disclosures accompanying checks that access a credit
card account must be provided in a tabular format in accordance with
the requirements of Sec. 1026.9(b)(3).
(vii) Certain disclosures provided in a change-in-terms notice must
be provided in a tabular format in accordance with the requirements of
Sec. 1026.9(c)(2)(iv)(D).
(viii) Certain disclosures provided when a rate is increased due to
delinquency, default or as a penalty must be provided in a tabular
format in accordance with the requirements of Sec. 1026.9(g)(3)(ii).
(b) Time of disclosures. (1) Account-opening disclosures. (i)
General rule. The creditor shall furnish account-opening disclosures
required by Sec. 1026.6 before the first transaction is made under the
plan.
(ii) Charges imposed as part of an open-end (not home-secured)
plan. Charges that are imposed as part of an open-end (not home-
secured) plan and are not required to be disclosed under Sec.
1026.6(b)(2) may be disclosed after account opening but before the
consumer agrees to pay or becomes obligated to pay for the charge,
provided they are disclosed at a time and in a manner that a consumer
would be likely to notice them. This provision does not apply to
charges imposed as part of a home-equity plan subject to the
requirements of Sec. 1026.40.
(iii) Telephone purchases. Disclosures required by Sec. 1026.6 may
be provided as soon as reasonably practicable after the first
transaction if:
(A) The first transaction occurs when a consumer contacts a
merchant by telephone to purchase goods and at the same time the
consumer accepts an offer to finance the purchase by establishing
[[Page 79778]]
an open-end plan with the merchant or third-party creditor;
(B) The merchant or third-party creditor permits consumers to
return any goods financed under the plan and provides consumers with a
sufficient time to reject the plan and return the goods free of cost
after the merchant or third-party creditor has provided the written
disclosures required by Sec. 1026.6; and
(C) The consumer's right to reject the plan and return the goods is
disclosed to the consumer as a part of the offer to finance the
purchase.
(iv) Membership fees. (A) General. In general, a creditor may not
collect any fee before account-opening disclosures are provided. A
creditor may collect, or obtain the consumer's agreement to pay,
membership fees, including application fees excludable from the finance
charge under Sec. 1026.4(c)(1), before providing account-opening
disclosures if, after receiving the disclosures, the consumer may
reject the plan and have no obligation to pay these fees (including
application fees) or any other fee or charge. A membership fee for
purposes of this paragraph has the same meaning as a fee for the
issuance or availability of credit described in Sec. 1026.60(b)(2). If
the consumer rejects the plan, the creditor must promptly refund the
membership fee if it has been paid, or take other action necessary to
ensure the consumer is not obligated to pay that fee or any other fee
or charge.
(B) Home-equity plans. Creditors offering home-equity plans subject
to the requirements of Sec. 1026.40 are not subject to the
requirements of paragraph (b)(1)(iv)(A) of this section.
(v) Application fees. A creditor may collect an application fee
excludable from the finance charge under Sec. 1026.4(c)(1) before
providing account-opening disclosures. However, if a consumer rejects
the plan after receiving account-opening disclosures, the consumer must
have no obligation to pay such an application fee, or if the fee was
paid, it must be refunded. See Sec. 1026.5(b)(1)(iv)(A).
(2) Periodic statements. (i) Statement required. The creditor shall
mail or deliver a periodic statement as required by Sec. 1026.7 for
each billing cycle at the end of which an account has a debit or credit
balance of more than $1 or on which a finance charge has been imposed.
A periodic statement need not be sent for an account if the creditor
deems it uncollectible, if delinquency collection proceedings have been
instituted, if the creditor has charged off the account in accordance
with loan-loss provisions and will not charge any additional fees or
interest on the account, or if furnishing the statement would violate
Federal law.
(ii) Timing requirements. (A) Credit card accounts under an open-
end (not home-secured) consumer credit plan. For credit card accounts
under an open-end (not home-secured) consumer credit plan, a card
issuer must adopt reasonable procedures designed to ensure that:
(1) Periodic statements are mailed or delivered at least 21 days
prior to the payment due date disclosed on the statement pursuant to
Sec. 1026.7(b)(11)(i)(A); and
(2) The card issuer does not treat as late for any purpose a
required minimum periodic payment received by the card issuer within 21
days after mailing or delivery of the periodic statement disclosing the
due date for that payment.
(B) Open-end consumer credit plans. For accounts under an open-end
consumer credit plan, a creditor must adopt reasonable procedures
designed to ensure that:
(1) If a grace period applies to the account:
(i) Periodic statements are mailed or delivered at least 21 days
prior to the date on which the grace period expires; and
(ii) The creditor does not impose finance charges as a result of
the loss of the grace period if a payment that satisfies the terms of
the grace period is received by the creditor within 21 days after
mailing or delivery of the periodic statement.
(2) Regardless of whether a grace period applies to the account:
(i) Periodic statements are mailed or delivered at least 14 days
prior to the date on which the required minimum periodic payment must
be received in order to avoid being treated as late for any purpose;
and
(ii) The creditor does not treat as late for any purpose a required
minimum periodic payment received by the creditor within 14 days after
mailing or delivery of the periodic statement.
(3) For purposes of paragraph (b)(2)(ii)(B) of this section,
``grace period'' means a period within which any credit extended may be
repaid without incurring a finance charge due to a periodic interest
rate.
(3) Credit and charge card application and solicitation
disclosures. The card issuer shall furnish the disclosures for credit
and charge card applications and solicitations in accordance with the
timing requirements of Sec. 1026.60.
(4) Home-equity plans. Disclosures for home-equity plans shall be
made in accordance with the timing requirements of Sec. 1026.40(b).
(c) Basis of disclosures and use of estimates. Disclosures shall
reflect the terms of the legal obligation between the parties. If any
information necessary for accurate disclosure is unknown to the
creditor, it shall make the disclosure based on the best information
reasonably available and shall state clearly that the disclosure is an
estimate.
(d) Multiple creditors; multiple consumers. If the credit plan
involves more than one creditor, only one set of disclosures shall be
given, and the creditors shall agree among themselves which creditor
must comply with the requirements that this part imposes on any or all
of them. If there is more than one consumer, the disclosures may be
made to any consumer who is primarily liable on the account. If the
right of rescission under Sec. 1026.15 is applicable, however, the
disclosures required by Sec. Sec. 1026.6 and 1026.15(b) shall be made
to each consumer having the right to rescind.
(e) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor mails or delivers
the disclosures, the resulting inaccuracy is not a violation of this
part, although new disclosures may be required under Sec. 1026.9(c).
Sec. 1026.6 Account-opening disclosures.
(a) Rules affecting home-equity plans. The requirements of this
paragraph (a) apply only to home-equity plans subject to the
requirements of Sec. 1026.40. A creditor shall disclose the items in
this section, to the extent applicable:
(1) Finance charge. The circumstances under which a finance charge
will be imposed and an explanation of how it will be determined, as
follows:
(i) A statement of when finance charges begin to accrue, including
an explanation of whether or not any time period exists within which
any credit extended may be repaid without incurring a finance charge.
If such a time period is provided, a creditor may, at its option and
without disclosure, impose no finance charge when payment is received
after the time period's expiration.
(ii) A disclosure of each periodic rate that may be used to compute
the finance charge, the range of balances to which it is applicable,
and the corresponding annual percentage rate. If a creditor offers a
variable-rate plan, the creditor shall also disclose: The circumstances
under which the rate(s) may increase; any limitations on the increase;
and the effect(s) of an increase. When different periodic rates apply
to different types of transactions, the types of transactions to which
the periodic rates shall apply
[[Page 79779]]
shall also be disclosed. A creditor is not required to adjust the range
of balances disclosure to reflect the balance below which only a
minimum charge applies.
(iii) An explanation of the method used to determine the balance on
which the finance charge may be computed.
(iv) An explanation of how the amount of any finance charge will be
determined, including a description of how any finance charge other
than the periodic rate will be determined.
(2) Other charges. The amount of any charge other than a finance
charge that may be imposed as part of the plan, or an explanation of
how the charge will be determined.
(3) Home-equity plan information. The following disclosures
described in Sec. 1026.40(d), as applicable:
(i) A statement of the conditions under which the creditor may take
certain action, as described in Sec. 1026.40(d)(4)(i), such as
terminating the plan or changing the terms.
(ii) The payment information described in Sec. 1026.40(d)(5)(i)
and (ii) for both the draw period and any repayment period.
(iii) A statement that negative amortization may occur as described
in Sec. 1026.40(d)(9).
(iv) A statement of any transaction requirements as described in
Sec. 1026.40(d)(10).
(v) A statement regarding the tax implications as described in
Sec. 1026.40(d)(11).
(vi) A statement that the annual percentage rate imposed under the
plan does not include costs other than interest as described in Sec.
1026.40(d)(6) and (d)(12)(ii).
(vii) The variable-rate disclosures described in Sec.
1026.40(d)(12)(viii), (d)(12)(x), (d)(12)(xi), and (d)(12)(xii), as
well as the disclosure described in Sec. 1026.40(d)(5)(iii), unless
the disclosures provided with the application were in a form the
consumer could keep and included a representative payment example for
the category of payment option chosen by the consumer.
(4) Security interests. The fact that the creditor has or will
acquire a security interest in the property purchased under the plan,
or in other property identified by item or type.
(5) Statement of billing rights. A statement that outlines the
consumer's rights and the creditor's responsibilities under Sec. Sec.
1026.12(c) and 1026.13 and that is substantially similar to the
statement found in Model Form G-3 or, at the creditor's option, G-3(A),
in Appendix G to this part.
(b) Rules affecting open-end (not home-secured) plans. The
requirements of paragraph (b) of this section apply to plans other than
home-equity plans subject to the requirements of Sec. 1026.40.
(1) Form of disclosures; tabular format for open-end (not home-
secured) plans. Creditors must provide the account-opening disclosures
specified in paragraph (b)(2)(i) through (b)(2)(v) (except for
(b)(2)(i)(D)(2)) and (b)(2)(vii) through (b)(2)(xiv) of this section in
the form of a table with the headings, content, and format
substantially similar to any of the applicable tables in G-17 in
Appendix G.
(i) Highlighting. In the table, any annual percentage rate required
to be disclosed pursuant to paragraph (b)(2)(i) of this section; any
introductory rate permitted to be disclosed pursuant to paragraph
(b)(2)(i)(B) or required to be disclosed under paragraph (b)(2)(i)(F)
of this section, any rate that will apply after a premium initial rate
expires permitted to be disclosed pursuant to paragraph (b)(2)(i)(C) or
required to be disclosed pursuant to paragraph (b)(2)(i)(F), and any
fee or percentage amounts or maximum limits on fee amounts disclosed
pursuant to paragraphs (b)(2)(ii), (b)(2)(iv), (b)(2)(vii) through
(b)(2)(xii) of this section must be disclosed in bold text. However,
bold text shall not be used for: The amount of any periodic fee
disclosed pursuant to paragraph (b)(2) of this section that is not an
annualized amount; and other annual percentage rates or fee amounts
disclosed in the table.
(ii) Location. Only the information required or permitted by
paragraphs (b)(2)(i) through (v) (except for (b)(2)(i)(D)(2)) and
(b)(2)(vii) through (xiv) of this section shall be in the table.
Disclosures required by paragraphs (b)(2)(i)(D)(2), (b)(2)(i)(D)(3),
(b)(2)(vi), and (b)(2)(xv) of this section shall be placed directly
below the table. Disclosures required by paragraphs (b)(3) through (5)
of this section that are not otherwise required to be in the table and
other information may be presented with the account agreement or
account-opening disclosure statement, provided such information appears
outside the required table.
(iii) Fees that vary by state. Creditors that impose fees referred
to in paragraphs (b)(2)(vii) through (b)(2)(xi) of this section that
vary by state and that provide the disclosures required by paragraph
(b) of this section in person at the time the open-end (not home-
secured) plan is established in connection with financing the purchase
of goods or services may, at the creditor's option, disclose in the
account-opening table the specific fee applicable to the consumer's
account, or the range of the fees, if the disclosure includes a
statement that the amount of the fee varies by state and refers the
consumer to the account agreement or other disclosure provided with the
account-opening table where the amount of the fee applicable to the
consumer's account is disclosed. A creditor may not list fees for
multiple states in the account-opening summary table.
(iv) Fees based on a percentage. If the amount of any fee required
to be disclosed under this section is determined on the basis of a
percentage of another amount, the percentage used and the
identification of the amount against which the percentage is applied
may be disclosed instead of the amount of the fee.
(2) Required disclosures for account-opening table for open-end
(not home-secured) plans. A creditor shall disclose the items in this
section, to the extent applicable:
(i) Annual percentage rate. Each periodic rate that may be used to
compute the finance charge on an outstanding balance for purchases, a
cash advance, or a balance transfer, expressed as an annual percentage
rate (as determined by Sec. 1026.14(b)). When more than one rate
applies for a category of transactions, the range of balances to which
each rate is applicable shall also be disclosed. The annual percentage
rate for purchases disclosed pursuant to this paragraph shall be in at
least 16-point type, except for the following: A penalty rate that may
apply upon the occurrence of one or more specific events.
(A) Variable-rate information. If a rate disclosed under paragraph
(b)(2)(i) of this section is a variable rate, the creditor shall also
disclose the fact that the rate may vary and how the rate is
determined. In describing how the applicable rate will be determined,
the creditor must identify the type of index or formula that is used in
setting the rate. The value of the index and the amount of the margin
that are used to calculate the variable rate shall not be disclosed in
the table. A disclosure of any applicable limitations on rate increases
or decreases shall not be included in the table.
(B) Discounted initial rates. If the initial rate is an
introductory rate, as that term is defined in Sec. 1026.16(g)(2)(ii),
the creditor must disclose the rate that would otherwise apply to the
account pursuant to paragraph (b)(2)(i) of this section. Where the rate
is not tied to an index or formula, the creditor must disclose the rate
that will apply after the introductory rate expires. In a variable-rate
account, the creditor must disclose a rate based on the applicable
index or
[[Page 79780]]
formula in accordance with the accuracy requirements of paragraph
(b)(4)(ii)(G) of this section. Except as provided in paragraph
(b)(2)(i)(F) of this section, the creditor is not required to, but may
disclose in the table the introductory rate along with the rate that
would otherwise apply to the account if the creditor also discloses the
time period during which the introductory rate will remain in effect,
and uses the term ``introductory'' or ``intro'' in immediate proximity
to the introductory rate.
(C) Premium initial rate. If the initial rate is temporary and is
higher than the rate that will apply after the temporary rate expires,
the creditor must disclose the premium initial rate pursuant to
paragraph (b)(2)(i) of this section. Consistent with paragraph
(b)(2)(i) of this section, the premium initial rate for purchases must
be in at least 16-point type. Except as provided in paragraph
(b)(2)(i)(F) of this section, the creditor is not required to, but may
disclose in the table the rate that will apply after the premium
initial rate expires if the creditor also discloses the time period
during which the premium initial rate will remain in effect. If the
creditor also discloses in the table the rate that will apply after the
premium initial rate for purchases expires, that rate also must be in
at least 16-point type.
(D) Penalty rates. (1) In general. Except as provided in paragraph
(b)(2)(i)(D)(2) and (b)(2)(i)(D)(3) of this section, if a rate may
increase as a penalty for one or more events specified in the account
agreement, such as a late payment or an extension of credit that
exceeds the credit limit, the creditor must disclose pursuant to
paragraph (b)(2)(i) of this section the increased rate that may apply,
a brief description of the event or events that may result in the
increased rate, and a brief description of how long the increased rate
will remain in effect. If more than one penalty rate may apply, the
creditor at its option may disclose the highest rate that could apply,
instead of disclosing the specific rates or the range of rates that
could apply.
(2) Introductory rates. If the creditor discloses in the table an
introductory rate, as that term is defined in Sec. 1026.16(g)(2)(ii),
creditors must briefly disclose directly beneath the table the
circumstances under which the introductory rate may be revoked, and the
rate that will apply after the introductory rate is revoked.
(3) Employee preferential rates. If a creditor discloses in the
table a preferential annual percentage rate for which only employees of
the creditor, employees of a third party, or other individuals with
similar affiliations with the creditor or third party, such as
executive officers, directors, or principal shareholders are eligible,
the creditor must briefly disclose directly beneath the table the
circumstances under which such preferential rate may be revoked, and
the rate that will apply after such preferential rate is revoked.
(E) Point of sale where APRs vary by state or based on
creditworthiness. Creditors imposing annual percentage rates that vary
by state or based on the consumer's creditworthiness and providing the
disclosures required by paragraph (b) of this section in person at the
time the open-end (not home-secured) plan is established in connection
with financing the purchase of goods or services may, at the creditor's
option, disclose pursuant to paragraph (b)(2)(i) of this section in the
account-opening table:
(1) The specific annual percentage rate applicable to the
consumer's account; or
(2) The range of the annual percentage rates, if the disclosure
includes a statement that the annual percentage rate varies by state or
will be determined based on the consumer's creditworthiness and refers
the consumer to the account agreement or other disclosure provided with
the account-opening table where the annual percentage rate applicable
to the consumer's account is disclosed. A creditor may not list annual
percentage rates for multiple states in the account-opening table.
(F) Credit card accounts under an open-end (not home-secured)
consumer credit plan. Notwithstanding paragraphs (b)(2)(i)(B) and
(b)(2)(i)(C) of this section, for credit card accounts under an open-
end (not home-secured) plan, issuers must disclose in the table:
(1) Any introductory rate as that term is defined in Sec.
1026.16(g)(2)(ii) that would apply to the account, consistent with the
requirements of paragraph (b)(2)(i)(B) of this section, and
(2) Any rate that would apply upon the expiration of a premium
initial rate, consistent with the requirements of paragraph
(b)(2)(i)(C) of this section.
(ii) Fees for issuance or availability. (A) Any annual or other
periodic fee that may be imposed for the issuance or availability of an
open-end plan, including any fee based on account activity or
inactivity; how frequently it will be imposed; and the annualized
amount of the fee.
(B) Any non-periodic fee that relates to opening the plan. A
creditor must disclose that the fee is a one-time fee.
(iii) Fixed finance charge; minimum interest charge. Any fixed
finance charge and a brief description of the charge. Any minimum
interest charge if it exceeds $1.00 that could be imposed during a
billing cycle, and a brief description of the charge. The $1.00
threshold amount shall be adjusted periodically by the Bureau to
reflect changes in the Consumer Price Index. The Bureau shall calculate
each year a price level adjusted minimum interest charge using the
Consumer Price Index in effect on the June 1 of that year. When the
cumulative change in the adjusted minimum value derived from applying
the annual Consumer Price level to the current minimum interest charge
threshold has risen by a whole dollar, the minimum interest charge will
be increased by $1.00. The creditor may, at its option, disclose in the
table minimum interest charges below this threshold.
(iv) Transaction charges. Any transaction charge imposed by the
creditor for use of the open-end plan for purchases.
(v) Grace period. The date by which or the period within which any
credit extended may be repaid without incurring a finance charge due to
a periodic interest rate and any conditions on the availability of the
grace period. If no grace period is provided, that fact must be
disclosed. If the length of the grace period varies, the creditor may
disclose the range of days, the minimum number of days, or the average
number of the days in the grace period, if the disclosure is identified
as a range, minimum, or average. In disclosing in the tabular format a
grace period that applies to all features on the account, the phrase
``How to Avoid Paying Interest'' shall be used as the heading for the
row describing the grace period. If a grace period is not offered on
all features of the account, in disclosing this fact in the tabular
format, the phrase ``Paying Interest'' shall be used as the heading for
the row describing this fact.
(vi) Balance computation method. The name of the balance
computation method listed in Sec. 1026.60(g) that is used to determine
the balance on which the finance charge is computed for each feature,
or an explanation of the method used if it is not listed, along with a
statement that an explanation of the method(s) required by paragraph
(b)(4)(i)(D) of this section is provided with the account-opening
disclosures. In determining which balance computation method to
disclose, the creditor shall assume that credit extended will not be
repaid within any grace period, if any.
[[Page 79781]]
(vii) Cash advance fee. Any fee imposed for an extension of credit
in the form of cash or its equivalent.
(viii) Late payment fee. Any fee imposed for a late payment.
(ix) Over-the-limit fee. Any fee imposed for exceeding a credit
limit.
(x) Balance transfer fee. Any fee imposed to transfer an
outstanding balance.
(xi) Returned-payment fee. Any fee imposed by the creditor for a
returned payment.
(xii) Required insurance, debt cancellation or debt suspension
coverage. (A) A fee for insurance described in Sec. 1026.4(b)(7) or
debt cancellation or suspension coverage described in Sec.
1026.4(b)(10), if the insurance, or debt cancellation or suspension
coverage is required as part of the plan; and
(B) A cross reference to any additional information provided about
the insurance or coverage, as applicable.
(xiii) Available credit. If a creditor requires fees for the
issuance or availability of credit described in paragraph (b)(2)(ii) of
this section, or requires a security deposit for such credit, and the
total amount of those required fees and/or security deposit that will
be imposed and charged to the account when the account is opened is 15
percent or more of the minimum credit limit for the plan, a creditor
must disclose the available credit remaining after these fees or
security deposit are debited to the account. The determination whether
the 15 percent threshold is met must be based on the minimum credit
limit for the plan. However, the disclosure provided under this
paragraph must be based on the actual initial credit limit provided on
the account. In determining whether the 15 percent threshold test is
met, the creditor must only consider fees for issuance or availability
of credit, or a security deposit, that are required. If fees for
issuance or availability are optional, these fees should not be
considered in determining whether the disclosure must be given.
Nonetheless, if the 15 percent threshold test is met, the creditor in
providing the disclosure must disclose the amount of available credit
calculated by excluding those optional fees, and the available credit
including those optional fees. The creditor shall also disclose that
the consumer has the right to reject the plan and not be obligated to
pay those fees or any other fee or charges until the consumer has used
the account or made a payment on the account after receiving a periodic
statement. This paragraph does not apply with respect to fees or
security deposits that are not debited to the account.
(xiv) Web site reference. For issuers of credit cards that are not
charge cards, a reference to the Web site established by the Bureau and
a statement that consumers may obtain on the Web site information about
shopping for and using credit cards. Until January 1, 2013, issuers may
substitute for this reference a reference to the Web site established
by the Board of Governors of the Federal Reserve System.
(xv) Billing error rights reference. A statement that information
about consumers' right to dispute transactions is included in the
account-opening disclosures.
(3) Disclosure of charges imposed as part of open-end (not home-
secured) plans. A creditor shall disclose, to the extent applicable:
(i) For charges imposed as part of an open-end (not home-secured)
plan, the circumstances under which the charge may be imposed,
including the amount of the charge or an explanation of how the charge
is determined. For finance charges, a statement of when the charge
begins to accrue and an explanation of whether or not any time period
exists within which any credit that has been extended may be repaid
without incurring the charge. If such a time period is provided, a
creditor may, at its option and without disclosure, elect not to impose
a finance charge when payment is received after the time period
expires.
(ii) Charges imposed as part of the plan are:
(A) Finance charges identified under Sec. 1026.4(a) and Sec.
1026.4(b).
(B) Charges resulting from the consumer's failure to use the plan
as agreed, except amounts payable for collection activity after
default, attorney's fees whether or not automatically imposed, and
post-judgment interest rates permitted by law.
(C) Taxes imposed on the credit transaction by a state or other
governmental body, such as documentary stamp taxes on cash advances.
(D) Charges for which the payment, or nonpayment, affect the
consumer's access to the plan, the duration of the plan, the amount of
credit extended, the period for which credit is extended, or the timing
or method of billing or payment.
(E) Charges imposed for terminating a plan.
(F) Charges for voluntary credit insurance, debt cancellation or
debt suspension.
(iii) Charges that are not imposed as part of the plan include:
(A) Charges imposed on a cardholder by an institution other than
the card issuer for the use of the other institution's ATM in a shared
or interchange system.
(B) A charge for a package of services that includes an open-end
credit feature, if the fee is required whether or not the open-end
credit feature is included and the non-credit services are not merely
incidental to the credit feature.
(C) Charges under Sec. 1026.4(e) disclosed as specified.
(4) Disclosure of rates for open-end (not home-secured) plans. A
creditor shall disclose, to the extent applicable:
(i) For each periodic rate that may be used to calculate interest:
(A) Rates. The rate, expressed as a periodic rate and a
corresponding annual percentage rate.
(B) Range of balances. The range of balances to which the rate is
applicable; however, a creditor is not required to adjust the range of
balances disclosure to reflect the balance below which only a minimum
charge applies.
(C) Type of transaction. The type of transaction to which the rate
applies, if different rates apply to different types of transactions.
(D) Balance computation method. An explanation of the method used
to determine the balance to which the rate is applied.
(ii) Variable-rate accounts. For interest rate changes that are
tied to increases in an index or formula (variable-rate accounts)
specifically set forth in the account agreement:
(A) The fact that the annual percentage rate may increase.
(B) How the rate is determined, including the margin.
(C) The circumstances under which the rate may increase.
(D) The frequency with which the rate may increase.
(E) Any limitation on the amount the rate may change.
(F) The effect(s) of an increase.
(G) Except as specified in paragraph (b)(4)(ii)(H) of this section,
a rate is accurate if it is a rate as of a specified date and this rate
was in effect within the last 30 days before the disclosures are
provided.
(H) Creditors imposing annual percentage rates that vary according
to an index that is not under the creditor's control that provide the
disclosures required by paragraph (b) of this section in person at the
time the open-end (not home-secured) plan is established in connection
with financing the purchase of goods or services may disclose in the
table a rate, or range of rates to the
[[Page 79782]]
extent permitted by Sec. 1026.6(b)(2)(i)(E), that was in effect within
the last 90 days before the disclosures are provided, along with a
reference directing the consumer to the account agreement or other
disclosure provided with the account-opening table where an annual
percentage rate applicable to the consumer's account in effect within
the last 30 days before the disclosures are provided is disclosed.
(iii) Rate changes not due to index or formula. For interest rate
changes that are specifically set forth in the account agreement and
not tied to increases in an index or formula:
(A) The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate) required under paragraph
(b)(4)(i)(A) of this section.
(B) How long the initial rate will remain in effect and the
specific events that cause the initial rate to change.
(C) The rate (expressed as a periodic rate and a corresponding
annual percentage rate) that will apply when the initial rate is no
longer in effect and any limitation on the time period the new rate
will remain in effect.
(D) The balances to which the new rate will apply.
(E) The balances to which the current rate at the time of the
change will apply.
(5) Additional disclosures for open-end (not home-secured) plans. A
creditor shall disclose, to the extent applicable:
(i) Voluntary credit insurance, debt cancellation or debt
suspension. The disclosures in Sec. Sec. 1026.4(d)(1)(i) and
(d)(1)(ii) and (d)(3)(i) through (d)(3)(iii) if the creditor offers
optional credit insurance or debt cancellation or debt suspension
coverage that is identified in Sec. 1026.4(b)(7) or (b)(10).
(ii) Security interests. The fact that the creditor has or will
acquire a security interest in the property purchased under the plan,
or in other property identified by item or type.
(iii) Statement of billing rights. A statement that outlines the
consumer's rights and the creditor's responsibilities under Sec. Sec.
1026.12(c) and 1026.13 and that is substantially similar to the
statement found in Model Form G-3(A) in Appendix G to this part.
Sec. 1026.7 Periodic statement.
The creditor shall furnish the consumer with a periodic statement
that discloses the following items, to the extent applicable:
(a) Rules affecting home-equity plans. The requirements of
paragraph (a) of this section apply only to home-equity plans subject
to the requirements of Sec. 1026.40. Alternatively, a creditor subject
to this paragraph may, at its option, comply with any of the
requirements of paragraph (b) of this section; however, any creditor
that chooses not to provide a disclosure under paragraph (a)(7) of this
section must comply with paragraph (b)(6) of this section.
(1) Previous balance. The account balance outstanding at the
beginning of the billing cycle.
(2) Identification of transactions. An identification of each
credit transaction in accordance with Sec. 1026.8.
(3) Credits. Any credit to the account during the billing cycle,
including the amount and the date of crediting. The date need not be
provided if a delay in accounting does not result in any finance or
other charge.
(4) Periodic rates. (i) Except as provided in paragraph (a)(4)(ii)
of this section, each periodic rate that may be used to compute the
finance charge, the range of balances to which it is applicable, and
the corresponding annual percentage rate. If no finance charge is
imposed when the outstanding balance is less than a certain amount, the
creditor is not required to disclose that fact, or the balance below
which no finance charge will be imposed. If different periodic rates
apply to different types of transactions, the types of transactions to
which the periodic rates apply shall also be disclosed. For variable-
rate plans, the fact that the periodic rate(s) may vary.
(ii) Exception. An annual percentage rate that differs from the
rate that would otherwise apply and is offered only for a promotional
period need not be disclosed except in periods in which the offered
rate is actually applied.
(5) Balance on which finance charge computed. The amount of the
balance to which a periodic rate was applied and an explanation of how
that balance was determined. When a balance is determined without first
deducting all credits and payments made during the billing cycle, the
fact and the amount of the credits and payments shall be disclosed.
(6) Amount of finance charge and other charges. Creditors may
comply with paragraphs (a)(6) of this section, or with paragraph (b)(6)
of this section, at their option.
(i) Finance charges. The amount of any finance charge debited or
added to the account during the billing cycle, using the term finance
charge. The components of the finance charge shall be individually
itemized and identified to show the amount(s) due to the application of
any periodic rates and the amounts(s) of any other type of finance
charge. If there is more than one periodic rate, the amount of the
finance charge attributable to each rate need not be separately
itemized and identified.
(ii) Other charges. The amounts, itemized and identified by type,
of any charges other than finance charges debited to the account during
the billing cycle.
(7) Annual percentage rate. At a creditor's option, when a finance
charge is imposed during the billing cycle, the annual percentage
rate(s) determined under Sec. 1026.14(c) using the term annual
percentage rate.
(8) Grace period. The date by which or the time period within which
the new balance or any portion of the new balance must be paid to avoid
additional finance charges. If such a time period is provided, a
creditor may, at its option and without disclosure, impose no finance
charge if payment is received after the time period's expiration.
(9) Address for notice of billing errors. The address to be used
for notice of billing errors. Alternatively, the address may be
provided on the billing rights statement permitted by Sec.
1026.9(a)(2).
(10) Closing date of billing cycle; new balance. The closing date
of the billing cycle and the account balance outstanding on that date.
(b) Rules affecting open-end (not home-secured) plans. The
requirements of paragraph (b) of this section apply only to plans other
than home-equity plans subject to the requirements of Sec. 1026.40.
(1) Previous balance. The account balance outstanding at the
beginning of the billing cycle.
(2) Identification of transactions. An identification of each
credit transaction in accordance with Sec. 1026.8.
(3) Credits. Any credit to the account during the billing cycle,
including the amount and the date of crediting. The date need not be
provided if a delay in crediting does not result in any finance or
other charge.
(4) Periodic rates. (i) Except as provided in paragraph (b)(4)(ii)
of this section, each periodic rate that may be used to compute the
interest charge expressed as an annual percentage rate and using the
term Annual Percentage Rate, along with the range of balances to which
it is applicable. If no interest charge is imposed when the outstanding
balance is less than a certain amount, the creditor is not required to
disclose that fact, or the balance below which no interest charge will
be imposed. The types of transactions to which the periodic rates apply
shall also be disclosed. For variable-rate plans, the fact that the
annual percentage rate may vary.
[[Page 79783]]
(ii) Exception. A promotional rate, as that term is defined in
Sec. 1026.16(g)(2)(i), is required to be disclosed only in periods in
which the offered rate is actually applied.
(5) Balance on which finance charge computed. The amount of the
balance to which a periodic rate was applied and an explanation of how
that balance was determined, using the term Balance Subject to Interest
Rate. When a balance is determined without first deducting all credits
and payments made during the billing cycle, the fact and the amount of
the credits and payments shall be disclosed. As an alternative to
providing an explanation of how the balance was determined, a creditor
that uses a balance computation method identified in Sec. 1026.60(g)
may, at the creditor's option, identify the name of the balance
computation method and provide a toll-free telephone number where
consumers may obtain from the creditor more information about the
balance computation method and how resulting interest charges were
determined. If the method used is not identified in Sec. 1026.60(g),
the creditor shall provide a brief explanation of the method used.
(6) Charges imposed. (i) The amounts of any charges imposed as part
of a plan as stated in Sec. 1026.6(b)(3), grouped together, in
proximity to transactions identified under paragraph (b)(2) of this
section, substantially similar to Sample G-18(A) in Appendix G to this
part.
(ii) Interest. Finance charges attributable to periodic interest
rates, using the term Interest Charge, must be grouped together under
the heading Interest Charged, itemized and totaled by type of
transaction, and a total of finance charges attributable to periodic
interest rates, using the term Total Interest, must be disclosed for
the statement period and calendar year to date, using a format
substantially similar to Sample G-18(A) in Appendix G to this part.
(iii) Fees. Charges imposed as part of the plan other than charges
attributable to periodic interest rates must be grouped together under
the heading Fees, identified consistent with the feature or type, and
itemized, and a total of charges, using the term Fees, must be
disclosed for the statement period and calendar year to date, using a
format substantially similar to Sample G-18(A) in Appendix G to this
part.
(7) Change-in-terms and increased penalty rate summary for open-end
(not home-secured) plans. Creditors that provide a change-in-terms
notice required by Sec. 1026.9(c), or a rate increase notice required
by Sec. 1026.9(g), on or with the periodic statement, must disclose
the information in Sec. 1026.9(c)(2)(iv)(A) and (c)(2)(iv)(B) (if
applicable) or Sec. 1026.9(g)(3)(i) on the periodic statement in
accordance with the format requirements in Sec. 1026.9(c)(2)(iv)(D),
and Sec. 1026.9(g)(3)(ii). See Forms G-18(F) and G-18(G) in Appendix G
to this part.
(8) Grace period. The date by which or the time period within which
the new balance or any portion of the new balance must be paid to avoid
additional finance charges. If such a time period is provided, a
creditor may, at its option and without disclosure, impose no finance
charge if payment is received after the time period's expiration.
(9) Address for notice of billing errors. The address to be used
for notice of billing errors. Alternatively, the address may be
provided on the billing rights statement permitted by Sec.
1026.9(a)(2).
(10) Closing date of billing cycle; new balance. The closing date
of the billing cycle and the account balance outstanding on that date.
The new balance must be disclosed in accordance with the format
requirements of paragraph (b)(13) of this section.
(11) Due date; late payment costs. (i) Except as provided in
paragraph (b)(11)(ii) of this section and in accordance with the format
requirements in paragraph (b)(13) of this section, for a credit card
account under an open-end (not home-secured) consumer credit plan, a
card issuer must provide on each periodic statement:
(A) The due date for a payment. The due date disclosed pursuant to
this paragraph shall be the same day of the month for each billing
cycle.
(B) The amount of any late payment fee and any increased periodic
rate(s) (expressed as an annual percentage rate(s)) that may be imposed
on the account as a result of a late payment. If a range of late
payment fees may be assessed, the card issuer may state the range of
fees, or the highest fee and an indication that the fee imposed could
be lower. If the rate may be increased for more than one feature or
balance, the card issuer may state the range of rates or the highest
rate that could apply and at the issuer's option an indication that the
rate imposed could be lower.
(ii) Exception. The requirements of paragraph (b)(11)(i) of this
section do not apply to the following:
(A) Periodic statements provided solely for charge card accounts;
and
(B) Periodic statements provided for a charged-off account where
payment of the entire account balance is due immediately.
(12) Repayment disclosures. (i) In general. Except as provided in
paragraphs (b)(12)(ii) and (b)(12)(v) of this section, for a credit
card account under an open-end (not home-secured) consumer credit plan,
a card issuer must provide the following disclosures on each periodic
statement:
(A) The following statement with a bold heading: ``Minimum Payment
Warning: If you make only the minimum payment each period, you will pay
more in interest and it will take you longer to pay off your balance;''
(B) The minimum payment repayment estimate, as described in
Appendix M1 to this part. If the minimum payment repayment estimate is
less than 2 years, the card issuer must disclose the estimate in
months. Otherwise, the estimate must be disclosed in years and rounded
to the nearest whole year;
(C) The minimum payment total cost estimate, as described in
Appendix M1 to this part. The minimum payment total cost estimate must
be rounded either to the nearest whole dollar or to the nearest cent,
at the card issuer's option;
(D) A statement that the minimum payment repayment estimate and the
minimum payment total cost estimate are based on the current
outstanding balance shown on the periodic statement. A statement that
the minimum payment repayment estimate and the minimum payment total
cost estimate are based on the assumption that only minimum payments
are made and no other amounts are added to the balance;
(E) A toll-free telephone number where the consumer may obtain from
the card issuer information about credit counseling services consistent
with paragraph (b)(12)(iv) of this section; and
(F)(1) Except as provided in paragraph (b)(12)(i)(F)(2) of this
section, the following disclosures:
(i) The estimated monthly payment for repayment in 36 months, as
described in Appendix M1 to this part. The estimated monthly payment
for repayment in 36 months must be rounded either to the nearest whole
dollar or to the nearest cent, at the card issuer's option;
(ii) A statement that the card issuer estimates that the consumer
will repay the outstanding balance shown on the periodic statement in 3
years if the consumer pays the estimated monthly payment each month for
3 years;
(iii) The total cost estimate for repayment in 36 months, as
described in Appendix M1 to this part. The total cost estimate for
repayment in 36 months must be rounded either to the nearest whole
dollar or to the nearest cent, at the card issuer's option; and
(iv) The savings estimate for repayment in 36 months, as described
in
[[Page 79784]]
Appendix M1 to this part. The savings estimate for repayment in 36
months must be rounded either to the nearest whole dollar or to the
nearest cent, at the card issuer's option.
(2) The requirements of paragraph (b)(12)(i)(F)(1) of this section
do not apply to a periodic statement in any of the following
circumstances:
(i) The minimum payment repayment estimate that is disclosed on the
periodic statement pursuant to paragraph (b)(12)(i)(B) of this section
after rounding is three years or less;
(ii) The estimated monthly payment for repayment in 36 months, as
described in Appendix M1 to this part, after rounding as set forth in
paragraph (b)(12)(i)(F)(1)(i) of this section that is calculated for a
particular billing cycle is less than the minimum payment required for
the plan for that billing cycle; and
(iii) A billing cycle where an account has both a balance in a
revolving feature where the required minimum payments for this feature
will not amortize that balance in a fixed amount of time specified in
the account agreement and a balance in a fixed repayment feature where
the required minimum payment for this fixed repayment feature will
amortize that balance in a fixed amount of time specified in the
account agreement which is less than 36 months.
(ii) Negative or no amortization. If negative or no amortization
occurs when calculating the minimum payment repayment estimate as
described in Appendix M1 of this part, a card issuer must provide the
following disclosures on the periodic statement instead of the
disclosures set forth in paragraph (b)(12)(i) of this section:
(A) The following statement: ``Minimum Payment Warning: Even if you
make no more charges using this card, if you make only the minimum
payment each month we estimate you will never pay off the balance shown
on this statement because your payment will be less than the interest
charged each month'';
(B) The following statement: ``If you make more than the minimum
payment each period, you will pay less in interest and pay off your
balance sooner'';
(C) The estimated monthly payment for repayment in 36 months, as
described in Appendix M1 to this part. The estimated monthly payment
for repayment in 36 months must be rounded either to the nearest whole
dollar or to the nearest cent, at the issuer's option;
(D) A statement that the card issuer estimates that the consumer
will repay the outstanding balance shown on the periodic statement in 3
years if the consumer pays the estimated monthly payment each month for
3 years; and
(E) A toll-free telephone number where the consumer may obtain from
the card issuer information about credit counseling services consistent
with paragraph (b)(12)(iv) of this section.
(iii) Format requirements. A card issuer must provide the
disclosures required by paragraph (b)(12)(i) or (b)(12)(ii) of this
section in accordance with the format requirements of paragraph (b)(13)
of this section, and in a format substantially similar to Samples G-
18(C)(1), G-18(C)(2) and G-18(C)(3) in Appendix G to this part, as
applicable.
(iv) Provision of information about credit counseling services. (A)
Required information. To the extent available from the United States
Trustee or a bankruptcy administrator, a card issuer must provide
through the toll-free telephone number disclosed pursuant to paragraphs
(b)(12)(i) or (b)(12)(ii) of this section the name, street address,
telephone number, and Web site address for at least three organizations
that have been approved by the United States Trustee or a bankruptcy
administrator pursuant to 11 U.S.C. 111(a)(1) to provide credit
counseling services in, at the card issuer's option, either the state
in which the billing address for the account is located or the state
specified by the consumer.
(B) Updating required information. At least annually, a card issuer
must update the information provided pursuant to paragraph
(b)(12)(iv)(A) of this section for consistency with the information
available from the United States Trustee or a bankruptcy administrator.
(v) Exemptions. Paragraph (b)(12) of this section does not apply
to:
(A) Charge card accounts that require payment of outstanding
balances in full at the end of each billing cycle;
(B) A billing cycle immediately following two consecutive billing
cycles in which the consumer paid the entire balance in full, had a
zero outstanding balance or had a credit balance; and
(C) A billing cycle where paying the minimum payment due for that
billing cycle will pay the entire outstanding balance on the account
for that billing cycle.
(13) Format requirements. The due date required by paragraph
(b)(11) of this section shall be disclosed on the front of the first
page of the periodic statement. The amount of the late payment fee and
the annual percentage rate(s) required by paragraph (b)(11) of this
section shall be stated in close proximity to the due date. The ending
balance required by paragraph (b)(10) of this section and the
disclosures required by paragraph (b)(12) of this section shall be
disclosed closely proximate to the minimum payment due. The due date,
late payment fee and annual percentage rate, ending balance, minimum
payment due, and disclosures required by paragraph (b)(12) of this
section shall be grouped together. Sample G-18(D) in Appendix G to this
part sets forth an example of how these terms may be grouped.
(14) Deferred interest or similar transactions. For accounts with
an outstanding balance subject to a deferred interest or similar
program, the date by which that outstanding balance must be paid in
full in order to avoid the obligation to pay finance charges on such
balance must be disclosed on the front of any page of each periodic
statement issued during the deferred interest period beginning with the
first periodic statement issued during the deferred interest period
that reflects the deferred interest or similar transaction. The
disclosure provided pursuant to this paragraph must be substantially
similar to Sample G-18(H) in Appendix G to this part.
Sec. 1026.8 Identifying transactions on periodic statements.
The creditor shall identify credit transactions on or with the
first periodic statement that reflects the transaction by furnishing
the following information, as applicable:
(a) Sale credit. (1) Except as provided in paragraph (a)(2) of this
section, for each credit transaction involving the sale of property or
services, the creditor must disclose the amount and date of the
transaction, and either:
(i) A brief identification of the property or services purchased,
for creditors and sellers that are the same or related; or
(ii) The seller's name; and the city and state or foreign country
where the transaction took place. The creditor may omit the address or
provide any suitable designation that helps the consumer to identify
the transaction when the transaction took place at a location that is
not fixed; took place in the consumer's home; or was a mail, Internet,
or telephone order.
(2) Creditors need not comply with paragraph (a)(1) of this section
if an actual copy of the receipt or other credit document is provided
with the first periodic statement reflecting the transaction, and the
amount of the transaction and either the date of the transaction to the
consumer's account or the date of debiting the transaction are
disclosed on the copy or on the periodic statement.
[[Page 79785]]
(b) Nonsale credit. For each credit transaction not involving the
sale of property or services, the creditor must disclose a brief
identification of the transaction; the amount of the transaction; and
at least one of the following dates: The date of the transaction, the
date the transaction was debited to the consumer's account, or, if the
consumer signed the credit document, the date appearing on the
document. If an actual copy of the receipt or other credit document is
provided and that copy shows the amount and at least one of the
specified dates, the brief identification may be omitted.
(c) Alternative creditor procedures; consumer inquiries for
clarification or documentation. The following procedures apply to
creditors that treat an inquiry for clarification or documentation as a
notice of a billing error, including correcting the account in
accordance with Sec. 1026.13(e):
(1) Failure to disclose the information required by paragraphs (a)
and (b) of this section is not a failure to comply with the regulation,
provided that the creditor also maintains procedures reasonably
designed to obtain and provide the information. This applies to
transactions that take place outside a state, as defined in Sec.
1026.2(a)(26), whether or not the creditor maintains procedures
reasonably adapted to obtain the required information.
(2) As an alternative to the brief identification for sale or
nonsale credit, the creditor may disclose a number or symbol that also
appears on the receipt or other credit document given to the consumer,
if the number or symbol reasonably identifies that transaction with
that creditor.
Sec. 1026.9 Subsequent disclosure requirements.
(a) Furnishing statement of billing rights. (1) Annual statement.
The creditor shall mail or deliver the billing rights statement
required by Sec. 1026.6(a)(5) and (b)(5)(iii) at least once per
calendar year, at intervals of not less than 6 months nor more than 18
months, either to all consumers or to each consumer entitled to receive
a periodic statement under Sec. 1026.5(b)(2) for any one billing
cycle.
(2) Alternative summary statement. As an alternative to paragraph
(a)(1) of this section, the creditor may mail or deliver, on or with
each periodic statement, a statement substantially similar to Model
Form G-4 or Model Form G-4(A) in Appendix G to this part, as
applicable. Creditors offering home-equity plans subject to the
requirements of Sec. 1026.40 may use either Model Form, at their
option.
(b) Disclosures for supplemental credit access devices and
additional features. (1) If a creditor, within 30 days after mailing or
delivering the account-opening disclosures under Sec. 1026.6(a)(1) or
(b)(3)(ii)(A), as applicable, adds a credit feature to the consumer's
account or mails or delivers to the consumer a credit access device,
including but not limited to checks that access a credit card account,
for which the finance charge terms are the same as those previously
disclosed, no additional disclosures are necessary. Except as provided
in paragraph (b)(3) of this section, after 30 days, if the creditor
adds a credit feature or furnishes a credit access device (other than
as a renewal, resupply, or the original issuance of a credit card) on
the same finance charge terms, the creditor shall disclose, before the
consumer uses the feature or device for the first time, that it is for
use in obtaining credit under the terms previously disclosed.
(2) Except as provided in paragraph (b)(3) of this section,
whenever a credit feature is added or a credit access device is mailed
or delivered to the consumer, and the finance charge terms for the
feature or device differ from disclosures previously given, the
disclosures required by Sec. 1026.6(a)(1) or (b)(3)(ii)(A), as
applicable, that are applicable to the added feature or device shall be
given before the consumer uses the feature or device for the first
time.
(3) Checks that access a credit card account. (i) Disclosures. For
open-end plans not subject to the requirements of Sec. 1026.40, if
checks that can be used to access a credit card account are provided
more than 30 days after account-opening disclosures under Sec.
1026.6(b) are mailed or delivered, or are provided within 30 days of
the account-opening disclosures and the finance charge terms for the
checks differ from the finance charge terms previously disclosed, the
creditor shall disclose on the front of the page containing the checks
the following terms in the form of a table with the headings, content,
and form substantially similar to Sample G-19 in Appendix G to this
part:
(A) If a promotional rate, as that term is defined in Sec.
1026.16(g)(2)(i) applies to the checks:
(1) The promotional rate and the time period during which the
promotional rate will remain in effect;
(2) The type of rate that will apply (such as whether the purchase
or cash advance rate applies) after the promotional rate expires, and
the annual percentage rate that will apply after the promotional rate
expires. For a variable-rate account, a creditor must disclose an
annual percentage rate based on the applicable index or formula in
accordance with the accuracy requirements set forth in paragraph
(b)(3)(ii) of this section; and
(3) The date, if any, by which the consumer must use the checks in
order to qualify for the promotional rate. If the creditor will honor
checks used after such date but will apply an annual percentage rate
other than the promotional rate, the creditor must disclose this fact
and the type of annual percentage rate that will apply if the consumer
uses the checks after such date.
(B) If no promotional rate applies to the checks:
(1) The type of rate that will apply to the checks and the
applicable annual percentage rate. For a variable-rate account, a
creditor must disclose an annual percentage rate based on the
applicable index or formula in accordance with the accuracy
requirements set forth in paragraph (b)(3)(ii) of this section.
(2) [Reserved]
(C) Any transaction fees applicable to the checks disclosed under
Sec. 1026.6(b)(2)(iv); and
(D) Whether or not a grace period is given within which any credit
extended by use of the checks may be repaid without incurring a finance
charge due to a periodic interest rate. When disclosing whether there
is a grace period, the phrase ``How to Avoid Paying Interest on Check
Transactions'' shall be used as the row heading when a grace period
applies to credit extended by the use of the checks. When disclosing
the fact that no grace period exists for credit extended by use of the
checks, the phrase ``Paying Interest'' shall be used as the row
heading.
(ii) Accuracy. The disclosures in paragraph (b)(3)(i) of this
section must be accurate as of the time the disclosures are mailed or
delivered. A variable annual percentage rate is accurate if it was in
effect within 60 days of when the disclosures are mailed or delivered.
(iii) Variable rates. If any annual percentage rate required to be
disclosed pursuant to paragraph (b)(3)(i) of this section is a variable
rate, the card issuer shall also disclose the fact that the rate may
vary and how the rate is determined. In describing how the applicable
rate will be determined, the card issuer must identify the type of
index or formula that is used in setting the rate. The value of the
index and the amount of the margin that are used to
[[Page 79786]]
calculate the variable rate shall not be disclosed in the table. A
disclosure of any applicable limitations on rate increases shall not be
included in the table.
(c) Change in terms. (1) Rules affecting home-equity plans. (i)
Written notice required. For home-equity plans subject to the
requirements of Sec. 1026.40, whenever any term required to be
disclosed under Sec. 1026.6(a) is changed or the required minimum
periodic payment is increased, the creditor shall mail or deliver
written notice of the change to each consumer who may be affected. The
notice shall be mailed or delivered at least 15 days prior to the
effective date of the change. The 15-day timing requirement does not
apply if the change has been agreed to by the consumer; the notice
shall be given, however, before the effective date of the change.
(ii) Notice not required. For home-equity plans subject to the
requirements of Sec. 1026.40, a creditor is not required to provide
notice under this section when the change involves a reduction of any
component of a finance or other charge or when the change results from
an agreement involving a court proceeding.
(iii) Notice to restrict credit. For home-equity plans subject to
the requirements of Sec. 1026.40, if the creditor prohibits additional
extensions of credit or reduces the credit limit pursuant to Sec.
1026.40(f)(3)(i) or (f)(3)(vi), the creditor shall mail or deliver
written notice of the action to each consumer who will be affected. The
notice must be provided not later than three business days after the
action is taken and shall contain specific reasons for the action. If
the creditor requires the consumer to request reinstatement of credit
privileges, the notice also shall state that fact.
(2) Rules affecting open-end (not home-secured) plans. (i) Changes
where written advance notice is required. (A) General. For plans other
than home-equity plans subject to the requirements of Sec. 1026.40,
except as provided in paragraphs (c)(2)(i)(B), (c)(2)(iii) and
(c)(2)(v) of this section, when a significant change in account terms
as described in paragraph (c)(2)(ii) of this section is made, a
creditor must provide a written notice of the change at least 45 days
prior to the effective date of the change to each consumer who may be
affected. The 45-day timing requirement does not apply if the consumer
has agreed to a particular change as described in paragraph
(c)(2)(i)(B) of this section; for such changes, notice must be given in
accordance with the timing requirements of paragraph (c)(2)(i)(B) of
this section. Increases in the rate applicable to a consumer's account
due to delinquency, default or as a penalty described in paragraph (g)
of this section that are not due to a change in the contractual terms
of the consumer's account must be disclosed pursuant to paragraph (g)
of this section instead of paragraph (c)(2) of this section.
(B) Changes agreed to by the consumer. A notice of change in terms
is required, but it may be mailed or delivered as late as the effective
date of the change if the consumer agrees to the particular change.
This paragraph (c)(2)(i)(B) applies only when a consumer substitutes
collateral or when the creditor can advance additional credit only if a
change relatively unique to that consumer is made, such as the
consumer's providing additional security or paying an increased minimum
payment amount. The following are not considered agreements between the
consumer and the creditor for purposes of this paragraph (c)(2)(i)(B):
The consumer's general acceptance of the creditor's contract
reservation of the right to change terms; the consumer's use of the
account (which might imply acceptance of its terms under state law);
the consumer's acceptance of a unilateral term change that is not
particular to that consumer, but rather is of general applicability to
consumers with that type of account; and the consumer's request to
reopen a closed account or to upgrade an existing account to another
account offered by the creditor with different credit or other
features.
(ii) Significant changes in account terms. For purposes of this
section, a ``significant change in account terms'' means a change to a
term required to be disclosed under Sec. 1026.6(b)(1) and (b)(2), an
increase in the required minimum periodic payment, a change to a term
required to be disclosed under Sec. 1026.6(b)(4), or the acquisition
of a security interest.
(iii) Charges not covered by Sec. 1026.6(b)(1) and (b)(2). Except
as provided in paragraph (c)(2)(vi) of this section, if a creditor
increases any component of a charge, or introduces a new charge,
required to be disclosed under Sec. 1026.6(b)(3) that is not a
significant change in account terms as described in paragraph
(c)(2)(ii) of this section, a creditor must either, at its option:
(A) Comply with the requirements of paragraph (c)(2)(i) of this
section; or
(B) Provide notice of the amount of the charge before the consumer
agrees to or becomes obligated to pay the charge, at a time and in a
manner that a consumer would be likely to notice the disclosure of the
charge. The notice may be provided orally or in writing.
(iv) Disclosure requirements. (A) Significant changes in account
terms. If a creditor makes a significant change in account terms as
described in paragraph (c)(2)(ii) of this section, the notice provided
pursuant to paragraph (c)(2)(i) of this section must provide the
following information:
(1) A summary of the changes made to terms required by Sec.
1026.6(b)(1) and (b)(2) or Sec. 1026.6(b)(4), a description of any
increase in the required minimum periodic payment, and a description of
any security interest being acquired by the creditor;
(2) A statement that changes are being made to the account;
(3) For accounts other than credit card accounts under an open-end
(not home-secured) consumer credit plan subject to Sec.
1026.9(c)(2)(iv)(B), a statement indicating the consumer has the right
to opt out of these changes, if applicable, and a reference to
additional information describing the opt-out right provided in the
notice, if applicable;
(4) The date the changes will become effective;
(5) If applicable, a statement that the consumer may find
additional information about the summarized changes, and other changes
to the account, in the notice;
(6) If the creditor is changing a rate on the account, other than a
penalty rate, a statement that if a penalty rate currently applies to
the consumer's account, the new rate described in the notice will not
apply to the consumer's account until the consumer's account balances
are no longer subject to the penalty rate;
(7) If the change in terms being disclosed is an increase in an
annual percentage rate, the balances to which the increased rate will
be applied. If applicable, a statement identifying the balances to
which the current rate will continue to apply as of the effective date
of the change in terms; and
(8) If the change in terms being disclosed is an increase in an
annual percentage rate for a credit card account under an open-end (not
home-secured) consumer credit plan, a statement of no more than four
principal reasons for the rate increase, listed in their order of
importance.
(B) Right to reject for credit card accounts under an open-end (not
home-secured) consumer credit plan. In addition to the disclosures in
paragraph (c)(2)(iv)(A) of this section, if a card issuer makes a
significant change in account terms on a credit card account under an
open-end (not home-secured)
[[Page 79787]]
consumer credit plan, the creditor must generally provide the following
information on the notice provided pursuant to paragraph (c)(2)(i) of
this section. This information is not required to be provided in the
case of an increase in the required minimum periodic payment, an
increase in a fee as a result of a reevaluation of a determination made
under Sec. 1026.52(b)(1)(i) or an adjustment to the safe harbors in
Sec. 1026.52(b)(1)(ii) to reflect changes in the Consumer Price Index,
a change in an annual percentage rate applicable to a consumer's
account, an increase in a fee previously reduced consistent with 50
U.S.C. app. 527 or a similar Federal or state statute or regulation if
the amount of the increased fee does not exceed the amount of that fee
prior to the reduction, or when the change results from the creditor
not receiving the consumer's required minimum periodic payment within
60 days after the due date for that payment:
(1) A statement that the consumer has the right to reject the
change or changes prior to the effective date of the changes, unless
the consumer fails to make a required minimum periodic payment within
60 days after the due date for that payment;
(2) Instructions for rejecting the change or changes, and a toll-
free telephone number that the consumer may use to notify the creditor
of the rejection; and
(3) If applicable, a statement that if the consumer rejects the
change or changes, the consumer's ability to use the account for
further advances will be terminated or suspended.
(C) Changes resulting from failure to make minimum periodic payment
within 60 days from due date for credit card accounts under an open-end
(not home-secured) consumer credit plan. For a credit card account
under an open-end (not home-secured) consumer credit plan:
(1) If the significant change required to be disclosed pursuant to
paragraph (c)(2)(i) of this section is an increase in an annual
percentage rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) based on the consumer's
failure to make a minimum periodic payment within 60 days from the due
date for that payment, the notice provided pursuant to paragraph
(c)(2)(i) of this section must state that the increase will cease to
apply to transactions that occurred prior to or within 14 days of
provision of the notice, if the creditor receives six consecutive
required minimum periodic payments on or before the payment due date,
beginning with the first payment due following the effective date of
the increase.
(2) If the significant change required to be disclosed pursuant to
paragraph (c)(2)(i) of this section is an increase in a fee or charge
required to be disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) based on the consumer's failure to make a minimum periodic
payment within 60 days from the due date for that payment, the notice
provided pursuant to paragraph (c)(2)(i) of this section must also
state the reason for the increase.
(D) Format requirements. (1) Tabular format. The summary of changes
described in paragraph (c)(2)(iv)(A)(1) of this section must be in a
tabular format (except for a summary of any increase in the required
minimum periodic payment, a summary of a term required to be disclosed
under Sec. 1026.6(b)(4) that is not required to be disclosed under
Sec. 1026.6(b)(1) and (b)(2), or a description of any security
interest being acquired by the creditor), with headings and format
substantially similar to any of the account-opening tables found in G-
17 in Appendix G to this part. The table must disclose the changed term
and information relevant to the change, if that relevant information is
required by Sec. 1026.6(b)(1) and (b)(2). The new terms shall be
described in the same level of detail as required when disclosing the
terms under Sec. 1026.6(b)(2).
(2) Notice included with periodic statement. If a notice required
by paragraph (c)(2)(i) of this section is included on or with a
periodic statement, the information described in paragraph
(c)(2)(iv)(A)(1) of this section must be disclosed on the front of any
page of the statement. The summary of changes described in paragraph
(c)(2)(iv)(A)(1) of this section must immediately follow the
information described in paragraph (c)(2)(iv)(A)(2) through
(c)(2)(iv)(A)(7) and, if applicable, paragraphs (c)(2)(iv)(A)(8),
(c)(2)(iv)(B), and (c)(2)(iv)(C) of this section, and be substantially
similar to the format shown in Sample G-20 or G-21 in Appendix G to
this part.
(3) Notice provided separately from periodic statement. If a notice
required by paragraph (c)(2)(i) of this section is not included on or
with a periodic statement, the information described in paragraph
(c)(2)(iv)(A)(1) of this section must, at the creditor's option, be
disclosed on the front of the first page of the notice or segregated on
a separate page from other information given with the notice. The
summary of changes required to be in a table pursuant to paragraph
(c)(2)(iv)(A)(1) of this section may be on more than one page, and may
use both the front and reverse sides, so long as the table begins on
the front of the first page of the notice and there is a reference on
the first page indicating that the table continues on the following
page. The summary of changes described in paragraph (c)(2)(iv)(A)(1) of
this section must immediately follow the information described in
paragraph (c)(2)(iv)(A)(2) through (c)(2)(iv)(A)(7) and, if applicable,
paragraphs (c)(2)(iv)(A)(8), (c)(2)(iv)(B), and (c)(2)(iv)(C), of this
section, substantially similar to the format shown in Sample G-20 or G-
21 in Appendix G to this part.
(v) Notice not required. For open-end plans (other than home equity
plans subject to the requirements of Sec. 1026.40) a creditor is not
required to provide notice under this section:
(A) When the change involves charges for documentary evidence; a
reduction of any component of a finance or other charge; suspension of
future credit privileges (except as provided in paragraph (c)(2)(vi) of
this section) or termination of an account or plan; when the change
results from an agreement involving a court proceeding; when the change
is an extension of the grace period; or if the change is applicable
only to checks that access a credit card account and the changed terms
are disclosed on or with the checks in accordance with paragraph (b)(3)
of this section;
(B) When the change is an increase in an annual percentage rate or
fee upon the expiration of a specified period of time, provided that:
(1) Prior to commencement of that period, the creditor disclosed in
writing to the consumer, in a clear and conspicuous manner, the length
of the period and the annual percentage rate or fee that would apply
after expiration of the period;
(2) The disclosure of the length of the period and the annual
percentage rate or fee that would apply after expiration of the period
are set forth in close proximity and in equal prominence to the first
listing of the disclosure of the rate or fee that applies during the
specified period of time; and
(3) The annual percentage rate or fee that applies after that
period does not exceed the rate or fee disclosed pursuant to paragraph
(c)(2)(v)(B)(1) of this paragraph or, if the rate disclosed pursuant to
paragraph (c)(2)(v)(B)(1) of this section was a variable rate, the rate
following any such increase is a variable rate determined by the same
formula (index and margin) that was used to calculate the variable rate
disclosed pursuant to paragraph (c)(2)(v)(B)(1);
[[Page 79788]]
(C) When the change is an increase in a variable annual percentage
rate in accordance with a credit card or other account agreement that
provides for changes in the rate according to operation of an index
that is not under the control of the creditor and is available to the
general public; or
(D) When the change is an increase in an annual percentage rate, a
fee or charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), (b)(2)(viii), (b)(2)(ix), (b)(2)(ix) or (b)(2)(xii), or
the required minimum periodic payment due to the completion of a
workout or temporary hardship arrangement by the consumer or the
consumer's failure to comply with the terms of such an arrangement,
provided that:
(1) The annual percentage rate or fee or charge applicable to a
category of transactions or the required minimum periodic payment
following any such increase does not exceed the rate or fee or charge
or required minimum periodic payment that applied to that category of
transactions prior to commencement of the arrangement or, if the rate
that applied to a category of transactions prior to the commencement of
the workout or temporary hardship arrangement was a variable rate, the
rate following any such increase is a variable rate determined by the
same formula (index and margin) that applied to the category of
transactions prior to commencement of the workout or temporary hardship
arrangement; and
(2) The creditor has provided the consumer, prior to the
commencement of such arrangement, with a clear and conspicuous
disclosure of the terms of the arrangement (including any increases due
to such completion or failure). This disclosure must generally be
provided in writing. However, a creditor may provide the disclosure of
the terms of the arrangement orally by telephone, provided that the
creditor mails or delivers a written disclosure of the terms of the
arrangement to the consumer as soon as reasonably practicable after the
oral disclosure is provided.
(vi) Reduction of the credit limit. For open-end plans that are not
subject to the requirements of Sec. 1026.40, if a creditor decreases
the credit limit on an account, advance notice of the decrease must be
provided before an over-the-limit fee or a penalty rate can be imposed
solely as a result of the consumer exceeding the newly decreased credit
limit. Notice shall be provided in writing or orally at least 45 days
prior to imposing the over-the-limit fee or penalty rate and shall
state that the credit limit on the account has been or will be
decreased.
(d) Finance charge imposed at time of transaction. (1) Any person,
other than the card issuer, who imposes a finance charge at the time of
honoring a consumer's credit card, shall disclose the amount of that
finance charge prior to its imposition.
(2) The card issuer, other than the person honoring the consumer's
credit card, shall have no responsibility for the disclosure required
by paragraph (d)(1) of this section, and shall not consider any such
charge for the purposes of Sec. Sec. 1026.60, 1026.6 and 1026.7.
(e) Disclosures upon renewal of credit or charge card. (1) Notice
prior to renewal. A card issuer that imposes any annual or other
periodic fee to renew a credit or charge card account of the type
subject to Sec. 1026.60, including any fee based on account activity
or inactivity or any card issuer that has changed or amended any term
of a cardholder's account required to be disclosed under Sec.
1026.6(b)(1) and (b)(2) that has not previously been disclosed to the
consumer, shall mail or deliver written notice of the renewal to the
cardholder. If the card issuer imposes any annual or other periodic fee
for renewal, the notice shall be provided at least 30 days or one
billing cycle, whichever is less, before the mailing or the delivery of
the periodic statement on which any renewal fee is initially charged to
the account. If the card issuer has changed or amended any term
required to be disclosed under Sec. 1026.6(b)(1) and (b)(2) and such
changed or amended term has not previously been disclosed to the
consumer, the notice shall be provided at least 30 days prior to the
scheduled renewal date of the consumer's credit or charge card. The
notice shall contain the following information:
(i) The disclosures contained in Sec. 1026.60(b)(1) through (b)(7)
that would apply if the account were renewed; and
(ii) How and when the cardholder may terminate credit availability
under the account to avoid paying the renewal fee, if applicable.
(2) Notification on periodic statements. The disclosures required
by this paragraph may be made on or with a periodic statement. If any
of the disclosures are provided on the back of a periodic statement,
the card issuer shall include a reference to those disclosures on the
front of the statement.
(f) Change in credit card account insurance provider. (1) Notice
prior to change. If a credit card issuer plans to change the provider
of insurance for repayment of all or part of the outstanding balance of
an open-end credit card account of the type subject to Sec. 1026.60,
the card issuer shall mail or deliver to the cardholder written notice
of the change not less than 30 days before the change in provider
occurs. The notice shall also include the following items, to the
extent applicable:
(i) Any increase in the rate that will result from the change;
(ii) Any substantial decrease in coverage that will result from the
change; and
(iii) A statement that the cardholder may discontinue the
insurance.
(2) Notice when change in provider occurs. If a change described in
paragraph (f)(1) of this section occurs, the card issuer shall provide
the cardholder with a written notice no later than 30 days after the
change, including the following items, to the extent applicable:
(i) The name and address of the new insurance provider;
(ii) A copy of the new policy or group certificate containing the
basic terms of the insurance, including the rate to be charged; and
(iii) A statement that the cardholder may discontinue the
insurance.
(3) Substantial decrease in coverage. For purposes of this
paragraph, a substantial decrease in coverage is a decrease in a
significant term of coverage that might reasonably be expected to
affect the cardholder's decision to continue the insurance. Significant
terms of coverage include, for example, the following:
(i) Type of coverage provided;
(ii) Age at which coverage terminates or becomes more restrictive;
(iii) Maximum insurable loan balance, maximum periodic benefit
payment, maximum number of payments, or other term affecting the dollar
amount of coverage or benefits provided;
(iv) Eligibility requirements and number and identity of persons
covered;
(v) Definition of a key term of coverage such as disability;
(vi) Exclusions from or limitations on coverage; and
(vii) Waiting periods and whether coverage is retroactive.
(4) Combined notification. The notices required by paragraph (f)(1)
and (2) of this section may be combined provided the timing requirement
of paragraph (f)(1) of this section is met. The notices may be provided
on or with a periodic statement.
(g) Increase in rates due to delinquency or default or as a
penalty. (1) Increases subject to this section. For plans other than
home-equity plans subject to the requirements of Sec. 1026.40, except
as provided in paragraph (g)(4) of this section, a creditor must
provide a written notice to each consumer who may be affected when:
[[Page 79789]]
(i) A rate is increased due to the consumer's delinquency or
default; or
(ii) A rate is increased as a penalty for one or more events
specified in the account agreement, such as making a late payment or
obtaining an extension of credit that exceeds the credit limit.
(2) Timing of written notice. Whenever any notice is required to be
given pursuant to paragraph (g)(1) of this section, the creditor shall
provide written notice of the increase in rates at least 45 days prior
to the effective date of the increase. The notice must be provided
after the occurrence of the events described in paragraphs (g)(1)(i)
and (g)(1)(ii) of this section that trigger the imposition of the rate
increase.
(3)(i) Disclosure requirements for rate increases. (A) General. If
a creditor is increasing the rate due to delinquency or default or as a
penalty, the creditor must provide the following information on the
notice sent pursuant to paragraph (g)(1) of this section:
(1) A statement that the delinquency or default rate or penalty
rate, as applicable, has been triggered;
(2) The date on which the delinquency or default rate or penalty
rate will apply;
(3) The circumstances under which the delinquency or default rate
or penalty rate, as applicable, will cease to apply to the consumer's
account, or that the delinquency or default rate or penalty rate will
remain in effect for a potentially indefinite time period;
(4) A statement indicating to which balances the delinquency or
default rate or penalty rate will be applied;
(5) If applicable, a description of any balances to which the
current rate will continue to apply as of the effective date of the
rate increase, unless a consumer fails to make a minimum periodic
payment within 60 days from the due date for that payment; and
(6) For a credit card account under an open-end (not home-secured)
consumer credit plan, a statement of no more than four principal
reasons for the rate increase, listed in their order of importance.
(B) Rate increases resulting from failure to make minimum periodic
payment within 60 days from due date. For a credit card account under
an open-end (not home-secured) consumer credit plan, if the rate
increase required to be disclosed pursuant to paragraph (g)(1) of this
section is an increase pursuant to Sec. 1026.55(b)(4) based on the
consumer's failure to make a minimum periodic payment within 60 days
from the due date for that payment, the notice provided pursuant to
paragraph (g)(1) of this section must also state that the increase will
cease to apply to transactions that occurred prior to or within 14 days
of provision of the notice, if the creditor receives six consecutive
required minimum periodic payments on or before the payment due date,
beginning with the first payment due following the effective date of
the increase.
(ii) Format requirements. (A) If a notice required by paragraph
(g)(1) of this section is included on or with a periodic statement, the
information described in paragraph (g)(3)(i) of this section must be in
the form of a table and provided on the front of any page of the
periodic statement, above the notice described in paragraph (c)(2)(iv)
of this section if that notice is provided on the same statement.
(B) If a notice required by paragraph (g)(1) of this section is not
included on or with a periodic statement, the information described in
paragraph (g)(3)(i) of this section must be disclosed on the front of
the first page of the notice. Only information related to the increase
in the rate to a penalty rate may be included with the notice, except
that this notice may be combined with a notice described in paragraph
(c)(2)(iv) or (g)(4) of this section.
(4) Exception for decrease in credit limit. A creditor is not
required to provide a notice pursuant to paragraph (g)(1) of this
section prior to increasing the rate for obtaining an extension of
credit that exceeds the credit limit, provided that:
(i) The creditor provides at least 45 days in advance of imposing
the penalty rate a notice, in writing, that includes:
(A) A statement that the credit limit on the account has been or
will be decreased.
(B) A statement indicating the date on which the penalty rate will
apply, if the outstanding balance exceeds the credit limit as of that
date;
(C) A statement that the penalty rate will not be imposed on the
date specified in paragraph (g)(4)(i)(B) of this section, if the
outstanding balance does not exceed the credit limit as of that date;
(D) The circumstances under which the penalty rate, if applied,
will cease to apply to the account, or that the penalty rate, if
applied, will remain in effect for a potentially indefinite time
period;
(E) A statement indicating to which balances the penalty rate may
be applied; and
(F) If applicable, a description of any balances to which the
current rate will continue to apply as of the effective date of the
rate increase, unless the consumer fails to make a minimum periodic
payment within 60 days from the due date for that payment; and
(ii) The creditor does not increase the rate applicable to the
consumer's account to the penalty rate if the outstanding balance does
not exceed the credit limit on the date set forth in the notice and
described in paragraph (g)(4)(i)(B) of this section.
(iii)(A) If a notice provided pursuant to paragraph (g)(4)(i) of
this section is included on or with a periodic statement, the
information described in paragraph (g)(4)(i) of this section must be in
the form of a table and provided on the front of any page of the
periodic statement; or
(B) If a notice required by paragraph (g)(4)(i) of this section is
not included on or with a periodic statement, the information described
in paragraph (g)(4)(i) of this section must be disclosed on the front
of the first page of the notice. Only information related to the
reduction in credit limit may be included with the notice, except that
this notice may be combined with a notice described in paragraph
(c)(2)(iv) or (g)(1) of this section.
(h) Consumer rejection of certain significant changes in terms. (1)
Right to reject. If paragraph (c)(2)(iv)(B) of this section requires
disclosure of the consumer's right to reject a significant change to an
account term, the consumer may reject that change by notifying the
creditor of the rejection before the effective date of the change.
(2) Effect of rejection. If a creditor is notified of a rejection
of a significant change to an account term as provided in paragraph
(h)(1) of this section, the creditor must not:
(i) Apply the change to the account;
(ii) Impose a fee or charge or treat the account as in default
solely as a result of the rejection; or
(iii) Require repayment of the balance on the account using a
method that is less beneficial to the consumer than one of the methods
listed in Sec. 1026.55(c)(2).
(3) Exception. Section 1026.9(h) does not apply when the creditor
has not received the consumer's required minimum periodic payment
within 60 days after the due date for that payment.
Sec. 1026.10 Payments.
(a) General rule. A creditor shall credit a payment to the
consumer's account as of the date of receipt, except when a delay in
crediting does not result in a finance or other charge or except as
provided in paragraph (b) of this section.
(b) Specific requirements for payments. (1) General rule. A
creditor may specify reasonable requirements for payments that enable
most consumers to make conforming payments.
[[Page 79790]]
(2) Examples of reasonable requirements for payments. Reasonable
requirements for making payment may include:
(i) Requiring that payments be accompanied by the account number or
payment stub;
(ii) Setting reasonable cut-off times for payments to be received
by mail, by electronic means, by telephone, and in person (except as
provided in paragraph (b)(3) of this section), provided that such cut-
off times shall be no earlier than 5 p.m. on the payment due date at
the location specified by the creditor for the receipt of such
payments;
(iii) Specifying that only checks or money orders should be sent by
mail;
(iv) Specifying that payment is to be made in U.S. dollars; or
(v) Specifying one particular address for receiving payments, such
as a post office box.
(3) In-person payments on credit card accounts. (i) General.
Notwithstanding Sec. 1026.10(b), payments on a credit card account
under an open-end (not home-secured) consumer credit plan made in
person at a branch or office of a card issuer that is a financial
institution prior to the close of business of that branch or office
shall be considered received on the date on which the consumer makes
the payment. A card issuer that is a financial institution shall not
impose a cut-off time earlier than the close of business for any such
payments made in person at any branch or office of the card issuer at
which such payments are accepted. Notwithstanding Sec.
1026.10(b)(2)(ii), a card issuer may impose a cut-off time earlier than
5 p.m. for such payments, if the close of business of the branch or
office is earlier than 5 p.m.
(ii) Financial institution. For purposes of paragraph (b)(3) of
this section, ``financial institution'' shall mean a bank, savings
association, or credit union.
(4) Nonconforming payments. (i) In general. Except as provided in
paragraph (b)(4)(ii) of this section, if a creditor specifies, on or
with the periodic statement, requirements for the consumer to follow in
making payments as permitted under this Sec. 1026.10, but accepts a
payment that does not conform to the requirements, the creditor shall
credit the payment within five days of receipt.
(ii) Payment methods promoted by creditor. If a creditor promotes a
method for making payments, such payments shall be considered
conforming payments in accordance with this paragraph (b) and shall be
credited to the consumer's account as of the date of receipt, except
when a delay in crediting does not result in a finance or other charge.
(c) Adjustment of account. If a creditor fails to credit a payment,
as required by paragraphs (a) or (b) of this section, in time to avoid
the imposition of finance or other charges, the creditor shall adjust
the consumer's account so that the charges imposed are credited to the
consumer's account during the next billing cycle.
(d) Crediting of payments when creditor does not receive or accept
payments on due date. (1) General. Except as provided in paragraph
(d)(2) of this section, if a creditor does not receive or accept
payments by mail on the due date for payments, the creditor may
generally not treat a payment received the next business day as late
for any purpose. For purposes of this paragraph (d), the ``next
business day'' means the next day on which the creditor accepts or
receives payments by mail.
(2) Payments accepted or received other than by mail. If a creditor
accepts or receives payments made on the due date by a method other
than mail, such as electronic or telephone payments, the creditor is
not required to treat a payment made by that method on the next
business day as timely, even if it does not accept mailed payments on
the due date.
(e) Limitations on fees related to method of payment. For credit
card accounts under an open-end (not home-secured) consumer credit
plan, a creditor may not impose a separate fee to allow consumers to
make a payment by any method, such as mail, electronic, or telephone
payments, unless such payment method involves an expedited service by a
customer service representative of the creditor. For purposes of
paragraph (e) of this section, the term ``creditor'' includes a third
party that collects, receives, or processes payments on behalf of a
creditor.
(f) Changes by card issuer. If a card issuer makes a material
change in the address for receiving payments or procedures for handling
payments, and such change causes a material delay in the crediting of a
payment to the consumer's account during the 60-day period following
the date on which such change took effect, the card issuer may not
impose any late fee or finance charge for a late payment on the credit
card account during the 60-day period following the date on which the
change took effect.
Sec. 1026.11 Treatment of credit balances; account termination.
(a) Credit balances. When a credit balance in excess of $1 is
created on a credit account (through transmittal of funds to a creditor
in excess of the total balance due on an account, through rebates of
unearned finance charges or insurance premiums, or through amounts
otherwise owed to or held for the benefit of the consumer), the
creditor shall:
(1) Credit the amount of the credit balance to the consumer's
account;
(2) Refund any part of the remaining credit balance within seven
business days from receipt of a written request from the consumer;
(3) Make a good faith effort to refund to the consumer by cash,
check, or money order, or credit to a deposit account of the consumer,
any part of the credit balance remaining in the account for more than
six months. No further action is required if the consumer's current
location is not known to the creditor and cannot be traced through the
consumer's last known address or telephone number.
(b) Account termination. (1) A creditor shall not terminate an
account prior to its expiration date solely because the consumer does
not incur a finance charge.
(2) Nothing in paragraph (b)(1) of this section prohibits a
creditor from terminating an account that is inactive for three or more
consecutive months. An account is inactive for purposes of this
paragraph if no credit has been extended (such as by purchase, cash
advance or balance transfer) and if the account has no outstanding
balance.
(c) Timely settlement of estate debts. (1) General rule. (i)
Reasonable policies and procedures required. For credit card accounts
under an open-end (not home-secured) consumer credit plan, card issuers
must adopt reasonable written policies and procedures designed to
ensure that an administrator of an estate of a deceased accountholder
can determine the amount of and pay any balance on the account in a
timely manner.
(ii) Application to joint accounts. Paragraph (c) of this section
does not apply to the account of a deceased consumer if a joint
accountholder remains on the account.
(2) Timely statement of balance. (i) Requirement. Upon request by
the administrator of an estate, a card issuer must provide the
administrator with the amount of the balance on a deceased consumer's
account in a timely manner.
(ii) Safe harbor. For purposes of paragraph (c)(2)(i) of this
section, providing the amount of the balance on the account within 30
days of receiving the request is deemed to be timely.
(3) Limitations after receipt of request from administrator. (i)
Limitation on
[[Page 79791]]
fees and increases in annual percentage rates. After receiving a
request from the administrator of an estate for the amount of the
balance on a deceased consumer's account, a card issuer must not impose
any fees on the account (such as a late fee, annual fee, or over-the-
limit fee) or increase any annual percentage rate, except as provided
by Sec. 1026.55(b)(2).
(ii) Limitation on trailing or residual interest. A card issuer
must waive or rebate any additional finance charge due to a periodic
interest rate if payment in full of the balance disclosed pursuant to
paragraph (c)(2) of this section is received within 30 days after
disclosure.
Sec. 1026.12 Special credit card provisions.
(a) Issuance of credit cards. Regardless of the purpose for which a
credit card is to be used, including business, commercial, or
agricultural use, no credit card shall be issued to any person except:
(1) In response to an oral or written request or application for
the card; or
(2) As a renewal of, or substitute for, an accepted credit card.
(b) Liability of cardholder for unauthorized use. (1)(i) Definition
of unauthorized use. For purposes of this section, the term
``unauthorized use'' means the use of a credit card by a person, other
than the cardholder, who does not have actual, implied, or apparent
authority for such use, and from which the cardholder receives no
benefit.
(ii) Limitation on amount. The liability of a cardholder for
unauthorized use of a credit card shall not exceed the lesser of $50 or
the amount of money, property, labor, or services obtained by the
unauthorized use before notification to the card issuer under paragraph
(b)(3) of this section.
(2) Conditions of liability. A cardholder shall be liable for
unauthorized use of a credit card only if:
(i) The credit card is an accepted credit card;
(ii) The card issuer has provided adequate notice of the
cardholder's maximum potential liability and of means by which the card
issuer may be notified of loss or theft of the card. The notice shall
state that the cardholder's liability shall not exceed $50 (or any
lesser amount) and that the cardholder may give oral or written
notification, and shall describe a means of notification (for example,
a telephone number, an address, or both); and
(iii) The card issuer has provided a means to identify the
cardholder on the account or the authorized user of the card.
(3) Notification to card issuer. Notification to a card issuer is
given when steps have been taken as may be reasonably required in the
ordinary course of business to provide the card issuer with the
pertinent information about the loss, theft, or possible unauthorized
use of a credit card, regardless of whether any particular officer,
employee, or agent of the card issuer does, in fact, receive the
information. Notification may be given, at the option of the person
giving it, in person, by telephone, or in writing. Notification in
writing is considered given at the time of receipt or, whether or not
received, at the expiration of the time ordinarily required for
transmission, whichever is earlier.
(4) Effect of other applicable law or agreement. If state law or an
agreement between a cardholder and the card issuer imposes lesser
liability than that provided in this paragraph, the lesser liability
shall govern.
(5) Business use of credit cards. If 10 or more credit cards are
issued by one card issuer for use by the employees of an organization,
this section does not prohibit the card issuer and the organization
from agreeing to liability for unauthorized use without regard to this
section. However, liability for unauthorized use may be imposed on an
employee of the organization, by either the card issuer or the
organization, only in accordance with this section.
(c) Right of cardholder to assert claims or defenses against card
issuer. (1) General rule. When a person who honors a credit card fails
to resolve satisfactorily a dispute as to property or services
purchased with the credit card in a consumer credit transaction, the
cardholder may assert against the card issuer all claims (other than
tort claims) and defenses arising out of the transaction and relating
to the failure to resolve the dispute. The cardholder may withhold
payment up to the amount of credit outstanding for the property or
services that gave rise to the dispute and any finance or other charges
imposed on that amount.
(2) Adverse credit reports prohibited. If, in accordance with
paragraph (c)(1) of this section, the cardholder withholds payment of
the amount of credit outstanding for the disputed transaction, the card
issuer shall not report that amount as delinquent until the dispute is
settled or judgment is rendered.
(3) Limitations. (i) General. The rights stated in paragraphs
(c)(1) and (c)(2) of this section apply only if:
(A) The cardholder has made a good faith attempt to resolve the
dispute with the person honoring the credit card; and
(B) The amount of credit extended to obtain the property or
services that result in the assertion of the claim or defense by the
cardholder exceeds $50, and the disputed transaction occurred in the
same state as the cardholder's current designated address or, if not
within the same state, within 100 miles from that address.
(ii) Exclusion. The limitations stated in paragraph (c)(3)(i)(B) of
this section shall not apply when the person honoring the credit card:
(A) Is the same person as the card issuer;
(B) Is controlled by the card issuer directly or indirectly;
(C) Is under the direct or indirect control of a third person that
also directly or indirectly controls the card issuer;
(D) Controls the card issuer directly or indirectly;
(E) Is a franchised dealer in the card issuer's products or
services; or
(F) Has obtained the order for the disputed transaction through a
mail solicitation made or participated in by the card issuer.
(d) Offsets by card issuer prohibited. (1) A card issuer may not
take any action, either before or after termination of credit card
privileges, to offset a cardholder's indebtedness arising from a
consumer credit transaction under the relevant credit card plan against
funds of the cardholder held on deposit with the card issuer.
(2) This paragraph does not alter or affect the right of a card
issuer acting under state or Federal law to do any of the following
with regard to funds of a cardholder held on deposit with the card
issuer if the same procedure is constitutionally available to creditors
generally: Obtain or enforce a consensual security interest in the
funds; attach or otherwise levy upon the funds; or obtain or enforce a
court order relating to the funds.
(3) This paragraph does not prohibit a plan, if authorized in
writing by the cardholder, under which the card issuer may periodically
deduct all or part of the cardholder's credit card debt from a deposit
account held with the card issuer (subject to the limitations in Sec.
1026.13(d)(1)).
(e) Prompt notification of returns and crediting of refunds. (1)
When a creditor other than the card issuer accepts the return of
property or forgives a debt for services that is to be reflected as a
credit to the consumer's credit card account, that creditor shall,
within 7 business days from accepting the return or forgiving the debt,
transmit a credit statement to the card issuer through the
[[Page 79792]]
card issuer's normal channels for credit statements.
(2) The card issuer shall, within 3 business days from receipt of a
credit statement, credit the consumer's account with the amount of the
refund.
(3) If a creditor other than a card issuer routinely gives cash
refunds to consumers paying in cash, the creditor shall also give
credit or cash refunds to consumers using credit cards, unless it
discloses at the time the transaction is consummated that credit or
cash refunds for returns are not given. This section does not require
refunds for returns nor does it prohibit refunds in kind.
(f) Discounts; tie-in arrangements. No card issuer may, by contract
or otherwise:
(1) Prohibit any person who honors a credit card from offering a
discount to a consumer to induce the consumer to pay by cash, check, or
similar means rather than by use of a credit card or its underlying
account for the purchase of property or services; or
(2) Require any person who honors the card issuer's credit card to
open or maintain any account or obtain any other service not essential
to the operation of the credit card plan from the card issuer or any
other person, as a condition of participation in a credit card plan. If
maintenance of an account for clearing purposes is determined to be
essential to the operation of the credit card plan, it may be required
only if no service charges or minimum balance requirements are imposed.
(g) Relation to Electronic Fund Transfer Act and Regulation E. For
guidance on whether Regulation Z (12 CFR part 1026) or Regulation E (12
CFR part 1005) applies in instances involving both credit and
electronic fund transfer aspects, refer to Regulation E, 12 CFR
1005.12(a) regarding issuance and liability for unauthorized use. On
matters other than issuance and liability, this section applies to the
credit aspects of combined credit/electronic fund transfer
transactions, as applicable.
Sec. 1026.13 Billing error resolution.
(a) Definition of billing error. For purposes of this section, the
term billing error means:
(1) A reflection on or with a periodic statement of an extension of
credit that is not made to the consumer or to a person who has actual,
implied, or apparent authority to use the consumer's credit card or
open-end credit plan.
(2) A reflection on or with a periodic statement of an extension of
credit that is not identified in accordance with the requirements of
Sec. Sec. 1026.7(a)(2) or (b)(2), as applicable, and 1026.8.
(3) A reflection on or with a periodic statement of an extension of
credit for property or services not accepted by the consumer or the
consumer's designee, or not delivered to the consumer or the consumer's
designee as agreed.
(4) A reflection on a periodic statement of the creditor's failure
to credit properly a payment or other credit issued to the consumer's
account.
(5) A reflection on a periodic statement of a computational or
similar error of an accounting nature that is made by the creditor.
(6) A reflection on a periodic statement of an extension of credit
for which the consumer requests additional clarification, including
documentary evidence.
(7) The creditor's failure to mail or deliver a periodic statement
to the consumer's last known address if that address was received by
the creditor, in writing, at least 20 days before the end of the
billing cycle for which the statement was required.
(b) Billing error notice. A billing error notice is a written
notice from a consumer that:
(1) Is received by a creditor at the address disclosed under Sec.
1026.7(a)(9) or (b)(9), as applicable, no later than 60 days after the
creditor transmitted the first periodic statement that reflects the
alleged billing error;
(2) Enables the creditor to identify the consumer's name and
account number; and
(3) To the extent possible, indicates the consumer's belief and the
reasons for the belief that a billing error exists, and the type, date,
and amount of the error.
(c) Time for resolution; general procedures. (1) The creditor shall
mail or deliver written acknowledgment to the consumer within 30 days
of receiving a billing error notice, unless the creditor has complied
with the appropriate resolution procedures of paragraphs (e) and (f) of
this section, as applicable, within the 30-day period; and
(2) The creditor shall comply with the appropriate resolution
procedures of paragraphs (e) and (f) of this section, as applicable,
within 2 complete billing cycles (but in no event later than 90 days)
after receiving a billing error notice.
(d) Rules pending resolution. Until a billing error is resolved
under paragraph (e) or (f) of this section, the following rules apply:
(1) Consumer's right to withhold disputed amount; collection action
prohibited. The consumer need not pay (and the creditor may not try to
collect) any portion of any required payment that the consumer believes
is related to the disputed amount (including related finance or other
charges). If the cardholder has enrolled in an automatic payment plan
offered by the card issuer and has agreed to pay the credit card
indebtedness by periodic deductions from the cardholder's deposit
account, the card issuer shall not deduct any part of the disputed
amount or related finance or other charges if a billing error notice is
received any time up to 3 business days before the scheduled payment
date.
(2) Adverse credit reports prohibited. The creditor or its agent
shall not (directly or indirectly) make or threaten to make an adverse
report to any person about the consumer's credit standing, or report
that an amount or account is delinquent, because the consumer failed to
pay the disputed amount or related finance or other charges.
(3) Acceleration of debt and restriction of account prohibited. A
creditor shall not accelerate any part of the consumer's indebtedness
or restrict or close a consumer's account solely because the consumer
has exercised in good faith rights provided by this section. A creditor
may be subject to the forfeiture penalty under 15 U.S.C. 1666(e) for
failure to comply with any of the requirements of this section.
(4) Permitted creditor actions. A creditor is not prohibited from
taking action to collect any undisputed portion of the item or bill;
from deducting any disputed amount and related finance or other charges
from the consumer's credit limit on the account; or from reflecting a
disputed amount and related finance or other charges on a periodic
statement, provided that the creditor indicates on or with the periodic
statement that payment of any disputed amount and related finance or
other charges is not required pending the creditor's compliance with
this section.
(e) Procedures if billing error occurred as asserted. If a creditor
determines that a billing error occurred as asserted, it shall within
the time limits in paragraph (c)(2) of this section:
(1) Correct the billing error and credit the consumer's account
with any disputed amount and related finance or other charges, as
applicable; and
(2) Mail or deliver a correction notice to the consumer.
(f) Procedures if different billing error or no billing error
occurred. If, after conducting a reasonable investigation, a creditor
determines that no billing error occurred or that a different billing
error occurred from that asserted, the creditor
[[Page 79793]]
shall within the time limits in paragraph (c)(2) of this section:
(1) Mail or deliver to the consumer an explanation that sets forth
the reasons for the creditor's belief that the billing error alleged by
the consumer is incorrect in whole or in part;
(2) Furnish copies of documentary evidence of the consumer's
indebtedness, if the consumer so requests; and
(3) If a different billing error occurred, correct the billing
error and credit the consumer's account with any disputed amount and
related finance or other charges, as applicable.
(g) Creditor's rights and duties after resolution. If a creditor,
after complying with all of the requirements of this section,
determines that a consumer owes all or part of the disputed amount and
related finance or other charges, the creditor:
(1) Shall promptly notify the consumer in writing of the time when
payment is due and the portion of the disputed amount and related
finance or other charges that the consumer still owes;
(2) Shall allow any time period disclosed under Sec. 1026.6(a)(1)
or (b)(2)(v), as applicable, and Sec. 1026.7(a)(8) or (b)(8), as
applicable, during which the consumer can pay the amount due under
paragraph (g)(1) of this section without incurring additional finance
or other charges;
(3) May report an account or amount as delinquent because the
amount due under paragraph (g)(1) of this section remains unpaid after
the creditor has allowed any time period disclosed under Sec.
1026.6(a)(1) or (b)(2)(v), as applicable, and Sec. 1026.7(a)(8) or
(b)(8), as applicable or 10 days (whichever is longer) during which the
consumer can pay the amount; but
(4) May not report that an amount or account is delinquent because
the amount due under paragraph (g)(1) of the section remains unpaid, if
the creditor receives (within the time allowed for payment in paragraph
(g)(3) of this section) further written notice from the consumer that
any portion of the billing error is still in dispute, unless the
creditor also:
(i) Promptly reports that the amount or account is in dispute;
(ii) Mails or delivers to the consumer (at the same time the report
is made) a written notice of the name and address of each person to
whom the creditor makes a report; and
(iii) Promptly reports any subsequent resolution of the reported
delinquency to all persons to whom the creditor has made a report.
(h) Reassertion of billing error. A creditor that has fully
complied with the requirements of this section has no further
responsibilities under this section (other than as provided in
paragraph (g)(4) of this section) if a consumer reasserts substantially
the same billing error.
(i) Relation to Electronic Fund Transfer Act and Regulation E. If
an extension of credit is incident to an electronic fund transfer,
under an agreement between a consumer and a financial institution to
extend credit when the consumer's account is overdrawn or to maintain a
specified minimum balance in the consumer's account, the creditor shall
comply with the requirements of Regulation E, 12 CFR 1005.11 governing
error resolution rather than those of paragraphs (a), (b), (c), (e),
(f), and (h) of this section.
Sec. 1026.14 Determination of annual percentage rate.
(a) General rule. The annual percentage rate is a measure of the
cost of credit, expressed as a yearly rate. An annual percentage rate
shall be considered accurate if it is not more than \1/8\th of 1
percentage point above or below the annual percentage rate determined
in accordance with this section. An error in disclosure of the annual
percentage rate or finance charge shall not, in itself, be considered a
violation of this part if:
(1) The error resulted from a corresponding error in a calculation
tool used in good faith by the creditor; and
(2) Upon discovery of the error, the creditor promptly discontinues
use of that calculation tool for disclosure purposes, and notifies the
Bureau in writing of the error in the calculation tool.
(b) Annual percentage rate--in general. Where one or more periodic
rates may be used to compute the finance charge, the annual percentage
rate(s) to be disclosed for purposes of Sec. Sec. 1026.60, 1026.40,
1026.6, 1026.7(a)(4) or (b)(4), 1026.9, 1026.15, 1026.16, 1026.26,
1026.55, and 1026.56 shall be computed by multiplying each periodic
rate by the number of periods in a year.
(c) Optional effective annual percentage rate for periodic
statements for creditors offering open-end credit plans secured by a
consumer's dwelling. A creditor offering an open-end plan subject to
the requirements of Sec. 1026.40 need not disclose an effective annual
percentage rate. Such a creditor may, at its option, disclose an
effective annual percentage rate(s) pursuant to Sec. 1026.7(a)(7) and
compute the effective annual percentage rate as follows:
(1) Solely periodic rates imposed. If the finance charge is
determined solely by applying one or more periodic rates, at the
creditor's option, either:
(i) By multiplying each periodic rate by the number of periods in a
year; or
(ii) By dividing the total finance charge for the billing cycle by
the sum of the balances to which the periodic rates were applied and
multiplying the quotient (expressed as a percentage) by the number of
billing cycles in a year.
(2) Minimum or fixed charge, but not transaction charge, imposed.
If the finance charge imposed during the billing cycle is or includes a
minimum, fixed, or other charge not due to the application of a
periodic rate, other than a charge with respect to any specific
transaction during the billing cycle, by dividing the total finance
charge for the billing cycle by the amount of the balance(s) to which
it is applicable and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a year. If there is no
balance to which the finance charge is applicable, an annual percentage
rate cannot be determined under this section. Where the finance charge
imposed during the billing cycle is or includes a loan fee, points, or
similar charge that relates to opening, renewing, or continuing an
account, the amount of such charge shall not be included in the
calculation of the annual percentage rate.
(3) Transaction charge imposed. If the finance charge imposed
during the billing cycle is or includes a charge relating to a specific
transaction during the billing cycle (even if the total finance charge
also includes any other minimum, fixed, or other charge not due to the
application of a periodic rate), by dividing the total finance charge
imposed during the billing cycle by the total of all balances and other
amounts on which a finance charge was imposed during the billing cycle
without duplication, and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a year, except that the
annual percentage rate shall not be less than the largest rate
determined by multiplying each periodic rate imposed during the billing
cycle by the number of periods in a year. Where the finance charge
imposed during the billing cycle is or includes a loan fee, points, or
similar charge that relates to the opening, renewing, or continuing an
account, the amount of such charge shall not be included in the
calculation of the annual percentage rate. See Appendix F to this part
regarding determination of the denominator of the fraction under this
paragraph.
[[Page 79794]]
(4) If the finance charge imposed during the billing cycle is or
includes a minimum, fixed, or other charge not due to the application
of a periodic rate and the total finance charge imposed during the
billing cycle does not exceed 50 cents for a monthly or longer billing
cycle, or the pro rata part of 50 cents for a billing cycle shorter
than monthly, at the creditor's option, by multiplying each applicable
periodic rate by the number of periods in a year, notwithstanding the
provisions of paragraphs (c)(2) and (c)(3) of this section.
(d) Calculations where daily periodic rate applied. If the
provisions of paragraph (c)(1)(ii) or (c)(2) of this section apply and
all or a portion of the finance charge is determined by the application
of one or more daily periodic rates, the annual percentage rate may be
determined either:
(1) By dividing the total finance charge by the average of the
daily balances and multiplying the quotient by the number of billing
cycles in a year; or
(2) By dividing the total finance charge by the sum of the daily
balances and multiplying the quotient by 365.
Sec. 1026.15 Right of rescission.
(a) Consumer's right to rescind. (1)(i) Except as provided in
paragraph (a)(1)(ii) of this section, in a credit plan in which a
security interest is or will be retained or acquired in a consumer's
principal dwelling, each consumer whose ownership interest is or will
be subject to the security interest shall have the right to rescind:
each credit extension made under the plan; the plan when the plan is
opened; a security interest when added or increased to secure an
existing plan; and the increase when a credit limit on the plan is
increased.
(ii) As provided in section 125(e) of the Act, the consumer does
not have the right to rescind each credit extension made under the plan
if such extension is made in accordance with a previously established
credit limit for the plan.
(2) To exercise the right to rescind, the consumer shall notify the
creditor of the rescission by mail, telegram, or other means of written
communication. Notice is considered given when mailed, or when filed
for telegraphic transmission, or, if sent by other means, when
delivered to the creditor's designated place of business.
(3) The consumer may exercise the right to rescind until midnight
of the third business day following the occurrence described in
paragraph (a)(1) of this section that gave rise to the right of
rescission, delivery of the notice required by paragraph (b) of this
section, or delivery of all material disclosures, whichever occurs
last. If the required notice and material disclosures are not
delivered, the right to rescind shall expire 3 years after the
occurrence giving rise to the right of rescission, or upon transfer of
all of the consumer's interest in the property, or upon sale of the
property, whichever occurs first. In the case of certain administrative
proceedings, the rescission period shall be extended in accordance with
section 125(f) of the Act. The term material disclosures means the
information that must be provided to satisfy the requirements in Sec.
1026.6 with regard to the method of determining the finance charge and
the balance upon which a finance charge will be imposed, the annual
percentage rate, the amount or method of determining the amount of any
membership or participation fee that may be imposed as part of the
plan, and the payment information described in Sec. 1026.40(d)(5)(i)
and (ii) that is required under Sec. 1026.6(e)(2).
(4) When more than one consumer has the right to rescind, the
exercise of the right by one consumer shall be effective as to all
consumers.
(b) Notice of right to rescind. In any transaction or occurrence
subject to rescission, a creditor shall deliver two copies of the
notice of the right to rescind to each consumer entitled to rescind
(one copy to each if the notice is delivered in electronic form in
accordance with the consumer consent and other applicable provisions of
the E-Sign Act). The notice shall identify the transaction or
occurrence and clearly and conspicuously disclose the following:
(1) The retention or acquisition of a security interest in the
consumer's principal dwelling.
(2) The consumer's right to rescind, as described in paragraph
(a)(1) of this section.
(3) How to exercise the right to rescind, with a form for that
purpose, designating the address of the creditor's place of business.
(4) The effects of rescission, as described in paragraph (d) of
this section.
(5) The date the rescission period expires.
(c) Delay of creditor's performance. Unless a consumer waives the
right to rescind under paragraph (e) of this section, no money shall be
disbursed other than in escrow, no services shall be performed, and no
materials delivered until after the rescission period has expired and
the creditor is reasonably satisfied that the consumer has not
rescinded. A creditor does not violate this section if a third party
with no knowledge of the event activating the rescission right does not
delay in providing materials or services, as long as the debt incurred
for those materials or services is not secured by the property subject
to rescission.
(d) Effects of rescission. (1) When a consumer rescinds a
transaction, the security interest giving rise to the right of
rescission becomes void, and the consumer shall not be liable for any
amount, including any finance charge.
(2) Within 20 calendar days after receipt of a notice of
rescission, the creditor shall return any money or property that has
been given to anyone in connection with the transaction and shall take
any action necessary to reflect the termination of the security
interest.
(3) If the creditor has delivered any money or property, the
consumer may retain possession until the creditor has met its
obligation under paragraph (d)(2) of this section. When the creditor
has complied with that paragraph, the consumer shall tender the money
or property to the creditor or, where the latter would be impracticable
or inequitable, tender its reasonable value. At the consumer's option,
tender of property may be made at the location of the property or at
the consumer's residence. Tender of money must be made at the
creditor's designated place of business. If the creditor does not take
possession of the money or property within 20 calendar days after the
consumer's tender, the consumer may keep it without further obligation.
(4) The procedures outlined in paragraphs (d)(2) and (3) of this
section may be modified by court order.
(e) Consumer's waiver of right to rescind. The consumer may modify
or waive the right to rescind if the consumer determines that the
extension of credit is needed to meet a bona fide personal financial
emergency. To modify or waive the right, the consumer shall give the
creditor a dated written statement that describes the emergency,
specifically modifies or waives the right to rescind, and bears the
signature of all the consumers entitled to rescind. Printed forms for
this purpose are prohibited.
(f) Exempt transactions. The right to rescind does not apply to the
following:
(1) A residential mortgage transaction.
(2) A credit plan in which a state agency is a creditor.
Sec. 1026.16 Advertising.
(a) Actually available terms. If an advertisement for credit states
specific credit terms, it shall state only those terms that actually
are or will be arranged or offered by the creditor.
[[Page 79795]]
(b) Advertisement of terms that require additional disclosures. (1)
Any term required to be disclosed under Sec. 1026.6(b)(3) set forth
affirmatively or negatively in an advertisement for an open-end (not
home-secured) credit plan triggers additional disclosures under this
section. Any term required to be disclosed under Sec. 1026.6(a)(1) or
(a)(2) set forth affirmatively or negatively in an advertisement for a
home-equity plan subject to the requirements of Sec. 1026.40 triggers
additional disclosures under this section. If any of the terms that
trigger additional disclosures under this paragraph is set forth in an
advertisement, the advertisement shall also clearly and conspicuously
set forth the following:
(i) Any minimum, fixed, transaction, activity or similar charge
that is a finance charge under Sec. 1026.4 that could be imposed.
(ii) Any periodic rate that may be applied expressed as an annual
percentage rate as determined under Sec. 1026.14(b). If the plan
provides for a variable periodic rate, that fact shall be disclosed.
(iii) Any membership or participation fee that could be imposed.
(2) If an advertisement for credit to finance the purchase of goods
or services specified in the advertisement states a periodic payment
amount, the advertisement shall also state the total of payments and
the time period to repay the obligation, assuming that the consumer
pays only the periodic payment amount advertised. The disclosure of the
total of payments and the time period to repay the obligation must be
equally prominent to the statement of the periodic payment amount.
(c) Catalogs or other multiple-page advertisements; electronic
advertisements. (1) If a catalog or other multiple-page advertisement,
or an electronic advertisement (such as an advertisement appearing on
an Internet Web site), gives information in a table or schedule in
sufficient detail to permit determination of the disclosures required
by paragraph (b) of this section, it shall be considered a single
advertisement if:
(i) The table or schedule is clearly and conspicuously set forth;
and
(ii) Any statement of terms set forth in Sec. 1026.6 appearing
anywhere else in the catalog or advertisement clearly refers to the
page or location where the table or schedule begins.
(2) A catalog or other multiple-page advertisement or an electronic
advertisement (such as an advertisement appearing on an Internet Web
site) complies with this paragraph if the table or schedule of terms
includes all appropriate disclosures for a representative scale of
amounts up to the level of the more commonly sold higher-priced
property or services offered.
(d) Additional requirements for home-equity plans. (1)
Advertisement of terms that require additional disclosures. If any of
the terms required to be disclosed under Sec. 1026.6(a)(1) or (a)(2)
or the payment terms of the plan are set forth, affirmatively or
negatively, in an advertisement for a home-equity plan subject to the
requirements of Sec. 1026.40, the advertisement also shall clearly and
conspicuously set forth the following:
(i) Any loan fee that is a percentage of the credit limit under the
plan and an estimate of any other fees imposed for opening the plan,
stated as a single dollar amount or a reasonable range.
(ii) Any periodic rate used to compute the finance charge,
expressed as an annual percentage rate as determined under Sec.
1026.14(b).
(iii) The maximum annual percentage rate that may be imposed in a
variable-rate plan.
(2) Discounted and premium rates. If an advertisement states an
initial annual percentage rate that is not based on the index and
margin used to make later rate adjustments in a variable-rate plan, the
advertisement also shall state with equal prominence and in close
proximity to the initial rate:
(i) The period of time such initial rate will be in effect; and
(ii) A reasonably current annual percentage rate that would have
been in effect using the index and margin.
(3) Balloon payment. If an advertisement contains a statement of
any minimum periodic payment and a balloon payment may result if only
the minimum periodic payments are made, even if such a payment is
uncertain or unlikely, the advertisement also shall state with equal
prominence and in close proximity to the minimum periodic payment
statement that a balloon payment may result, if applicable. A balloon
payment results if paying the minimum periodic payments does not fully
amortize the outstanding balance by a specified date or time, and the
consumer is required to repay the entire outstanding balance at such
time. If a balloon payment will occur when the consumer makes only the
minimum payments required under the plan, an advertisement for such a
program which contains any statement of any minimum periodic payment
shall also state with equal prominence and in close proximity to the
minimum periodic payment statement:
(i) That a balloon payment will result; and
(ii) The amount and timing of the balloon payment that will result
if the consumer makes only the minimum payments for the maximum period
of time that the consumer is permitted to make such payments.
(4) Tax implications. An advertisement that states that any
interest expense incurred under the home-equity plan is or may be tax
deductible may not be misleading in this regard. If an advertisement
distributed in paper form or through the Internet (rather than by radio
or television) is for a home-equity plan secured by the consumer's
principal dwelling, and the advertisement states that the advertised
extension of credit may exceed the fair market value of the dwelling,
the advertisement shall clearly and conspicuously state that:
(i) The interest on the portion of the credit extension that is
greater than the fair market value of the dwelling is not tax
deductible for Federal income tax purposes; and
(ii) The consumer should consult a tax adviser for further
information regarding the deductibility of interest and charges.
(5) Misleading terms. An advertisement may not refer to a home-
equity plan as ``free money'' or contain a similarly misleading term.
(6) Promotional rates and payments. (i) Definitions. The following
definitions apply for purposes of paragraph (d)(6) of this section:
(A) Promotional rate. The term ``promotional rate'' means, in a
variable-rate plan, any annual percentage rate that is not based on the
index and margin that will be used to make rate adjustments under the
plan, if that rate is less than a reasonably current annual percentage
rate that would be in effect under the index and margin that will be
used to make rate adjustments under the plan.
(B) Promotional payment. The term ``promotional payment'' means:
(1) For a variable-rate plan, any minimum payment applicable for a
promotional period that:
(i) Is not derived by applying the index and margin to the
outstanding balance when such index and margin will be used to
determine other minimum payments under the plan; and
(ii) Is less than other minimum payments under the plan derived by
applying a reasonably current index and margin that will be used to
determine the amount of such payments, given an assumed balance.
(2) For a plan other than a variable-rate plan, any minimum payment
[[Page 79796]]
applicable for a promotional period if that payment is less than other
payments required under the plan given an assumed balance.
(C) Promotional period. A ``promotional period'' means a period of
time, less than the full term of the loan, that the promotional rate or
promotional payment may be applicable.
(ii) Stating the promotional period and post-promotional rate or
payments. If any annual percentage rate that may be applied to a plan
is a promotional rate, or if any payment applicable to a plan is a
promotional payment, the following must be disclosed in any
advertisement, other than television or radio advertisements, in a
clear and conspicuous manner with equal prominence and in close
proximity to each listing of the promotional rate or payment:
(A) The period of time during which the promotional rate or
promotional payment will apply;
(B) In the case of a promotional rate, any annual percentage rate
that will apply under the plan. If such rate is variable, the annual
percentage rate must be disclosed in accordance with the accuracy
standards in Sec. Sec. 1026.40 or 1026.16(b)(1)(ii) as applicable; and
(C) In the case of a promotional payment, the amounts and time
periods of any payments that will apply under the plan. In variable-
rate transactions, payments that will be determined based on
application of an index and margin shall be disclosed based on a
reasonably current index and margin.
(iii) Envelope excluded. The requirements in paragraph (d)(6)(ii)
of this section do not apply to an envelope in which an application or
solicitation is mailed, or to a banner advertisement or pop-up
advertisement linked to an application or solicitation provided
electronically.
(e) Alternative disclosures--television or radio advertisements. An
advertisement made through television or radio stating any of the terms
requiring additional disclosures under paragraphs (b)(1) or (d)(1) of
this section may alternatively comply with paragraphs (b)(1) or (d)(1)
of this section by stating the information required by paragraphs
(b)(1)(ii) or (d)(1)(ii) of this section, as applicable, and listing a
toll-free telephone number, or any telephone number that allows a
consumer to reverse the phone charges when calling for information,
along with a reference that such number may be used by consumers to
obtain the additional cost information.
(f) Misleading terms. An advertisement may not refer to an annual
percentage rate as ``fixed,'' or use a similar term, unless the
advertisement also specifies a time period that the rate will be fixed
and the rate will not increase during that period, or if no such time
period is provided, the rate will not increase while the plan is open.
(g) Promotional rates and fees. (1) Scope. The requirements of this
paragraph apply to any advertisement of an open-end (not home-secured)
plan, including promotional materials accompanying applications or
solicitations subject to Sec. 1026.60(c) or accompanying applications
or solicitations subject to Sec. 1026.60(e).
(2) Definitions. (i) Promotional rate means any annual percentage
rate applicable to one or more balances or transactions on an open-end
(not home-secured) plan for a specified period of time that is lower
than the annual percentage rate that will be in effect at the end of
that period on such balances or transactions.
(ii) Introductory rate means a promotional rate offered in
connection with the opening of an account.
(iii) Promotional period means the maximum time period for which a
promotional rate or promotional fee may be applicable.
(iv) Promotional fee means a fee required to be disclosed under
Sec. 1026.6(b)(1) and (2) applicable to an open-end (not home-secured)
plan, or to one or more balances or transactions on an open-end (not
home-secured) plan, for a specified period of time that is lower than
the fee that will be in effect at the end of that period for such plan
or types of balances or transactions.
(v) Introductory fee means a promotional fee offered in connection
with the opening of an account.
(3) Stating the term ``introductory''. If any annual percentage
rate or fee that may be applied to the account is an introductory rate
or introductory fee, the term introductory or intro must be in
immediate proximity to each listing of the introductory rate or
introductory fee in a written or electronic advertisement.
(4) Stating the promotional period and post-promotional rate or
fee. If any annual percentage rate that may be applied to the account
is a promotional rate under paragraph (g)(2)(i) of this section or any
fee that may be applied to the account is a promotional fee under
paragraph (g)(2)(iv) of this section, the information in paragraphs
(g)(4)(i) and, as applicable, (g)(4)(ii) or (iii) of this section must
be stated in a clear and conspicuous manner in the advertisement. If
the rate or fee is stated in a written or electronic advertisement, the
information in paragraphs (g)(4)(i) and, as applicable, (g)(4)(ii) or
(iii) of this section must also be stated in a prominent location
closely proximate to the first listing of the promotional rate or
promotional fee.
(i) When the promotional rate or promotional fee will end;
(ii) The annual percentage rate that will apply after the end of
the promotional period. If such rate is variable, the annual percentage
rate must comply with the accuracy standards in Sec. Sec.
1026.60(c)(2), 1026.60(d)(3), 1026.60(e)(4), or 1026.16(b)(1)(ii), as
applicable. If such rate cannot be determined at the time disclosures
are given because the rate depends at least in part on a later
determination of the consumer's creditworthiness, the advertisement
must disclose the specific rates or the range of rates that might
apply; and
(iii) The fee that will apply after the end of the promotional
period.
(5) Envelope excluded. The requirements in paragraph (g)(4) of this
section do not apply to an envelope or other enclosure in which an
application or solicitation is mailed, or to a banner advertisement or
pop-up advertisement, linked to an application or solicitation provided
electronically.
(h) Deferred interest or similar offers. (1) Scope. The
requirements of this paragraph apply to any advertisement of an open-
end credit plan not subject to Sec. 1026.40, including promotional
materials accompanying applications or solicitations subject to Sec.
1026.60(c) or accompanying applications or solicitations subject to
Sec. 1026.60(e).
(2) Definitions. ``Deferred interest'' means finance charges,
accrued on balances or transactions, that a consumer is not obligated
to pay or that will be waived or refunded to a consumer if those
balances or transactions are paid in full by a specified date. The
maximum period from the date the consumer becomes obligated for the
balance or transaction until the specified date by which the consumer
must pay the balance or transaction in full in order to avoid finance
charges, or receive a waiver or refund of finance charges, is the
``deferred interest period.'' ``Deferred interest'' does not include
any finance charges the consumer avoids paying in connection with any
recurring grace period.
(3) Stating the deferred interest period. If a deferred interest
offer is advertised, the deferred interest period must be stated in a
clear and conspicuous manner in the advertisement. If the phrase ``no
interest'' or similar term regarding the possible avoidance of interest
obligations under the deferred interest program is stated, the term
``if paid in
[[Page 79797]]
full'' must also be stated in a clear and conspicuous manner preceding
the disclosure of the deferred interest period in the advertisement. If
the deferred interest offer is included in a written or electronic
advertisement, the deferred interest period and, if applicable, the
term ``if paid in full'' must also be stated in immediate proximity to
each statement of ``no interest,'' ``no payments,'' ``deferred
interest,'' ``same as cash,'' or similar term regarding interest or
payments during the deferred interest period.
(4) Stating the terms of the deferred interest or similar offer. If
any deferred interest offer is advertised, the information in
paragraphs (h)(4)(i) and (h)(4)(ii) of this section must be stated in
the advertisement, in language similar to Sample G-24 in Appendix G to
this part. If the deferred interest offer is included in a written or
electronic advertisement, the information in paragraphs (h)(4)(i) and
(h)(4)(ii) of this section must also be stated in a prominent location
closely proximate to the first statement of ``no interest,'' ``no
payments,'' ``deferred interest,'' ``same as cash,'' or similar term
regarding interest or payments during the deferred interest period.
(i) A statement that interest will be charged from the date the
consumer becomes obligated for the balance or transaction subject to
the deferred interest offer if the balance or transaction is not paid
in full within the deferred interest period; and
(ii) A statement, if applicable, that interest will be charged from
the date the consumer incurs the balance or transaction subject to the
deferred interest offer if the account is in default before the end of
the deferred interest period.
(5) Envelope excluded. The requirements in paragraph (h)(4) of this
section do not apply to an envelope or other enclosure in which an
application or solicitation is mailed, or to a banner advertisement or
pop-up advertisement linked to an application or solicitation provided
electronically.
Subpart C--Closed-End Credit
Sec. 1026.17 General disclosure requirements.
(a) Form of disclosures. (1) The creditor shall make the
disclosures required by this subpart clearly and conspicuously in
writing, in a form that the consumer may keep. The disclosures required
by this subpart may be provided to the consumer in electronic form,
subject to compliance with the consumer consent and other applicable
provisions of the Electronic Signatures in Global and National Commerce
Act (E-Sign Act) (15 U.S.C. 7001 et seq.). The disclosures required by
Sec. Sec. 1026.17(g), 1026.19(b), and 1026.24 may be provided to the
consumer in electronic form without regard to the consumer consent or
other provisions of the E-Sign Act in the circumstances set forth in
those sections. The disclosures shall be grouped together, shall be
segregated from everything else, and shall not contain any information
not directly related to the disclosures required under Sec. 1026.18 or
Sec. 1026.47. The disclosures may include an acknowledgment of
receipt, the date of the transaction, and the consumer's name, address,
and account number. The following disclosures may be made together with
or separately from other required disclosures: the creditor's identity
under Sec. 1026.18(a), the variable rate example under Sec.
1026.18(f)(1)(iv), insurance or debt cancellation under Sec.
1026.18(n), and certain security interest charges under Sec.
1026.18(o). The itemization of the amount financed under Sec.
1026.18(c)(1) must be separate from the other disclosures under Sec.
1026.18, except for private education loan disclosures made in
compliance with Sec. 1026.47.
(2) Except for private education loan disclosures made in
compliance with Sec. 1026.47, the terms ``finance charge'' and
``annual percentage rate,'' when required to be disclosed under Sec.
1026.18(d) and (e) together with a corresponding amount or percentage
rate, shall be more conspicuous than any other disclosure, except the
creditor's identity under Sec. 1026.18(a). For private education loan
disclosures made in compliance with Sec. 1026.47, the term ``annual
percentage rate,'' and the corresponding percentage rate must be less
conspicuous than the term ``finance charge'' and corresponding amount
under Sec. 1026.18(d), the interest rate under Sec. Sec.
1026.47(b)(1)(i) and (c)(1), and the notice of the right to cancel
under Sec. 1026.47(c)(4).
(b) Time of disclosures. The creditor shall make disclosures before
consummation of the transaction. In certain residential mortgage
transactions, special timing requirements are set forth in Sec.
1026.19(a). In certain variable-rate transactions, special timing
requirements for variable-rate disclosures are set forth in Sec.
1026.19(b) and Sec. 1026.20(c). For private education loan disclosures
made in compliance with Sec. 1026.47, special timing requirements are
set forth in Sec. 1026.46(d). In certain transactions involving mail
or telephone orders or a series of sales, the timing of disclosures may
be delayed in accordance with paragraphs (g) and (h) of this section.
(c) Basis of disclosures and use of estimates. (1) The disclosures
shall reflect the terms of the legal obligation between the parties.
(2)(i) If any information necessary for an accurate disclosure is
unknown to the creditor, the creditor shall make the disclosure based
on the best information reasonably available at the time the disclosure
is provided to the consumer, and shall state clearly that the
disclosure is an estimate.
(ii) For a transaction in which a portion of the interest is
determined on a per-diem basis and collected at consummation, any
disclosure affected by the per-diem interest shall be considered
accurate if the disclosure is based on the information known to the
creditor at the time that the disclosure documents are prepared for
consummation of the transaction.
(3) The creditor may disregard the effects of the following in
making calculations and disclosures.
(i) That payments must be collected in whole cents.
(ii) That dates of scheduled payments and advances may be changed
because the scheduled date is not a business day.
(iii) That months have different numbers of days.
(iv) The occurrence of leap year.
(4) In making calculations and disclosures, the creditor may
disregard any irregularity in the first period that falls within the
limits described below and any payment schedule irregularity that
results from the irregular first period:
(i) For transactions in which the term is less than 1 year, a first
period not more than 6 days shorter or 13 days longer than a regular
period;
(ii) For transactions in which the term is at least 1 year and less
than 10 years, a first period not more than 11 days shorter or 21 days
longer than a regular period; and
(iii) For transactions in which the term is at least 10 years, a
first period shorter than or not more than 32 days longer than a
regular period.
(5) If an obligation is payable on demand, the creditor shall make
the disclosures based on an assumed maturity of 1 year. If an alternate
maturity date is stated in the legal obligation between the parties,
the disclosures shall be based on that date.
(6)(i) A series of advances under an agreement to extend credit up
to a certain amount may be considered as one transaction.
(ii) When a multiple-advance loan to finance the construction of a
dwelling
[[Page 79798]]
may be permanently financed by the same creditor, the construction
phase and the permanent phase may be treated as either one transaction
or more than one transaction.
(d) Multiple creditors; multiple consumers. If a transaction
involves more than one creditor, only one set of disclosures shall be
given and the creditors shall agree among themselves which creditor
must comply with the requirements that this part imposes on any or all
of them. If there is more than one consumer, the disclosures may be
made to any consumer who is primarily liable on the obligation. If the
transaction is rescindable under Sec. 1026.23, however, the
disclosures shall be made to each consumer who has the right to
rescind.
(e) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor delivers the
required disclosures, the inaccuracy is not a violation of this part,
although new disclosures may be required under paragraph (f) of this
section, Sec. 1026.19, Sec. 1026.20, or Sec. 1026.48(c)(4).
(f) Early disclosures. Except for private education loan
disclosures made in compliance with Sec. 1026.47, if disclosures
required by this subpart are given before the date of consummation of a
transaction and a subsequent event makes them inaccurate, the creditor
shall disclose before consummation (subject to the provisions of Sec.
1026.19(a)(2) and Sec. 1026.19(a)(5)(iii)):
(1) Any changed term unless the term was based on an estimate in
accordance with Sec. 1026.17(c)(2) and was labeled an estimate;
(2) All changed terms, if the annual percentage rate at the time of
consummation varies from the annual percentage rate disclosed earlier
by more than \1/8\ of 1 percentage point in a regular transaction, or
more than \1/4\ of 1 percentage point in an irregular transaction, as
defined in Sec. 1026.22(a).
(g) Mail or telephone orders--delay in disclosures. Except for
private education loan disclosures made in compliance with Sec.
1026.47, if a creditor receives a purchase order or a request for an
extension of credit by mail, telephone, or facsimile machine without
face-to-face or direct telephone solicitation, the creditor may delay
the disclosures until the due date of the first payment, if the
following information for representative amounts or ranges of credit is
made available in written form or in electronic form to the consumer or
to the public before the actual purchase order or request:
(1) The cash price or the principal loan amount.
(2) The total sale price.
(3) The finance charge.
(4) The annual percentage rate, and if the rate may increase after
consummation, the following disclosures:
(i) The circumstances under which the rate may increase.
(ii) Any limitations on the increase.
(iii) The effect of an increase.
(5) The terms of repayment.
(h) Series of sales--delay in disclosures. If a credit sale is one
of a series made under an agreement providing that subsequent sales may
be added to an outstanding balance, the creditor may delay the required
disclosures until the due date of the first payment for the current
sale, if the following two conditions are met:
(1) The consumer has approved in writing the annual percentage rate
or rates, the range of balances to which they apply, and the method of
treating any unearned finance charge on an existing balance.
(2) The creditor retains no security interest in any property after
the creditor has received payments equal to the cash price and any
finance charge attributable to the sale of that property. For purposes
of this provision, in the case of items purchased on different dates,
the first purchased is deemed the first item paid for; in the case of
items purchased on the same date, the lowest priced is deemed the first
item paid for.
(i) Interim student credit extensions. For transactions involving
an interim credit extension under a student credit program for which an
application is received prior to the mandatory compliance date of
Sec. Sec. 1026.46, 47, and 48, the creditor need not make the
following disclosures: the finance charge under Sec. 1026.18(d), the
payment schedule under Sec. 1026.18(g), the total of payments under
Sec. 1026.18(h), or the total sale price under Sec. 1026.18(j) at the
time the credit is actually extended. The creditor must make complete
disclosures at the time the creditor and consumer agree upon the
repayment schedule for the total obligation. At that time, a new set of
disclosures must be made of all applicable items under Sec. 1026.18.
Sec. 1026.18 Content of disclosures.
For each transaction, the creditor shall disclose the following
information as applicable:
(a) Creditor. The identity of the creditor making the disclosures.
(b) Amount financed. The amount financed, using that term, and a
brief description such as the amount of credit provided to you or on
your behalf. The amount financed is calculated by:
(1) Determining the principal loan amount or the cash price
(subtracting any downpayment);
(2) Adding any other amounts that are financed by the creditor and
are not part of the finance charge; and
(3) Subtracting any prepaid finance charge.
(c) Itemization of amount financed. (1) Except as provided in
paragraphs (c)(2) and (c)(3) of this section, a separate written
itemization of the amount financed, including:
(i) The amount of any proceeds distributed directly to the
consumer.
(ii) The amount credited to the consumer's account with the
creditor.
(iii) Any amounts paid to other persons by the creditor on the
consumer's behalf. The creditor shall identify those persons. The
following payees may be described using generic or other general terms
and need not be further identified: public officials or government
agencies, credit reporting agencies, appraisers, and insurance
companies.
(iv) The prepaid finance charge.
(2) The creditor need not comply with paragraph (c)(1) of this
section if the creditor provides a statement that the consumer has the
right to receive a written itemization of the amount financed, together
with a space for the consumer to indicate whether it is desired, and
the consumer does not request it.
(3) Good faith estimates of settlement costs provided for
transactions subject to the Real Estate Settlement Procedures Act (12
U.S.C. 2601 et seq.) may be substituted for the disclosures required by
paragraph (c)(1) of this section.
(d) Finance charge. The finance charge, using that term, and a
brief description such as ``the dollar amount the credit will cost
you.''
(1) Mortgage loans. In a transaction secured by real property or a
dwelling, the disclosed finance charge and other disclosures affected
by the disclosed finance charge (including the amount financed and the
annual percentage rate) shall be treated as accurate if the amount
disclosed as the finance charge:
(i) Is understated by no more than $100; or
(ii) Is greater than the amount required to be disclosed.
(2) Other credit. In any other transaction, the amount disclosed as
the finance charge shall be treated as accurate if, in a transaction
involving an amount financed of $1,000 or less, it is not more than $5
above or below the amount required to be disclosed; or, in a
transaction involving an amount financed of more than $1,000, it is not
[[Page 79799]]
more than $10 above or below the amount required to be disclosed.
(e) Annual percentage rate. The annual percentage rate, using that
term, and a brief description such as ``the cost of your credit as a
yearly rate.'' For any transaction involving a finance charge of $5 or
less on an amount financed of $75 or less, or a finance charge of $7.50
or less on an amount financed of more than $75, the creditor need not
disclose the annual percentage rate.
(f) Variable rate. (1) Except as provided in paragraph (f)(3) of
this section, if the annual percentage rate may increase after
consummation in a transaction not secured by the consumer's principal
dwelling or in a transaction secured by the consumer's principal
dwelling with a term of one year or less, the following disclosures:
(i) The circumstances under which the rate may increase.
(ii) Any limitations on the increase.
(iii) The effect of an increase.
(iv) An example of the payment terms that would result from an
increase.
(2) If the annual percentage rate may increase after consummation
in a transaction secured by the consumer's principal dwelling with a
term greater than one year, the following disclosures:
(i) The fact that the transaction contains a variable-rate feature.
(ii) A statement that variable-rate disclosures have been provided
earlier.
(3) Information provided in accordance with Sec. Sec.
1026.18(f)(2) and 1026.19(b) may be substituted for the disclosures
required by paragraph (f)(1) of this section.
(g) Payment schedule. Other than for a transaction that is subject
to paragraph (s) of this section, the number, amounts, and timing of
payments scheduled to repay the obligation.
(1) In a demand obligation with no alternate maturity date, the
creditor may comply with this paragraph by disclosing the due dates or
payment periods of any scheduled interest payments for the first year.
(2) In a transaction in which a series of payments varies because a
finance charge is applied to the unpaid principal balance, the creditor
may comply with this paragraph by disclosing the following information:
(i) The dollar amounts of the largest and smallest payments in the
series.
(ii) A reference to the variations in the other payments in the
series.
(h) Total of payments. The total of payments, using that term, and
a descriptive explanation such as ``the amount you will have paid when
you have made all scheduled payments.'' In any transaction involving a
single payment, the creditor need not disclose the total of payments.
(i) Demand feature. If the obligation has a demand feature, that
fact shall be disclosed. When the disclosures are based on an assumed
maturity of 1 year as provided in Sec. 1026.17(c)(5), that fact shall
also be disclosed.
(j) Total sale price. In a credit sale, the total sale price, using
that term, and a descriptive explanation (including the amount of any
downpayment) such as ``the total price of your purchase on credit,
including your downpayment of $----.'' The total sale price is the sum
of the cash price, the items described in paragraph (b)(2), and the
finance charge disclosed under paragraph (d) of this section.
(k) Prepayment. (1) When an obligation includes a finance charge
computed from time to time by application of a rate to the unpaid
principal balance, a statement indicating whether or not a penalty may
be imposed if the obligation is prepaid in full.
(2) When an obligation includes a finance charge other than the
finance charge described in paragraph (k)(1) of this section, a
statement indicating whether or not the consumer is entitled to a
rebate of any finance charge if the obligation is prepaid in full.
(l) Late payment. Any dollar or percentage charge that may be
imposed before maturity due to a late payment, other than a deferral or
extension charge.
(m) Security interest. The fact that the creditor has or will
acquire a security interest in the property purchased as part of the
transaction, or in other property identified by item or type.
(n) Insurance and debt cancellation. The items required by Sec.
1026.4(d) in order to exclude certain insurance premiums and debt
cancellation fees from the finance charge.
(o) Certain security interest charges. The disclosures required by
Sec. 1026.4(e) in order to exclude from the finance charge certain
fees prescribed by law or certain premiums for insurance in lieu of
perfecting a security interest.
(p) Contract reference. A statement that the consumer should refer
to the appropriate contract document for information about nonpayment,
default, the right to accelerate the maturity of the obligation, and
prepayment rebates and penalties. At the creditor's option, the
statement may also include a reference to the contract for further
information about security interests and, in a residential mortgage
transaction, about the creditor's policy regarding assumption of the
obligation.
(q) Assumption policy. In a residential mortgage transaction, a
statement whether or not a subsequent purchaser of the dwelling from
the consumer may be permitted to assume the remaining obligation on its
original terms.
(r) Required deposit. If the creditor requires the consumer to
maintain a deposit as a condition of the specific transaction, a
statement that the annual percentage rate does not reflect the effect
of the required deposit. A required deposit need not include, for
example:
(1) An escrow account for items such as taxes, insurance or
repairs;
(2) A deposit that earns not less than 5 percent per year; or
(3) Payments under a Morris Plan.
(s) Interest rate and payment summary for mortgage transactions.
For a closed-end transaction secured by real property or a dwelling,
other than a transaction secured by a consumer's interest in a
timeshare plan described in 11 U.S.C. 101(53D), the creditor shall
disclose the following information about the interest rate and
payments:
(1) Form of disclosures. The information in paragraphs (s)(2)-(4)
of this section shall be in the form of a table, with no more than five
columns, with headings and format substantially similar to Model Clause
H-4(E), H-4(F), H-4(G), or H-4(H) in Appendix H to this part. The table
shall contain only the information required in paragraphs (s)(2)-(4) of
this section, shall be placed in a prominent location, and shall be in
a minimum 10-point font.
(2) Interest rates. (i) Amortizing loans. (A) For a fixed-rate
mortgage, the interest rate at consummation.
(B) For an adjustable-rate or step-rate mortgage:
(1) The interest rate at consummation and the period of time until
the first interest rate adjustment may occur, labeled as the
``introductory rate and monthly payment'';
(2) The maximum interest rate that may apply during the first five
years after the date on which the first regular periodic payment will
be due and the earliest date on which that rate may apply, labeled as
``maximum during first five years''; and
(3) The maximum interest rate that may apply during the life of the
loan and the earliest date on which that rate may apply, labeled as
``maximum ever.''
(C) If the loan provides for payment increases as described in
paragraph (s)(3)(i)(B) of this section, the interest rate in effect at
the time the first such payment increase is scheduled to occur and the
date on which the increase will occur, labeled as ``first adjustment''
if the loan is an adjustable-rate mortgage or, otherwise, labeled as
``first increase.''
(ii) Negative amortization loans. For a negative amortization loan:
[[Page 79800]]
(A) The interest rate at consummation and, if it will adjust after
consummation, the length of time until it will adjust, and the label
``introductory'' or ``intro'';
(B) The maximum interest rate that could apply when the consumer
must begin making fully amortizing payments under the terms of the
legal obligation;
(C) If the minimum required payment will increase before the
consumer must begin making fully amortizing payments, the maximum
interest rate that could apply at the time of the first payment
increase and the date the increase is scheduled to occur; and
(D) If a second increase in the minimum required payment may occur
before the consumer must begin making fully amortizing payments, the
maximum interest rate that could apply at the time of the second
payment increase and the date the increase is scheduled to occur.
(iii) Introductory rate disclosure for amortizing adjustable-rate
mortgages. For an amortizing adjustable-rate mortgage, if the interest
rate at consummation is less than the fully-indexed rate, placed in a
box directly beneath the table required by paragraph (s)(1) of this
section, in a format substantially similar to Model Clause H-4(I) in
Appendix H to this part:
(A) The interest rate that applies at consummation and the period
of time for which it applies;
(B) A statement that, even if market rates do not change, the
interest rate will increase at the first adjustment and a designation
of the place in sequence of the month or year, as applicable, of such
rate adjustment; and
(C) The fully-indexed rate.
(3) Payments for amortizing loans. (i) Principal and interest
payments. If all periodic payments will be applied to accrued interest
and principal, for each interest rate disclosed under paragraph
(s)(2)(i) of this section:
(A) The corresponding periodic principal and interest payment,
labeled as ``principal and interest;''
(B) If the periodic payment may increase without regard to an
interest rate adjustment, the payment that corresponds to the first
such increase and the earliest date on which the increase could occur;
(C) If an escrow account will be established, an estimate of the
amount of taxes and insurance, including any mortgage insurance,
payable with each periodic payment; and
(D) The sum of the amounts disclosed under paragraphs (s)(3)(i)(A)
and (C) of this section or (s)(3)(i)(B) and (C) of this section, as
applicable, labeled as ``total estimated monthly payment.''
(ii) Interest-only payments. If the loan is an interest-only loan,
for each interest rate disclosed under paragraph (s)(2)(i) of this
section, the corresponding periodic payment and:
(A) If the payment will be applied to only accrued interest, the
amount applied to interest, labeled as ``interest payment,'' and a
statement that none of the payment is being applied to principal;
(B) If the payment will be applied to accrued interest and
principal, an itemization of the amount of the first such payment
applied to accrued interest and to principal, labeled as ``interest
payment'' and ``principal payment,'' respectively;
(C) The escrow information described in paragraph (s)(3)(i)(C) of
this section; and
(D) The sum of all amounts required to be disclosed under
paragraphs (s)(3)(ii)(A) and (C) of this section or (s)(3)(ii)(B) and
(C) of this section, as applicable, labeled as ``total estimated
monthly payment.''
(4) Payments for negative amortization loans. For negative
amortization loans:
(i)(A) The minimum periodic payment required until the first
payment increase or interest rate increase, corresponding to the
interest rate disclosed under paragraph (s)(2)(ii)(A) of this section;
(B) The minimum periodic payment that would be due at the first
payment increase and the second, if any, corresponding to the interest
rates described in paragraphs (s)(2)(ii)(C) and (D) of this section;
and
(C) A statement that the minimum payment pays only some interest,
does not repay any principal, and will cause the loan amount to
increase;
(ii) The fully amortizing periodic payment amount at the earliest
time when such a payment must be made, corresponding to the interest
rate disclosed under paragraph (s)(2)(ii)(B) of this section; and
(iii) If applicable, in addition to the payments in paragraphs
(s)(4)(i) and (ii) of this section, for each interest rate disclosed
under paragraph (s)(2)(ii) of this section, the amount of the fully
amortizing periodic payment, labeled as the ``full payment option,''
and a statement that these payments pay all principal and all accrued
interest.
(5) Balloon payments. (i) Except as provided in paragraph
(s)(5)(ii) of this section, if the transaction will require a balloon
payment, defined as a payment that is more than two times a regular
periodic payment, the balloon payment shall be disclosed separately
from other periodic payments disclosed in the table under this
paragraph (s), outside the table and in a manner substantially similar
to Model Clause H-4(J) in Appendix H to this part.
(ii) If the balloon payment is scheduled to occur at the same time
as another payment required to be disclosed in the table pursuant to
paragraph (s)(3) or (s)(4) of this section, then the balloon payment
must be disclosed in the table.
(6) Special disclosures for loans with negative amortization. For a
negative amortization loan, the following information, in close
proximity to the table required in paragraph (s)(1) of this section,
with headings, content, and format substantially similar to Model
Clause H-4(G) in Appendix H to this part:
(i) The maximum interest rate, the shortest period of time in which
such interest rate could be reached, the amount of estimated taxes and
insurance included in each payment disclosed, and a statement that the
loan offers payment options, two of which are shown.
(ii) The dollar amount of the increase in the loan's principal
balance if the consumer makes only the minimum required payments for
the maximum possible time and the earliest date on which the consumer
must begin making fully amortizing payments, assuming that the maximum
interest rate is reached at the earliest possible time.
(7) Definitions. For purposes of this Sec. 1026.18(s):
(i) The term ``adjustable-rate mortgage'' means a transaction
secured by real property or a dwelling for which the annual percentage
rate may increase after consummation.
(ii) The term ``step-rate mortgage'' means a transaction secured by
real property or a dwelling for which the interest rate will change
after consummation, and the rates that will apply and the periods for
which they will apply are known at consummation.
(iii) The term ``fixed-rate mortgage'' means a transaction secured
by real property or a dwelling that is not an adjustable-rate mortgage
or a step-rate mortgage.
(iv) The term ``interest-only'' means that, under the terms of the
legal obligation, one or more of the periodic payments may be applied
solely to accrued interest and not to loan principal; an ``interest-
only loan'' is a loan that permits interest-only payments.
(v) The term ``amortizing loan'' means a loan in which payment of
the periodic payments does not result in an increase in the principal
balance under the terms of the legal obligation; the term
[[Page 79801]]
``negative amortization'' means payment of periodic payments that will
result in an increase in the principal balance under the terms of the
legal obligation; the term ``negative amortization loan'' means a loan,
other than a reverse mortgage subject to Sec. 1026.33, that provides
for a minimum periodic payment that covers only a portion of the
accrued interest, resulting in negative amortization.
(vi) The term ``fully-indexed rate'' means the interest rate
calculated using the index value and margin at the time of
consummation.
(t) `` No-guarantee-to-refinance'' statement. (1) Disclosure. For a
closed-end transaction secured by real property or a dwelling, other
than a transaction secured by a consumer's interest in a timeshare plan
described in 11 U.S.C. 101(53D), the creditor shall disclose a
statement that there is no guarantee the consumer can refinance the
transaction to lower the interest rate or periodic payments.
(2) Format. The statement required by paragraph (t)(1) of this
section must be in a form substantially similar to Model Clause H-4(K)
in Appendix H to this part.
Sec. 1026.19 Certain mortgage and variable-rate transactions.
(a) Mortgage transactions subject to RESPA. (1)(i) Time of
disclosures. In a mortgage transaction subject to the Real Estate
Settlement Procedures Act (12 U.S.C. 2601 et seq.) that is secured by
the consumer's dwelling, other than a home equity line of credit
subject to Sec. 1026.40 or mortgage transaction subject to paragraph
(a)(5) of this section, the creditor shall make good faith estimates of
the disclosures required by Sec. 1026.18 and shall deliver or place
them in the mail not later than the third business day after the
creditor receives the consumer's written application.
(ii) Imposition of fees. Except as provided in paragraph
(a)(1)(iii) of this section, neither a creditor nor any other person
may impose a fee on a consumer in connection with the consumer's
application for a mortgage transaction subject to paragraph (a)(1)(i)
of this section before the consumer has received the disclosures
required by paragraph (a)(1)(i) of this section. If the disclosures are
mailed to the consumer, the consumer is considered to have received
them three business days after they are mailed.
(iii) Exception to fee restriction. A creditor or other person may
impose a fee for obtaining the consumer's credit history before the
consumer has received the disclosures required by paragraph (a)(1)(i)
of this section, provided the fee is bona fide and reasonable in
amount.
(2) Waiting periods for early disclosures and corrected
disclosures. (i) The creditor shall deliver or place in the mail the
good faith estimates required by paragraph (a)(1)(i) of this section
not later than the seventh business day before consummation of the
transaction.
(ii) If the annual percentage rate disclosed under paragraph
(a)(1)(i) of this section becomes inaccurate, as defined in Sec.
1026.22, the creditor shall provide corrected disclosures with all
changed terms. The consumer must receive the corrected disclosures no
later than three business days before consummation. If the corrected
disclosures are mailed to the consumer or delivered to the consumer by
means other than delivery in person, the consumer is deemed to have
received the corrected disclosures three business days after they are
mailed or delivered.
(3) Consumer's waiver of waiting period before consummation. If the
consumer determines that the extension of credit is needed to meet a
bona fide personal financial emergency, the consumer may modify or
waive the seven-business-day waiting period or the three-business-day
waiting period required by paragraph (a)(2) of this section, after
receiving the disclosures required by Sec. 1026.18. To modify or waive
a waiting period, the consumer shall give the creditor a dated written
statement that describes the emergency, specifically modifies or waives
the waiting period, and bears the signature of all the consumers who
are primarily liable on the legal obligation. Printed forms for this
purpose are prohibited.
(4) Notice. Disclosures made pursuant to paragraph (a)(1) or
paragraph (a)(2) of this section shall contain the following statement:
``You are not required to complete this agreement merely because you
have received these disclosures or signed a loan application.'' The
disclosure required by this paragraph shall be grouped together with
the disclosures required by paragraphs (a)(1) or (a)(2) of this
section.
(5) Timeshare plans. In a mortgage transaction subject to the Real
Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.) that is
secured by a consumer's interest in a timeshare plan described in 11
U.S.C. 101(53(D)):
(i) The requirements of paragraphs (a)(1) through (a)(4) of this
section do not apply;
(ii) The creditor shall make good faith estimates of the
disclosures required by Sec. 1026.18 before consummation, or shall
deliver or place them in the mail not later than three business days
after the creditor receives the consumer's written application,
whichever is earlier; and
(iii) If the annual percentage rate at the time of consummation
varies from the annual percentage rate disclosed under paragraph
(a)(5)(ii) of this section by more than \1/8\ of 1 percentage point in
a regular transaction or more than \1/4\ of 1 percentage point in an
irregular transaction, as defined in Sec. 1026.22, the creditor shall
disclose all the changed terms no later than consummation or
settlement.
(b) Certain variable-rate transactions. Except as provided in
paragraph (d) of this section, if the annual percentage rate may
increase after consummation in a transaction secured by the consumer's
principal dwelling with a term greater than one year, the following
disclosures must be provided at the time an application form is
provided or before the consumer pays a non-refundable fee, whichever is
earlier (except that the disclosures may be delivered or placed in the
mail not later than three business days following receipt of a
consumer's application when the application reaches the creditor by
telephone, or through an intermediary agent or broker):
(1) The booklet titled Consumer Handbook on Adjustable Rate
Mortgages, or a suitable substitute.
(2) A loan program disclosure for each variable-rate program in
which the consumer expresses an interest. The following disclosures, as
applicable, shall be provided:
(i) The fact that the interest rate, payment, or term of the loan
can change.
(ii) The index or formula used in making adjustments, and a source
of information about the index or formula.
(iii) An explanation of how the interest rate and payment will be
determined, including an explanation of how the index is adjusted, such
as by the addition of a margin.
(iv) A statement that the consumer should ask about the current
margin value and current interest rate.
(v) The fact that the interest rate will be discounted, and a
statement that the consumer should ask about the amount of the interest
rate discount.
(vi) The frequency of interest rate and payment changes.
(vii) Any rules relating to changes in the index, interest rate,
payment amount, and outstanding loan balance including, for example, an
explanation of interest rate or payment limitations, negative
amortization, and interest rate carryover.
(viii) At the option of the creditor, either of the following:
[[Page 79802]]
(A) A historical example, based on a $10,000 loan amount,
illustrating how payments and the loan balance would have been affected
by interest rate changes implemented according to the terms of the loan
program disclosure. The example shall reflect the most recent 15 years
of index values. The example shall reflect all significant loan program
terms, such as negative amortization, interest rate carryover, interest
rate discounts, and interest rate and payment limitations, that would
have been affected by the index movement during the period.
(B) The maximum interest rate and payment for a $10,000 loan
originated at the initial interest rate (index value plus margin,
adjusted by the amount of any discount or premium) in effect as of an
identified month and year for the loan program disclosure assuming the
maximum periodic increases in rates and payments under the program; and
the initial interest rate and payment for that loan and a statement
that the periodic payment may increase or decrease substantially
depending on changes in the rate.
(ix) An explanation of how the consumer may calculate the payments
for the loan amount to be borrowed based on either:
(A) The most recent payment shown in the historical example in
paragraph (b)(2)(viii)(A) of this section; or
(B) The initial interest rate used to calculate the maximum
interest rate and payment in paragraph (b)(2)(viii)(B) of this section.
(x) The fact that the loan program contains a demand feature.
(xi) The type of information that will be provided in notices of
adjustments and the timing of such notices.
(xii) A statement that disclosure forms are available for the
creditor's other variable-rate loan programs.
(c) Electronic disclosures. For an application that is accessed by
the consumer in electronic form, the disclosures required by paragraph
(b) of this section may be provided to the consumer in electronic form
on or with the application.
(d) Information provided in accordance with variable-rate
regulations of other Federal agencies may be substituted for the
disclosures required by paragraph (b) of this section.
Sec. 1026.20 Subsequent disclosure requirements.
(a) Refinancings. A refinancing occurs when an existing obligation
that was subject to this subpart is satisfied and replaced by a new
obligation undertaken by the same consumer. A refinancing is a new
transaction requiring new disclosures to the consumer. The new finance
charge shall include any unearned portion of the old finance charge
that is not credited to the existing obligation. The following shall
not be treated as a refinancing:
(1) A renewal of a single payment obligation with no change in the
original terms.
(2) A reduction in the annual percentage rate with a corresponding
change in the payment schedule.
(3) An agreement involving a court proceeding.
(4) A change in the payment schedule or a change in collateral
requirements as a result of the consumer's default or delinquency,
unless the rate is increased, or the new amount financed exceeds the
unpaid balance plus earned finance charge and premiums for continuation
of insurance of the types described in Sec. 1026.4(d).
(5) The renewal of optional insurance purchased by the consumer and
added to an existing transaction, if disclosures relating to the
initial purchase were provided as required by this subpart.
(b) Assumptions. An assumption occurs when a creditor expressly
agrees in writing with a subsequent consumer to accept that consumer as
a primary obligor on an existing residential mortgage transaction.
Before the assumption occurs, the creditor shall make new disclosures
to the subsequent consumer, based on the remaining obligation. If the
finance charge originally imposed on the existing obligation was an
add-on or discount finance charge, the creditor need only disclose:
(1) The unpaid balance of the obligation assumed.
(2) The total charges imposed by the creditor in connection with
the assumption.
(3) The information required to be disclosed under Sec.
1026.18(k), (l), (m), and (n).
(4) The annual percentage rate originally imposed on the
obligation.
(5) The payment schedule under Sec. 1026.18(g) and the total of
payments under Sec. 1026.18(h) based on the remaining obligation.
(c) Variable-rate adjustments. Except as provided in paragraph (d)
of this section, an adjustment to the interest rate with or without a
corresponding adjustment to the payment in a variable-rate transaction
subject to Sec. 1026.19(b) is an event requiring new disclosures to
the consumer. At least once each year during which an interest rate
adjustment is implemented without an accompanying payment change, and
at least 25, but no more than 120, calendar days before a payment at a
new level is due, the following disclosures, as applicable, must be
delivered or placed in the mail:
(1) The current and prior interest rates.
(2) The index values upon which the current and prior interest
rates are based.
(3) The extent to which the creditor has foregone any increase in
the interest rate.
(4) The contractual effects of the adjustment, including the
payment due after the adjustment is made, and a statement of the loan
balance.
(5) The payment, if different from that referred to in paragraph
(c)(4) of this section, that would be required to fully amortize the
loan at the new interest rate over the remainder of the loan term.
(d) Information provided in accordance with variable-rate
subsequent disclosure regulations of other Federal agencies may be
substituted for the disclosure required by paragraph (c) of this
section.
Sec. 1026.21 Treatment of credit balances.
When a credit balance in excess of $1 is created in connection with
a transaction (through transmittal of funds to a creditor in excess of
the total balance due on an account, through rebates of unearned
finance charges or insurance premiums, or through amounts otherwise
owed to or held for the benefit of a consumer), the creditor shall:
(a) Credit the amount of the credit balance to the consumer's
account;
(b) Refund any part of the remaining credit balance, upon the
written request of the consumer; and
(c) Make a good faith effort to refund to the consumer by cash,
check, or money order, or credit to a deposit account of the consumer,
any part of the credit balance remaining in the account for more than 6
months, except that no further action is required if the consumer's
current location is not known to the creditor and cannot be traced
through the consumer's last known address or telephone number.
Sec. 1026.22 Determination of annual percentage rate.
(a) Accuracy of annual percentage rate. (1) The annual percentage
rate is a measure of the cost of credit, expressed as a yearly rate,
that relates the amount and timing of value received by the consumer to
the amount and timing of payments made. The annual percentage rate
shall be determined in accordance with either the actuarial method or
the United States Rule method. Explanations, equations and instructions
for determining the annual
[[Page 79803]]
percentage rate in accordance with the actuarial method are set forth
in Appendix J to this part. An error in disclosure of the annual
percentage rate or finance charge shall not, in itself, be considered a
violation of this part if:
(i) The error resulted from a corresponding error in a calculation
tool used in good faith by the creditor; and
(ii) Upon discovery of the error, the creditor promptly
discontinues use of that calculation tool for disclosure purposes and
notifies the Bureau in writing of the error in the calculation tool.
(2) As a general rule, the annual percentage rate shall be
considered accurate if it is not more than \1/8\ of 1 percentage point
above or below the annual percentage rate determined in accordance with
paragraph (a)(1) of this section.
(3) In an irregular transaction, the annual percentage rate shall
be considered accurate if it is not more than \1/4\ of 1 percentage
point above or below the annual percentage rate determined in
accordance with paragraph (a)(1) of this section. For purposes of this
paragraph (a)(3), an irregular transaction is one that includes one or
more of the following features: multiple advances, irregular payment
periods, or irregular payment amounts (other than an irregular first
period or an irregular first or final payment).
(4) Mortgage loans. If the annual percentage rate disclosed in a
transaction secured by real property or a dwelling varies from the
actual rate determined in accordance with paragraph (a)(1) of this
section, in addition to the tolerances applicable under paragraphs
(a)(2) and (3) of this section, the disclosed annual percentage rate
shall also be considered accurate if:
(i) The rate results from the disclosed finance charge; and
(ii)(A) The disclosed finance charge would be considered accurate
under Sec. 1026.18(d)(1); or
(B) For purposes of rescission, if the disclosed finance charge
would be considered accurate under Sec. 1026.23(g) or (h), whichever
applies.
(5) Additional tolerance for mortgage loans. In a transaction
secured by real property or a dwelling, in addition to the tolerances
applicable under paragraphs (a)(2) and (3) of this section, if the
disclosed finance charge is calculated incorrectly but is considered
accurate under Sec. 1026.18(d)(1) or Sec. 1026.23(g) or (h), the
disclosed annual percentage rate shall be considered accurate:
(i) If the disclosed finance charge is understated, and the
disclosed annual percentage rate is also understated but it is closer
to the actual annual percentage rate than the rate that would be
considered accurate under paragraph (a)(4) of this section;
(ii) If the disclosed finance charge is overstated, and the
disclosed annual percentage rate is also overstated but it is closer to
the actual annual percentage rate than the rate that would be
considered accurate under paragraph (a)(4) of this section.
(b) Computation tools. (1) The Regulation Z Annual Percentage Rate
Tables produced by the Bureau may be used to determine the annual
percentage rate, and any rate determined from those tables in
accordance with the accompanying instructions complies with the
requirements of this section. Volume I of the tables applies to single
advance transactions involving up to 480 monthly payments or 104 weekly
payments. It may be used for regular transactions and for transactions
with any of the following irregularities: an irregular first period, an
irregular first payment, and an irregular final payment. Volume II of
the tables applies to transactions involving multiple advances and any
type of payment or period irregularity.
(2) Creditors may use any other computation tool in determining the
annual percentage rate if the rate so determined equals the rate
determined in accordance with Appendix J to this part, within the
degree of accuracy set forth in paragraph (a) of this section.
(c) Single add-on rate transactions. If a single add-on rate is
applied to all transactions with maturities up to 60 months and if all
payments are equal in amount and period, a single annual percentage
rate may be disclosed for all those transactions, so long as it is the
highest annual percentage rate for any such transaction.
(d) Certain transactions involving ranges of balances. For purposes
of disclosing the annual percentage rate referred to in Sec.
1026.17(g)(4) (Mail or telephone orders--delay in disclosures) and (h)
(Series of sales--delay in disclosures), if the same finance charge is
imposed on all balances within a specified range of balances, the
annual percentage rate computed for the median balance may be disclosed
for all the balances. However, if the annual percentage rate computed
for the median balance understates the annual percentage rate computed
for the lowest balance by more than 8 percent of the latter rate, the
annual percentage rate shall be computed on whatever lower balance will
produce an annual percentage rate that does not result in an
understatement of more than 8 percent of the rate determined on the
lowest balance.
Sec. 1026.23 Right of rescission.
(a) Consumer's right to rescind. (1) In a credit transaction in
which a security interest is or will be retained or acquired in a
consumer's principal dwelling, each consumer whose ownership interest
is or will be subject to the security interest shall have the right to
rescind the transaction, except for transactions described in paragraph
(f) of this section. For purposes of this section, the addition to an
existing obligation of a security interest in a consumer's principal
dwelling is a transaction. The right of rescission applies only to the
addition of the security interest and not the existing obligation. The
creditor shall deliver the notice required by paragraph (b) of this
section but need not deliver new material disclosures. Delivery of the
required notice shall begin the rescission period.
(2) To exercise the right to rescind, the consumer shall notify the
creditor of the rescission by mail, telegram or other means of written
communication. Notice is considered given when mailed, when filed for
telegraphic transmission or, if sent by other means, when delivered to
the creditor's designated place of business.
(3)(i) The consumer may exercise the right to rescind until
midnight of the third business day following consummation, delivery of
the notice required by paragraph (b) of this section, or delivery of
all material disclosures, whichever occurs last. If the required notice
or material disclosures are not delivered, the right to rescind shall
expire 3 years after consummation, upon transfer of all of the
consumer's interest in the property, or upon sale of the property,
whichever occurs first. In the case of certain administrative
proceedings, the rescission period shall be extended in accordance with
section 125(f) of the Act.
(ii) For purposes of this paragraph (a)(3), the term ``material
disclosures'' means the required disclosures of the annual percentage
rate, the finance charge, the amount financed, the total of payments,
the payment schedule, and the disclosures and limitations referred to
in Sec. Sec. 1026.32(c) and (d) and 1026.35(b)(2).
(4) When more than one consumer in a transaction has the right to
rescind, the exercise of the right by one consumer shall be effective
as to all consumers.
(b)(1) Notice of right to rescind. In a transaction subject to
rescission, a creditor shall deliver two copies of the
[[Page 79804]]
notice of the right to rescind to each consumer entitled to rescind
(one copy to each if the notice is delivered in electronic form in
accordance with the consumer consent and other applicable provisions of
the E-Sign Act). The notice shall be on a separate document that
identifies the transaction and shall clearly and conspicuously disclose
the following:
(i) The retention or acquisition of a security interest in the
consumer's principal dwelling.
(ii) The consumer's right to rescind the transaction.
(iii) How to exercise the right to rescind, with a form for that
purpose, designating the address of the creditor's place of business.
(iv) The effects of rescission, as described in paragraph (d) of
this section.
(v) The date the rescission period expires.
(2) Proper form of notice. To satisfy the disclosure requirements
of paragraph (b)(1) of this section, the creditor shall provide the
appropriate model form in Appendix H of this part or a substantially
similar notice.
(c) Delay of creditor's performance. Unless a consumer waives the
right of rescission under paragraph (e) of this section, no money shall
be disbursed other than in escrow, no services shall be performed and
no materials delivered until the rescission period has expired and the
creditor is reasonably satisfied that the consumer has not rescinded.
(d) Effects of rescission. (1) When a consumer rescinds a
transaction, the security interest giving rise to the right of
rescission becomes void and the consumer shall not be liable for any
amount, including any finance charge.
(2) Within 20 calendar days after receipt of a notice of
rescission, the creditor shall return any money or property that has
been given to anyone in connection with the transaction and shall take
any action necessary to reflect the termination of the security
interest.
(3) If the creditor has delivered any money or property, the
consumer may retain possession until the creditor has met its
obligation under paragraph (d)(2) of this section. When the creditor
has complied with that paragraph, the consumer shall tender the money
or property to the creditor or, where the latter would be impracticable
or inequitable, tender its reasonable value. At the consumer's option,
tender of property may be made at the location of the property or at
the consumer's residence. Tender of money must be made at the
creditor's designated place of business. If the creditor does not take
possession of the money or property within 20 calendar days after the
consumer's tender, the consumer may keep it without further obligation.
(4) The procedures outlined in paragraphs (d)(2) and (3) of this
section may be modified by court order.
(e) Consumer's waiver of right to rescind. The consumer may modify
or waive the right to rescind if the consumer determines that the
extension of credit is needed to meet a bona fide personal financial
emergency. To modify or waive the right, the consumer shall give the
creditor a dated written statement that describes the emergency,
specifically modifies or waives the right to rescind, and bears the
signature of all the consumers entitled to rescind. Printed forms for
this purpose are prohibited.
(f) Exempt transactions. The right to rescind does not apply to the
following:
(1) A residential mortgage transaction.
(2) A refinancing or consolidation by the same creditor of an
extension of credit already secured by the consumer's principal
dwelling. The right of rescission shall apply, however, to the extent
the new amount financed exceeds the unpaid principal balance, any
earned unpaid finance charge on the existing debt, and amounts
attributed solely to the costs of the refinancing or consolidation.
(3) A transaction in which a state agency is a creditor.
(4) An advance, other than an initial advance, in a series of
advances or in a series of single-payment obligations that is treated
as a single transaction under Sec. 1026.17(c)(6), if the notice
required by paragraph (b) of this section and all material disclosures
have been given to the consumer.
(5) A renewal of optional insurance premiums that is not considered
a refinancing under Sec. 1026.20(a)(5).
(g) Tolerances for accuracy. (1) One-half of 1 percent tolerance.
Except as provided in paragraphs (g)(2) and (h)(2) of this section, the
finance charge and other disclosures affected by the finance charge
(such as the amount financed and the annual percentage rate) shall be
considered accurate for purposes of this section if the disclosed
finance charge:
(i) Is understated by no more than \1/2\ of 1 percent of the face
amount of the note or $100, whichever is greater; or
(ii) Is greater than the amount required to be disclosed.
(2) One percent tolerance. In a refinancing of a residential
mortgage transaction with a new creditor (other than a transaction
covered by Sec. 1026.32), if there is no new advance and no
consolidation of existing loans, the finance charge and other
disclosures affected by the finance charge (such as the amount financed
and the annual percentage rate) shall be considered accurate for
purposes of this section if the disclosed finance charge:
(i) Is understated by no more than 1 percent of the face amount of
the note or $100, whichever is greater; or
(ii) Is greater than the amount required to be disclosed.
(h) Special rules for foreclosures. (1) Right to rescind. After the
initiation of foreclosure on the consumer's principal dwelling that
secures the credit obligation, the consumer shall have the right to
rescind the transaction if:
(i) A mortgage broker fee that should have been included in the
finance charge was not included; or
(ii) The creditor did not provide the properly completed
appropriate model form in Appendix H of this part, or a substantially
similar notice of rescission.
(2) Tolerance for disclosures. After the initiation of foreclosure
on the consumer's principal dwelling that secures the credit
obligation, the finance charge and other disclosures affected by the
finance charge (such as the amount financed and the annual percentage
rate) shall be considered accurate for purposes of this section if the
disclosed finance charge:
(i) Is understated by no more than $35; or
(ii) Is greater than the amount required to be disclosed.
Sec. 1026.24 Advertising.
(a) Actually available terms. If an advertisement for credit states
specific credit terms, it shall state only those terms that actually
are or will be arranged or offered by the creditor.
(b) Clear and conspicuous standard. Disclosures required by this
section shall be made clearly and conspicuously.
(c) Advertisement of rate of finance charge. If an advertisement
states a rate of finance charge, it shall state the rate as an ``annual
percentage rate,'' using that term. If the annual percentage rate may
be increased after consummation, the advertisement shall state that
fact. If an advertisement is for credit not secured by a dwelling, the
advertisement shall not state any other rate, except that a simple
annual rate or periodic rate that is applied to an unpaid balance may
be stated in conjunction with, but not more conspicuously than, the
annual percentage rate. If an advertisement is for credit secured by a
dwelling, the advertisement shall not state any other rate, except that
a simple annual rate that is applied to an unpaid balance may be stated
in conjunction with, but
[[Page 79805]]
not more conspicuously than, the annual percentage rate.
(d) Advertisement of terms that require additional disclosures. (1)
Triggering terms. If any of the following terms is set forth in an
advertisement, the advertisement shall meet the requirements of
paragraph (d)(2) of this section:
(i) The amount or percentage of any downpayment.
(ii) The number of payments or period of repayment.
(iii) The amount of any payment.
(iv) The amount of any finance charge.
(2) Additional terms. An advertisement stating any of the terms in
paragraph (d)(1) of this section shall state the following terms, as
applicable (an example of one or more typical extensions of credit with
a statement of all the terms applicable to each may be used):
(i) The amount or percentage of the downpayment.
(ii) The terms of repayment, which reflect the repayment
obligations over the full term of the loan, including any balloon
payment.
(iii) The ``annual percentage rate,'' using that term, and, if the
rate may be increased after consummation, that fact.
(e) Catalogs or other multiple-page advertisements; electronic
advertisements. (1) If a catalog or other multiple-page advertisement,
or an electronic advertisement (such as an advertisement appearing on
an Internet Web site), gives information in a table or schedule in
sufficient detail to permit determination of the disclosures required
by paragraph (d)(2) of this section, it shall be considered a single
advertisement if:
(i) The table or schedule is clearly and conspicuously set forth;
and
(ii) Any statement of the credit terms in paragraph (d)(1) of this
section appearing anywhere else in the catalog or advertisement clearly
refers to the page or location where the table or schedule begins.
(2) A catalog or other multiple-page advertisement or an electronic
advertisement (such as an advertisement appearing on an Internet Web
site) complies with paragraph (d)(2) of this section if the table or
schedule of terms includes all appropriate disclosures for a
representative scale of amounts up to the level of the more commonly
sold higher-priced property or services offered.
(f) Disclosure of rates and payments in advertisements for credit
secured by a dwelling.
(1) Scope. The requirements of this paragraph apply to any
advertisement for credit secured by a dwelling, other than television
or radio advertisements, including promotional materials accompanying
applications.
(2) Disclosure of rates. (i) In general. If an advertisement for
credit secured by a dwelling states a simple annual rate of interest
and more than one simple annual rate of interest will apply over the
term of the advertised loan, the advertisement shall disclose in a
clear and conspicuous manner:
(A) Each simple annual rate of interest that will apply. In
variable-rate transactions, a rate determined by adding an index and
margin shall be disclosed based on a reasonably current index and
margin;
(B) The period of time during which each simple annual rate of
interest will apply; and
(C) The annual percentage rate for the loan. If such rate is
variable, the annual percentage rate shall comply with the accuracy
standards in Sec. Sec. 1026.17(c) and 1026.22.
(ii) Clear and conspicuous requirement. For purposes of paragraph
(f)(2)(i) of this section, clearly and conspicuously disclosed means
that the required information in paragraphs (f)(2)(i)(A) through (C)
shall be disclosed with equal prominence and in close proximity to any
advertised rate that triggered the required disclosures. The required
information in paragraph (f)(2)(i)(C) may be disclosed with greater
prominence than the other information.
(3) Disclosure of payments. (i) In general. In addition to the
requirements of paragraph (c) of this section, if an advertisement for
credit secured by a dwelling states the amount of any payment, the
advertisement shall disclose in a clear and conspicuous manner:
(A) The amount of each payment that will apply over the term of the
loan, including any balloon payment. In variable-rate transactions,
payments that will be determined based on the application of the sum of
an index and margin shall be disclosed based on a reasonably current
index and margin;
(B) The period of time during which each payment will apply; and
(C) In an advertisement for credit secured by a first lien on a
dwelling, the fact that the payments do not include amounts for taxes
and insurance premiums, if applicable, and that the actual payment
obligation will be greater.
(ii) Clear and conspicuous requirement. For purposes of paragraph
(f)(3)(i) of this section, a clear and conspicuous disclosure means
that the required information in paragraphs (f)(3)(i)(A) and (B) shall
be disclosed with equal prominence and in close proximity to any
advertised payment that triggered the required disclosures, and that
the required information in paragraph (f)(3)(i)(C) shall be disclosed
with prominence and in close proximity to the advertised payments.
(4) Envelope excluded. The requirements in paragraphs (f)(2) and
(f)(3) of this section do not apply to an envelope in which an
application or solicitation is mailed, or to a banner advertisement or
pop-up advertisement linked to an application or solicitation provided
electronically.
(g) Alternative disclosures--television or radio advertisements. An
advertisement made through television or radio stating any of the terms
requiring additional disclosures under paragraph (d)(2) of this section
may comply with paragraph (d)(2) of this section either by:
(1) Stating clearly and conspicuously each of the additional
disclosures required under paragraph (d)(2) of this section; or
(2) Stating clearly and conspicuously the information required by
paragraph (d)(2)(iii) of this section and listing a toll-free telephone
number, or any telephone number that allows a consumer to reverse the
phone charges when calling for information, along with a reference that
such number may be used by consumers to obtain additional cost
information.
(h) Tax implications. If an advertisement distributed in paper form
or through the Internet (rather than by radio or television) is for a
loan secured by the consumer's principal dwelling, and the
advertisement states that the advertised extension of credit may exceed
the fair market value of the dwelling, the advertisement shall clearly
and conspicuously state that:
(1) The interest on the portion of the credit extension that is
greater than the fair market value of the dwelling is not tax
deductible for Federal income tax purposes; and
(2) The consumer should consult a tax adviser for further
information regarding the deductibility of interest and charges.
(i) Prohibited acts or practices in advertisements for credit
secured by a dwelling. The following acts or practices are prohibited
in advertisements for credit secured by a dwelling:
(1) Misleading advertising of ``fixed'' rates and payments. Using
the word ``fixed'' to refer to rates, payments, or the credit
transaction in an advertisement for variable-rate transactions or other
transactions where the payment will increase, unless:
[[Page 79806]]
(i) In the case of an advertisement solely for one or more
variable-rate transactions,
(A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate
Mortgage,'' or ``ARM'' appears in the advertisement before the first
use of the word ``fixed'' and is at least as conspicuous as any use of
the word ``fixed'' in the advertisement; and
(B) Each use of the word ``fixed'' to refer to a rate or payment is
accompanied by an equally prominent and closely proximate statement of
the time period for which the rate or payment is fixed, and the fact
that the rate may vary or the payment may increase after that period;
(ii) In the case of an advertisement solely for non-variable-rate
transactions where the payment will increase (e.g., a stepped-rate
mortgage transaction with an initial lower payment), each use of the
word ``fixed'' to refer to the payment is accompanied by an equally
prominent and closely proximate statement of the time period for which
the payment is fixed, and the fact that the payment will increase after
that period; or
(iii) In the case of an advertisement for both variable-rate
transactions and non-variable-rate transactions,
(A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate
Mortgage,'' or ``ARM'' appears in the advertisement with equal
prominence as any use of the term ``fixed,'' ``Fixed-Rate Mortgage,''
or similar terms; and
(B) Each use of the word ``fixed'' to refer to a rate, payment, or
the credit transaction either refers solely to the transactions for
which rates are fixed and complies with paragraph (i)(1)(ii) of this
section, if applicable, or, if it refers to the variable-rate
transactions, is accompanied by an equally prominent and closely
proximate statement of the time period for which the rate or payment is
fixed, and the fact that the rate may vary or the payment may increase
after that period.
(2) Misleading comparisons in advertisements. Making any comparison
in an advertisement between actual or hypothetical credit payments or
rates and any payment or simple annual rate that will be available
under the advertised product for a period less than the full term of
the loan, unless:
(i) In general. The advertisement includes a clear and conspicuous
comparison to the information required to be disclosed under Sec.
1026.24(f)(2) and (3); and
(ii) Application to variable-rate transactions. If the
advertisement is for a variable-rate transaction, and the advertised
payment or simple annual rate is based on the index and margin that
will be used to make subsequent rate or payment adjustments over the
term of the loan, the advertisement includes an equally prominent
statement in close proximity to the payment or rate that the payment or
rate is subject to adjustment and the time period when the first
adjustment will occur.
(3) Misrepresentations about government endorsement. Making any
statement in an advertisement that the product offered is a
``government loan program'', ``government-supported loan'', or is
otherwise endorsed or sponsored by any Federal, state, or local
government entity, unless the advertisement is for an FHA loan, VA
loan, or similar loan program that is, in fact, endorsed or sponsored
by a Federal, state, or local government entity.
(4) Misleading use of the current lender's name. Using the name of
the consumer's current lender in an advertisement that is not sent by
or on behalf of the consumer's current lender, unless the
advertisement:
(i) Discloses with equal prominence the name of the person or
creditor making the advertisement; and
(ii) Includes a clear and conspicuous statement that the person
making the advertisement is not associated with, or acting on behalf
of, the consumer's current lender.
(5) Misleading claims of debt elimination. Making any misleading
claim in an advertisement that the mortgage product offered will
eliminate debt or result in a waiver or forgiveness of a consumer's
existing loan terms with, or obligations to, another creditor.
(6) Misleading use of the term ``counselor''. Using the term
``counselor'' in an advertisement to refer to a for-profit mortgage
broker or mortgage creditor, its employees, or persons working for the
broker or creditor that are involved in offering, originating or
selling mortgages.
(7) Misleading foreign-language advertisements. Providing
information about some trigger terms or required disclosures, such as
an initial rate or payment, only in a foreign language in an
advertisement, but providing information about other trigger terms or
required disclosures, such as information about the fully-indexed rate
or fully amortizing payment, only in English in the same advertisement.
Subpart D--Miscellaneous
Sec. 1026.25 Record retention.
(a) General rule. A creditor shall retain evidence of compliance
with this part (other than advertising requirements under Sec. Sec.
1026.16 and 1026.24) for 2 years after the date disclosures are
required to be made or action is required to be taken. The
administrative agencies responsible for enforcing the regulation may
require creditors under their jurisdictions to retain records for a
longer period if necessary to carry out their enforcement
responsibilities under section 108 of the Act.
(b) Inspection of records. A creditor shall permit the agency
responsible for enforcing this part with respect to that creditor to
inspect its relevant records for compliance.
Sec. 1026.26 Use of annual percentage rate in oral disclosures.
(a) Open-end credit. In an oral response to a consumer's inquiry
about the cost of open-end credit, only the annual percentage rate or
rates shall be stated, except that the periodic rate or rates also may
be stated. If the annual percentage rate cannot be determined in
advance because there are finance charges other than a periodic rate,
the corresponding annual percentage rate shall be stated, and other
cost information may be given.
(b) Closed-end credit. In an oral response to a consumer's inquiry
about the cost of closed-end credit, only the annual percentage rate
shall be stated, except that a simple annual rate or periodic rate also
may be stated if it is applied to an unpaid balance. If the annual
percentage rate cannot be determined in advance, the annual percentage
rate for a sample transaction shall be stated, and other cost
information for the consumer's specific transaction may be given.
Sec. 1026.27 Language of disclosures.
Disclosures required by this part may be made in a language other
than English, provided that the disclosures are made available in
English upon the consumer's request. This requirement for providing
English disclosures on request does not apply to advertisements subject
to Sec. Sec. 1026.16 and 1026.24.
Sec. 1026.28 Effect on state laws.
(a) Inconsistent disclosure requirements. (1) Except as provided in
paragraph (d) of this section, state law requirements that are
inconsistent with the requirements contained in chapter 1 (General
Provisions), chapter 2 (Credit Transactions), or chapter 3 (Credit
Advertising) of the Act and the implementing provisions of this part
are preempted to the extent of the inconsistency. A state law is
[[Page 79807]]
inconsistent if it requires a creditor to make disclosures or take
actions that contradict the requirements of the Federal law. A state
law is contradictory if it requires the use of the same term to
represent a different amount or a different meaning than the Federal
law, or if it requires the use of a term different from that required
in the Federal law to describe the same item. A creditor, state, or
other interested party may request the Bureau to determine whether a
state law requirement is inconsistent. After the Bureau determines that
a state law is inconsistent, a creditor may not make disclosures using
the inconsistent term or form.
(2)(i) State law requirements are inconsistent with the
requirements contained in sections 161 (Correction of billing errors)
or 162 (Regulation of credit reports) of the Act and the implementing
provisions of this part and are preempted if they provide rights,
responsibilities, or procedures for consumers or creditors that are
different from those required by the Federal law. However, a state law
that allows a consumer to inquire about an open-end credit account and
imposes on the creditor an obligation to respond to such inquiry after
the time allowed in the Federal law for the consumer to submit written
notice of a billing error shall not be preempted in any situation where
the time period for making written notice under this part has expired.
If a creditor gives written notice of a consumer's rights under such
state law, the notice shall state that reliance on the longer time
period available under state law may result in the loss of important
rights that could be preserved by acting more promptly under Federal
law; it shall also explain that the state law provisions apply only
after expiration of the time period for submitting a proper written
notice of a billing error under the Federal law. If the state
disclosures are made on the same side of a page as the required Federal
disclosures, the state disclosures shall appear under a demarcation
line below the Federal disclosures, and the Federal disclosures shall
be identified by a heading indicating that they are made in compliance
with Federal law.
(ii) State law requirements are inconsistent with the requirements
contained in chapter 4 (Credit billing) of the Act (other than section
161 or 162) and the implementing provisions of this part and are
preempted if the creditor cannot comply with state law without
violating Federal law.
(iii) A state may request the Bureau to determine whether its law
is inconsistent with chapter 4 of the Act and its implementing
provisions.
(b) Equivalent disclosure requirements. If the Bureau determines
that a disclosure required by state law (other than a requirement
relating to the finance charge, annual percentage rate, or the
disclosures required under Sec. 1026.32) is substantially the same in
meaning as a disclosure required under the Act or this part, creditors
in that state may make the state disclosure in lieu of the Federal
disclosure. A creditor, state, or other interested party may request
the Bureau to determine whether a state disclosure is substantially the
same in meaning as a Federal disclosure.
(c) Request for determination. The procedures under which a request
for a determination may be made under this section are set forth in
Appendix A.
(d) Special rule for credit and charge cards. State law
requirements relating to the disclosure of credit information in any
credit or charge card application or solicitation that is subject to
the requirements of section 127(c) of chapter 2 of the Act (Sec.
1026.60 of the regulation) or in any renewal notice for a credit or
charge card that is subject to the requirements of section 127(d) of
chapter 2 of the Act (Sec. 1026.9(e) of the regulation) are preempted.
State laws relating to the enforcement of section 127(c) and (d) of the
Act are not preempted.
Sec. 1026.29 State exemptions.
(a) General rule. Any state may apply to the Bureau to exempt a
class of transactions within the state from the requirements of chapter
2 (Credit transactions) or chapter 4 (Credit billing) of the Act and
the corresponding provisions of this part. The Bureau shall grant an
exemption if it determines that:
(1) The state law is substantially similar to the Federal law or,
in the case of chapter 4, affords the consumer greater protection than
the Federal law; and
(2) There is adequate provision for enforcement.
(b) Civil liability. (1) No exemptions granted under this section
shall extend to the civil liability provisions of sections 130 and 131
of the Act.
(2) If an exemption has been granted, the disclosures required by
the applicable state law (except any additional requirements not
imposed by Federal law) shall constitute the disclosures required by
the Act.
(c) Applications. The procedures under which a state may apply for
an exemption under this section are set forth in Appendix B to this
part.
Sec. 1026.30 Limitation on rates.
A creditor shall include in any consumer credit contract secured by
a dwelling and subject to the Act and this part the maximum interest
rate that may be imposed during the term of the obligation when:
(a) In the case of closed-end credit, the annual percentage rate
may increase after consummation, or
(b) In the case of open-end credit, the annual percentage rate may
increase during the plan.
Subpart E--Special Rules for Certain Home Mortgage Transactions
Sec. 1026.31 General rules.
(a) Relation to other subparts in this part. The requirements and
limitations of this subpart are in addition to and not in lieu of those
contained in other subparts of this part.
(b) Form of disclosures. The creditor shall make the disclosures
required by this subpart clearly and conspicuously in writing, in a
form that the consumer may keep. The disclosures required by this
subpart may be provided to the consumer in electronic form, subject to
compliance with the consumer consent and other applicable provisions of
the Electronic Signatures in Global and National Commerce Act (E-Sign
Act) (15 U.S.C. 7001 et seq.).
(c) Timing of disclosure. (1) Disclosures for certain closed-end
home mortgages. The creditor shall furnish the disclosures required by
Sec. 1026.32 at least three business days prior to consummation of a
mortgage transaction covered by Sec. 1026.32.
(i) Change in terms. After complying with paragraph (c)(1) of this
section and prior to consummation, if the creditor changes any term
that makes the disclosures inaccurate, new disclosures shall be
provided in accordance with the requirements of this subpart.
(ii) Telephone disclosures. A creditor may provide new disclosures
by telephone if the consumer initiates the change and if, at
consummation:
(A) The creditor provides new written disclosures; and
(B) The consumer and creditor sign a statement that the new
disclosures were provided by telephone at least three days prior to
consummation.
(iii) Consumer's waiver of waiting period before consummation. The
consumer may, after receiving the disclosures required by paragraph
(c)(1) of this section, modify or waive the three-day waiting period
between delivery of those disclosures and consummation if the consumer
determines that the extension of credit is needed to meet a bona fide
personal
[[Page 79808]]
financial emergency. To modify or waive the right, the consumer shall
give the creditor a dated written statement that describes the
emergency, specifically modifies or waives the waiting period, and
bears the signature of all the consumers entitled to the waiting
period. Printed forms for this purpose are prohibited, except when
creditors are permitted to use printed forms pursuant to Sec.
1026.23(e)(2).
(2) Disclosures for reverse mortgages. The creditor shall furnish
the disclosures required by Sec. 1026.33 at least three business days
prior to:
(i) Consummation of a closed-end credit transaction; or
(ii) The first transaction under an open-end credit plan.
(d) Basis of disclosures and use of estimates. (1) Legal
Obligation. Disclosures shall reflect the terms of the legal obligation
between the parties.
(2) Estimates. If any information necessary for an accurate
disclosure is unknown to the creditor, the creditor shall make the
disclosure based on the best information reasonably available at the
time the disclosure is provided, and shall state clearly that the
disclosure is an estimate.
(3) Per-diem interest. For a transaction in which a portion of the
interest is determined on a per-diem basis and collected at
consummation, any disclosure affected by the per-diem interest shall be
considered accurate if the disclosure is based on the information known
to the creditor at the time that the disclosure documents are prepared.
(e) Multiple creditors; multiple consumers. If a transaction
involves more than one creditor, only one set of disclosures shall be
given and the creditors shall agree among themselves which creditor
must comply with the requirements that this part imposes on any or all
of them. If there is more than one consumer, the disclosures may be
made to any consumer who is primarily liable on the obligation. If the
transaction is rescindable under Sec. 1026.15 or Sec. 1026.23,
however, the disclosures shall be made to each consumer who has the
right to rescind.
(f) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor delivers the
required disclosures, the inaccuracy is not a violation of Regulation Z
(12 CFR part 1026), although new disclosures may be required for
mortgages covered by Sec. 1026.32 under paragraph (c) of this section,
Sec. 1026.9(c), Sec. 1026.19, or Sec. 1026.20.
(g) Accuracy of annual percentage rate. For purposes of Sec.
1026.32, the annual percentage rate shall be considered accurate, and
may be used in determining whether a transaction is covered by Sec.
1026.32, if it is accurate according to the requirements and within the
tolerances under Sec. 1026.22. The finance charge tolerances for
rescission under Sec. 1026.23(g) or (h) shall not apply for this
purpose.
Sec. 1026.32 Requirements for certain closed-end home mortgages.
(a) Coverage. (1) Except as provided in paragraph (a)(2) of this
section, the requirements of this section apply to a consumer credit
transaction that is secured by the consumer's principal dwelling, and
in which either:
(i) The annual percentage rate at consummation will exceed by more
than 8 percentage points for first-lien loans, or by more than 10
percentage points for subordinate-lien loans, the yield on Treasury
securities having comparable periods of maturity to the loan maturity
as of the fifteenth day of the month immediately preceding the month in
which the application for the extension of credit is received by the
creditor; or
(ii) The total points and fees payable by the consumer at or before
loan closing will exceed the greater of 8 percent of the total loan
amount, or $400; the $400 figure shall be adjusted annually on January
1 by the annual percentage change in the Consumer Price Index that was
reported on the preceding June 1.
(2) This section does not apply to the following:
(i) A residential mortgage transaction.
(ii) A reverse mortgage transaction subject to Sec. 1026.33.
(iii) An open-end credit plan subject to subpart B of this part.
(b) Definitions. For purposes of this subpart, the following
definitions apply:
(1) For purposes of paragraph (a)(1)(ii) of this section, points
and fees means:
(i) All items required to be disclosed under Sec. 1026.4(a) and
1026.4(b), except interest or the time-price differential;
(ii) All compensation paid to mortgage brokers;
(iii) All items listed in Sec. 1026.4(c)(7) (other than amounts
held for future payment of taxes) unless the charge is reasonable, the
creditor receives no direct or indirect compensation in connection with
the charge, and the charge is not paid to an affiliate of the creditor;
and
(iv) Premiums or other charges for credit life, accident, health,
or loss-of-income insurance, or debt-cancellation coverage (whether or
not the debt-cancellation coverage is insurance under applicable law)
that provides for cancellation of all or part of the consumer's
liability in the event of the loss of life, health, or income or in the
case of accident, written in connection with the credit transaction.
(2) Affiliate means any company that controls, is controlled by, or
is under common control with another company, as set forth in the Bank
Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
(c) Disclosures. In addition to other disclosures required by this
part, in a mortgage subject to this section, the creditor shall
disclose the following in conspicuous type size:
(1) Notices. The following statement: ``You are not required to
complete this agreement merely because you have received these
disclosures or have signed a loan application. If you obtain this loan,
the lender will have a mortgage on your home. You could lose your home,
and any money you have put into it, if you do not meet your obligations
under the loan.''
(2) Annual percentage rate. The annual percentage rate.
(3) Regular payment; balloon payment. The amount of the regular
monthly (or other periodic) payment and the amount of any balloon
payment. The regular payment disclosed under this paragraph shall be
treated as accurate if it is based on an amount borrowed that is deemed
accurate and is disclosed under paragraph (c)(5) of this section.
(4) Variable-rate. For variable-rate transactions, a statement that
the interest rate and monthly payment may increase, and the amount of
the single maximum monthly payment, based on the maximum interest rate
required to be disclosed under Sec. 1026.30.
(5) Amount borrowed. For a mortgage refinancing, the total amount
the consumer will borrow, as reflected by the face amount of the note;
and where the amount borrowed includes premiums or other charges for
optional credit insurance or debt-cancellation coverage, that fact
shall be stated, grouped together with the disclosure of the amount
borrowed. The disclosure of the amount borrowed shall be treated as
accurate if it is not more than $100 above or below the amount required
to be disclosed.
(d) Limitations. A mortgage transaction subject to this section
shall not include the following terms:
(1)(i) Balloon payment. For a loan with a term of less than five
years, a payment schedule with regular periodic payments that when
aggregated do not fully amortize the outstanding principal balance.
[[Page 79809]]
(ii) Exception. The limitations in paragraph (d)(1)(i) of this
section do not apply to loans with maturities of less than one year, if
the purpose of the loan is a ``bridge'' loan connected with the
acquisition or construction of a dwelling intended to become the
consumer's principal dwelling.
(2) Negative amortization. A payment schedule with regular periodic
payments that cause the principal balance to increase.
(3) Advance payments. A payment schedule that consolidates more
than two periodic payments and pays them in advance from the proceeds.
(4) Increased interest rate. An increase in the interest rate after
default.
(5) Rebates. A refund calculated by a method less favorable than
the actuarial method (as defined by section 933(d) of the Housing and
Community Development Act of 1992, 15 U.S.C. 1615(d)), for rebates of
interest arising from a loan acceleration due to default.
(6) Prepayment penalties. Except as allowed under paragraph (d)(7)
of this section, a penalty for paying all or part of the principal
before the date on which the principal is due. A prepayment penalty
includes computing a refund of unearned interest by a method that is
less favorable to the consumer than the actuarial method, as defined by
section 933(d) of the Housing and Community Development Act of 1992, 15
U.S.C. 1615(d).
(7) Prepayment penalty exception. A mortgage transaction subject to
this section may provide for a prepayment penalty (including a refund
calculated according to the rule of 78s) otherwise permitted by law if,
under the terms of the loan:
(i) The penalty will not apply after the two-year period following
consummation;
(ii) The penalty will not apply if the source of the prepayment
funds is a refinancing by the creditor or an affiliate of the creditor;
(iii) At consummation, the consumer's total monthly debt payments
(including amounts owed under the mortgage) do not exceed 50 percent of
the consumer's monthly gross income, as verified in accordance with
Sec. 1026.34(a)(4)(ii); and
(iv) The amount of the periodic payment of principal or interest or
both may not change during the four-year period following consummation.
(8) Due-on-demand clause. A demand feature that permits the
creditor to terminate the loan in advance of the original maturity date
and to demand repayment of the entire outstanding balance, except in
the following circumstances:
(i) There is fraud or material misrepresentation by the consumer in
connection with the loan;
(ii) The consumer fails to meet the repayment terms of the
agreement for any outstanding balance; or
(iii) There is any action or inaction by the consumer that
adversely affects the creditor's security for the loan, or any right of
the creditor in such security.
Sec. 1026.33 Requirements for reverse mortgages.
(a) Definition. For purposes of this subpart, reverse mortgage
transaction means a nonrecourse consumer credit obligation in which:
(1) A mortgage, deed of trust, or equivalent consensual security
interest securing one or more advances is created in the consumer's
principal dwelling; and
(2) Any principal, interest, or shared appreciation or equity is
due and payable (other than in the case of default) only after:
(i) The consumer dies;
(ii) The dwelling is transferred; or
(iii) The consumer ceases to occupy the dwelling as a principal
dwelling.
(b) Content of disclosures. In addition to other disclosures
required by this part, in a reverse mortgage transaction the creditor
shall provide the following disclosures in a form substantially similar
to the model form found in paragraph (d) of Appendix K of this part:
(1) Notice. A statement that the consumer is not obligated to
complete the reverse mortgage transaction merely because the consumer
has received the disclosures required by this section or has signed an
application for a reverse mortgage loan.
(2) Total annual loan cost rates. A good-faith projection of the
total cost of the credit, determined in accordance with paragraph (c)
of this section and expressed as a table of ``total annual loan cost
rates,'' using that term, in accordance with Appendix K of this part.
(3) Itemization of pertinent information. An itemization of loan
terms, charges, the age of the youngest borrower and the appraised
property value.
(4) Explanation of table. An explanation of the table of total
annual loan cost rates as provided in the model form found in paragraph
(d) of Appendix K of this part.
(c) Projected total cost of credit. The projected total cost of
credit shall reflect the following factors, as applicable:
(1) Costs to consumer. All costs and charges to the consumer,
including the costs of any annuity the consumer purchases as part of
the reverse mortgage transaction.
(2) Payments to consumer. All advances to and for the benefit of
the consumer, including annuity payments that the consumer will receive
from an annuity that the consumer purchases as part of the reverse
mortgage transaction.
(3) Additional creditor compensation. Any shared appreciation or
equity in the dwelling that the creditor is entitled by contract to
receive.
(4) Limitations on consumer liability. Any limitation on the
consumer's liability (such as nonrecourse limits and equity
conservation agreements).
(5) Assumed annual appreciation rates. Each of the following
assumed annual appreciation rates for the dwelling:
(i) 0 percent.
(ii) 4 percent.
(iii) 8 percent.
(6) Assumed loan period. (i) Each of the following assumed loan
periods, as provided in Appendix L of this part:
(A) Two years.
(B) The actuarial life expectancy of the consumer to become
obligated on the reverse mortgage transaction (as of that consumer's
most recent birthday). In the case of multiple consumers, the period
shall be the actuarial life expectancy of the youngest consumer (as of
that consumer's most recent birthday).
(C) The actuarial life expectancy specified by paragraph
(c)(6)(i)(B) of this section, multiplied by a factor of 1.4 and rounded
to the nearest full year.
(ii) At the creditor's option, the actuarial life expectancy
specified by paragraph (c)(6)(i)(B) of this section, multiplied by a
factor of .5 and rounded to the nearest full year.
Sec. 1026.34 Prohibited acts or practices in connection with high-
cost mortgages.
(a) Prohibited acts or practices for high-cost mortgages. A
creditor extending mortgage credit subject to Sec. 1026.32 shall not:
(1) Home improvement contracts. Pay a contractor under a home
improvement contract from the proceeds of a mortgage covered by Sec.
1026.32, other than:
(i) By an instrument payable to the consumer or jointly to the
consumer and the contractor; or
(ii) At the election of the consumer, through a third-party escrow
agent in accordance with terms established in a written agreement
signed by the consumer, the creditor, and the contractor prior to the
disbursement.
(2) Notice to assignee. Sell or otherwise assign a mortgage subject
to Sec. 1026.32 without furnishing the following statement to the
purchaser or
[[Page 79810]]
assignee: ``Notice: This is a mortgage subject to special rules under
the Federal Truth in Lending Act. Purchasers or assignees of this
mortgage could be liable for all claims and defenses with respect to
the mortgage that the borrower could assert against the creditor.''
(3) Refinancings within one-year period. Within one year of having
extended credit subject to Sec. 1026.32, refinance any loan subject to
Sec. 1026.32 to the same borrower into another loan subject to Sec.
1026.32, unless the refinancing is in the borrower's interest. An
assignee holding or servicing an extension of mortgage credit subject
to Sec. 1026.32, shall not, for the remainder of the one-year period
following the date of origination of the credit, refinance any loan
subject to Sec. 1026.32 to the same borrower into another loan subject
to Sec. 1026.32, unless the refinancing is in the borrower's interest.
A creditor (or assignee) is prohibited from engaging in acts or
practices to evade this provision, including a pattern or practice of
arranging for the refinancing of its own loans by affiliated or
unaffiliated creditors, or modifying a loan agreement (whether or not
the existing loan is satisfied and replaced by the new loan) and
charging a fee.
(4) Repayment ability. Extend credit subject to Sec. 1026.32 to a
consumer based on the value of the consumer's collateral without regard
to the consumer's repayment ability as of consummation, including the
consumer's current and reasonably expected income, employment, assets
other than the collateral, current obligations, and mortgage-related
obligations.
(i) Mortgage-related obligations. For purposes of this paragraph
(a)(4), mortgage-related obligations are expected property taxes,
premiums for mortgage-related insurance required by the creditor as set
forth in Sec. 1026.35(b)(3)(i), and similar expenses.
(ii) Verification of repayment ability. Under this paragraph (a)(4)
a creditor must verify the consumer's repayment ability as follows:
(A) A creditor must verify amounts of income or assets that it
relies on to determine repayment ability, including expected income or
assets, by the consumer's Internal Revenue Service Form W-2, tax
returns, payroll receipts, financial institution records, or other
third-party documents that provide reasonably reliable evidence of the
consumer's income or assets.
(B) Notwithstanding paragraph (a)(4)(ii)(A), a creditor has not
violated paragraph (a)(4)(ii) if the amounts of income and assets that
the creditor relied upon in determining repayment ability are not
materially greater than the amounts of the consumer's income or assets
that the creditor could have verified pursuant to paragraph
(a)(4)(ii)(A) at the time the loan was consummated.
(C) A creditor must verify the consumer's current obligations.
(iii) Presumption of compliance. A creditor is presumed to have
complied with this paragraph (a)(4) with respect to a transaction if
the creditor:
(A) Verifies the consumer's repayment ability as provided in
paragraph (a)(4)(ii);
(B) Determines the consumer's repayment ability using the largest
payment of principal and interest scheduled in the first seven years
following consummation and taking into account current obligations and
mortgage-related obligations as defined in paragraph (a)(4)(i); and
(C) Assesses the consumer's repayment ability taking into account
at least one of the following: The ratio of total debt obligations to
income, or the income the consumer will have after paying debt
obligations.
(iv) Exclusions from presumption of compliance. Notwithstanding the
previous paragraph, no presumption of compliance is available for a
transaction for which:
(A) The regular periodic payments for the first seven years would
cause the principal balance to increase; or
(B) The term of the loan is less than seven years and the regular
periodic payments when aggregated do not fully amortize the outstanding
principal balance.
(v) Exemption. This paragraph (a)(4) does not apply to temporary or
``bridge'' loans with terms of twelve months or less, such as a loan to
purchase a new dwelling where the consumer plans to sell a current
dwelling within twelve months.
(b) Prohibited acts or practices for dwelling-secured loans; open-
end credit. In connection with credit secured by the consumer's
dwelling that does not meet the definition in Sec. 1026.2(a)(20), a
creditor shall not structure a home-secured loan as an open-end plan to
evade the requirements of Sec. 1026.32.
Sec. 1026.35 Prohibited acts or practices in connection with higher-
priced mortgage loans.
(a) Higher-priced mortgage loans. (1) For purposes of this section,
except as provided in paragraph (b)(3)(v) of this section, a higher-
priced mortgage loan is a consumer credit transaction secured by the
consumer's principal dwelling with an annual percentage rate that
exceeds the average prime offer rate for a comparable transaction as of
the date the interest rate is set by 1.5 or more percentage points for
loans secured by a first lien on a dwelling, or by 3.5 or more
percentage points for loans secured by a subordinate lien on a
dwelling.
(2) ``Average prime offer rate'' means an annual percentage rate
that is derived from average interest rates, points, and other loan
pricing terms currently offered to consumers by a representative sample
of creditors for mortgage transactions that have low-risk pricing
characteristics. The Bureau publishes average prime offer rates for a
broad range of types of transactions in a table updated at least weekly
as well as the methodology the Bureau uses to derive these rates.
(3) Notwithstanding paragraph (a)(1) of this section, the term
``higher-priced mortgage loan'' does not include a transaction to
finance the initial construction of a dwelling, a temporary or
``bridge'' loan with a term of twelve months or less, such as a loan to
purchase a new dwelling where the consumer plans to sell a current
dwelling within twelve months, a reverse-mortgage transaction subject
to Sec. 1026.33, or a home equity line of credit subject to Sec.
1026.40.
(b) Rules for higher-priced mortgage loans. Higher-priced mortgage
loans are subject to the following restrictions:
(1) Repayment ability. A creditor shall not extend credit based on
the value of the consumer's collateral without regard to the consumer's
repayment ability as of consummation as provided in Sec.
1026.34(a)(4).
(2) Prepayment penalties. A loan may not include a penalty
described by Sec. 1026.32(d)(6) unless:
(i) The penalty is otherwise permitted by law, including Sec.
1026.32(d)(7) if the loan is a mortgage transaction described in Sec.
1026.32(a); and
(ii) Under the terms of the loan:
(A) The penalty will not apply after the two-year period following
consummation;
(B) The penalty will not apply if the source of the prepayment
funds is a refinancing by the creditor or an affiliate of the creditor;
and
(C) The amount of the periodic payment of principal or interest or
both may not change during the four-year period following consummation.
(3) Escrows. (i) Failure to escrow for property taxes and
insurance. Except as provided in paragraph (b)(3)(ii) of this section,
a creditor may not extend a loan secured by a first lien on a principal
dwelling unless an escrow account is established before consummation
for payment of property taxes and
[[Page 79811]]
premiums for mortgage-related insurance required by the creditor, such
as insurance against loss of or damage to property, or against
liability arising out of the ownership or use of the property, or
insurance protecting the creditor against the consumer's default or
other credit loss.
(ii) Exemptions for loans secured by shares in a cooperative and
for certain condominium units. (A) Escrow accounts need not be
established for loans secured by shares in a cooperative; and
(B) Insurance premiums described in paragraph (b)(3)(i) of this
section need not be included in escrow accounts for loans secured by
condominium units, where the condominium association has an obligation
to the condominium unit owners to maintain a master policy insuring
condominium units.
(iii) Cancellation. A creditor or servicer may permit a consumer to
cancel the escrow account required in paragraph (b)(3)(i) of this
section only in response to a consumer's dated written request to
cancel the escrow account that is received no earlier than 365 days
after consummation.
(iv) Definition of escrow account. For purposes of this section,
``escrow account'' shall have the same meaning as in 12 CFR 1024.17(b)
as amended.
(v) ``Jumbo'' loans. For purposes of this Sec. 1026.35(b)(3), for
a transaction with a principal obligation at consummation that exceeds
the limit in effect as of the date the transaction's interest rate is
set for the maximum principal obligation eligible for purchase by
Freddie Mac, the coverage threshold set forth in paragraph (a)(1) of
this section for loans secured by a first lien on a dwelling shall be
2.5 or more percentage points greater than the applicable average prime
offer rate.
(4) Evasion; open-end credit. In connection with credit secured by
a consumer's principal dwelling that does not meet the definition of
open-end credit in Sec. 1026.2(a)(20), a creditor shall not structure
a home-secured loan as an open-end plan to evade the requirements of
this section.
Sec. 1026.36 Prohibited acts or practices in connection with credit
secured by a dwelling.
(a) Loan originator and mortgage broker defined. (1) Loan
originator. For purposes of this section, the term ``loan originator''
means with respect to a particular transaction, a person who for
compensation or other monetary gain, or in expectation of compensation
or other monetary gain, arranges, negotiates, or otherwise obtains an
extension of consumer credit for another person. The term ``loan
originator'' includes an employee of the creditor if the employee meets
this definition. The term ``loan originator'' includes the creditor
only if the creditor does not provide the funds for the transaction at
consummation out of the creditor's own resources, including drawing on
a bona fide warehouse line of credit, or out of deposits held by the
creditor.
(2) Mortgage broker. For purposes of this section, a mortgage
broker with respect to a particular transaction is any loan originator
that is not an employee of the creditor.
(b) [Reserved]
(c) Servicing practices. (1) In connection with a consumer credit
transaction secured by a consumer's principal dwelling, no servicer
shall:
(i) Fail to credit a payment to the consumer's loan account as of
the date of receipt, except when a delay in crediting does not result
in any charge to the consumer or in the reporting of negative
information to a consumer reporting agency, or except as provided in
paragraph (c)(2) of this section;
(ii) Impose on the consumer any late fee or delinquency charge in
connection with a payment, when the only delinquency is attributable to
late fees or delinquency charges assessed on an earlier payment, and
the payment is otherwise a full payment for the applicable period and
is paid on its due date or within any applicable grace period; or
(iii) Fail to provide, within a reasonable time after receiving a
request from the consumer or any person acting on behalf of the
consumer, an accurate statement of the total outstanding balance that
would be required to satisfy the consumer's obligation in full as of a
specified date.
(2) If a servicer specifies in writing requirements for the
consumer to follow in making payments, but accepts a payment that does
not conform to the requirements, the servicer shall credit the payment
as of 5 days after receipt.
(3) For purposes of this paragraph (c), the terms ``servicer'' and
``servicing'' have the same meanings as provided in 12 CFR 1024.2(b),
as amended.
(d) Prohibited payments to loan originators. (1) Payments based on
transaction terms or conditions. (i) In connection with a consumer
credit transaction secured by a dwelling, no loan originator shall
receive and no person shall pay to a loan originator, directly or
indirectly, compensation in an amount that is based on any of the
transaction's terms or conditions.
(ii) For purposes of this paragraph (d)(1), the amount of credit
extended is not deemed to be a transaction term or condition, provided
compensation received by or paid to a loan originator, directly or
indirectly, is based on a fixed percentage of the amount of credit
extended; however, such compensation may be subject to a minimum or
maximum dollar amount.
(iii) This paragraph (d)(1) shall not apply to any transaction in
which paragraph (d)(2) of this section applies.
(2) Payments by persons other than consumer. If any loan originator
receives compensation directly from a consumer in a consumer credit
transaction secured by a dwelling:
(i) No loan originator shall receive compensation, directly or
indirectly, from any person other than the consumer in connection with
the transaction; and
(ii) No person who knows or has reason to know of the consumer-paid
compensation to the loan originator (other than the consumer) shall pay
any compensation to a loan originator, directly or indirectly, in
connection with the transaction.
(3) Affiliates. For purposes of this paragraph (d), affiliates
shall be treated as a single ``person.''
(e) Prohibition on steering. (1) General. In connection with a
consumer credit transaction secured by a dwelling, a loan originator
shall not direct or ``steer'' a consumer to consummate a transaction
based on the fact that the originator will receive greater compensation
from the creditor in that transaction than in other transactions the
originator offered or could have offered to the consumer, unless the
consummated transaction is in the consumer's interest.
(2) Permissible transactions. A transaction does not violate
paragraph (e)(1) of this section if the consumer is presented with loan
options that meet the conditions in paragraph (e)(3) of this section
for each type of transaction in which the consumer expressed an
interest. For purposes of paragraph (e) of this section, the term
``type of transaction'' refers to whether:
(i) A loan has an annual percentage rate that cannot increase after
consummation;
(ii) A loan has an annual percentage rate that may increase after
consummation; or
(iii) A loan is a reverse mortgage.
(3) Loan options presented. A transaction satisfies paragraph
(e)(2) of this section only if the loan originator presents the loan
options required by that paragraph and all of the following conditions
are met:
(i) The loan originator must obtain loan options from a significant
number of the creditors with which the
[[Page 79812]]
originator regularly does business and, for each type of transaction in
which the consumer expressed an interest, must present the consumer
with loan options that include:
(A) The loan with the lowest interest rate;
(B) The loan with the lowest interest rate without negative
amortization, a prepayment penalty, interest-only payments, a balloon
payment in the first 7 years of the life of the loan, a demand feature,
shared equity, or shared appreciation; or, in the case of a reverse
mortgage, a loan without a prepayment penalty, or shared equity or
shared appreciation; and
(C) The loan with the lowest total dollar amount for origination
points or fees and discount points.
(ii) The loan originator must have a good faith belief that the
options presented to the consumer pursuant to paragraph (e)(3)(i) of
this section are loans for which the consumer likely qualifies.
(iii) For each type of transaction, if the originator presents to
the consumer more than three loans, the originator must highlight the
loans that satisfy the criteria specified in paragraph (e)(3)(i) of
this section.
(4) Number of loan options presented. The loan originator can
present fewer than three loans and satisfy paragraphs (e)(2) and
(e)(3)(i) of this section if the loan(s) presented to the consumer
satisfy the criteria of the options in paragraph (e)(3)(i) of this
section and the provisions of paragraph (e)(3) of this section are
otherwise met.
(f) This section does not apply to a home-equity line of credit
subject to Sec. 1026.40. Section 1026.36(d) and (e) do not apply to a
loan that is secured by a consumer's interest in a timeshare plan
described in 11 U.S.C. 101(53D).
Sec. Sec. 1026.37-1026.38 [Reserved]
Sec. 1026.39 Mortgage transfer disclosures.
(a) Scope. The disclosure requirements of this section apply to any
covered person except as otherwise provided in this section. For
purposes of this section:
(1) A ``covered person'' means any person, as defined in Sec.
1026.2(a)(22), that becomes the owner of an existing mortgage loan by
acquiring legal title to the debt obligation, whether through a
purchase, assignment or other transfer, and who acquires more than one
mortgage loan in any twelve-month period. For purposes of this section,
a servicer of a mortgage loan shall not be treated as the owner of the
obligation if the servicer holds title to the loan, or title is
assigned to the servicer, solely for the administrative convenience of
the servicer in servicing the obligation.
(2) A ``mortgage loan'' means any consumer credit transaction that
is secured by the principal dwelling of a consumer.
(b) Disclosure required. Except as provided in paragraph (c) of
this section, each covered person is subject to the requirements of
this section and shall mail or deliver the disclosures required by this
section to the consumer on or before the 30th calendar day following
the date of transfer.
(1) Form of disclosures. The disclosures required by this section
shall be provided clearly and conspicuously in writing, in a form that
the consumer may keep. The disclosures required by this section may be
provided to the consumer in electronic form, subject to compliance with
the consumer consent and other applicable provisions of the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C.
7001 et seq.).
(2) The date of transfer. For purposes of this section, the date of
transfer to the covered person may, at the covered person's option, be
either the date of acquisition recognized in the books and records of
the acquiring party, or the date of transfer recognized in the books
and records of the transferring party.
(3) Multiple consumers. If more than one consumer is liable on the
obligation, a covered person may mail or deliver the disclosures to any
consumer who is primarily liable.
(4) Multiple transfers. If a mortgage loan is acquired by a covered
person and subsequently sold, assigned, or otherwise transferred to
another covered person, a single disclosure may be provided on behalf
of both covered persons if the disclosure satisfies the timing and
content requirements applicable to each covered person.
(5) Multiple covered persons. If an acquisition involves multiple
covered persons who jointly acquire the loan, a single disclosure must
be provided on behalf of all covered persons.
(c) Exceptions. Notwithstanding paragraph (b) of this section, a
covered person is not subject to the requirements of this section with
respect to a particular mortgage loan if:
(1) The covered person sells, or otherwise transfers or assigns
legal title to the mortgage loan on or before the 30th calendar day
following the date that the covered person acquired the mortgage loan
which shall be the date of transfer recognized for purposes of
paragraph (b)(2) of this section;
(2) The mortgage loan is transferred to the covered person in
connection with a repurchase agreement that obligates the transferor to
repurchase the loan. However, if the transferor does not repurchase the
loan, the covered person must provide the disclosures required by this
section within 30 days after the date that the transaction is
recognized as an acquisition on its books and records; or
(3) The covered person acquires only a partial interest in the loan
and the party authorized to receive the consumer's notice of the right
to rescind and resolve issues concerning the consumer's payments on the
loan does not change as a result of the transfer of the partial
interest.
(d) Content of required disclosures. The disclosures required by
this section shall identify the loan that was sold, assigned or
otherwise transferred, and state the following:
(1) The name, address, and telephone number of the covered person.
(i) If a single disclosure is provided on behalf of more than one
covered person, the information required by this paragraph shall be
provided for each of them unless paragraph (d)(1)(ii) of this section
applies.
(ii) If a single disclosure is provided on behalf of more than one
covered person and one of them has been authorized in accordance with
paragraph (d)(3) of this section to receive the consumer's notice of
the right to rescind and resolve issues concerning the consumer's
payments on the loan, the information required by paragraph (d)(1) of
this section may be provided only for that covered person.
(2) The date of transfer.
(3) The name, address and telephone number of an agent or party
authorized to receive notice of the right to rescind and resolve issues
concerning the consumer's payments on the loan. However, no information
is required to be provided under this paragraph if the consumer can use
the information provided under paragraph (d)(1) of this section for
these purposes.
(4) Where transfer of ownership of the debt to the covered person
is or may be recorded in public records, or, alternatively, that the
transfer of ownership has not been recorded in public records at the
time the disclosure is provided.
(e) Optional disclosures. In addition to the information required
to be disclosed under paragraph (d) of this section, a covered person
may, at its option, provide any other information regarding the
transaction.
Sec. 1026.40 Requirements for home equity plans.
The requirements of this section apply to open-end credit plans
secured
[[Page 79813]]
by the consumer's dwelling. For purposes of this section, an annual
percentage rate is the annual percentage rate corresponding to the
periodic rate as determined under Sec. 1026.14(b).
(a) Form of disclosures. (1) General. The disclosures required by
paragraph (d) of this section shall be made clearly and conspicuously
and shall be grouped together and segregated from all unrelated
information. The disclosures may be provided on the application form or
on a separate form. The disclosure described in paragraph (d)(4)(iii),
the itemization of third-party fees described in paragraph (d)(8), and
the variable-rate information described in paragraph (d)(12) of this
section may be provided separately from the other required disclosures.
(2) Precedence of certain disclosures. The disclosures described in
paragraph (d)(1) through (4)(ii) of this section shall precede the
other required disclosures.
(3) For an application that is accessed by the consumer in
electronic form, the disclosures required under this section may be
provided to the consumer in electronic form on or with the application.
(b) Time of disclosures. The disclosures and brochure required by
paragraphs (d) and (e) of this section shall be provided at the time an
application is provided to the consumer. The disclosures and the
brochure may be delivered or placed in the mail not later than three
business days following receipt of a consumer's application in the case
of applications contained in magazines or other publications, or when
the application is received by telephone or through an intermediary
agent or broker.
(c) Duties of third parties. Persons other than the creditor who
provide applications to consumers for home equity plans must provide
the brochure required under paragraph (e) of this section at the time
an application is provided. If such persons have the disclosures
required under paragraph (d) of this section for a creditor's home
equity plan, they also shall provide the disclosures at such time. The
disclosures and the brochure may be delivered or placed in the mail not
later than three business days following receipt of a consumer's
application in the case of applications contained in magazines or other
publications, or when the application is received by telephone or
through an intermediary agent or broker.
(d) Content of disclosures. The creditor shall provide the
following disclosures, as applicable:
(1) Retention of information. A statement that the consumer should
make or otherwise retain a copy of the disclosures.
(2) Conditions for disclosed terms. (i) A statement of the time by
which the consumer must submit an application to obtain specific terms
disclosed and an identification of any disclosed term that is subject
to change prior to opening the plan.
(ii) A statement that, if a disclosed term changes (other than a
change due to fluctuations in the index in a variable-rate plan) prior
to opening the plan and the consumer therefore elects not to open the
plan, the consumer may receive a refund of all fees paid in connection
with the application.
(3) Security interest and risk to home. A statement that the
creditor will acquire a security interest in the consumer's dwelling
and that loss of the dwelling may occur in the event of default.
(4) Possible actions by creditor. (i) A statement that, under
certain conditions, the creditor may terminate the plan and require
payment of the outstanding balance in full in a single payment and
impose fees upon termination; prohibit additional extensions of credit
or reduce the credit limit; and, as specified in the initial agreement,
implement certain changes in the plan.
(ii) A statement that the consumer may receive, upon request,
information about the conditions under which such actions may occur.
(iii) In lieu of the disclosure required under paragraph (d)(4)(ii)
of this section, a statement of such conditions.
(5) Payment terms. The payment terms of the plan. If different
payment terms may apply to the draw and any repayment period, or if
different payment terms may apply within either period, the disclosures
shall reflect the different payment terms. The payment terms of the
plan include:
(i) The length of the draw period and any repayment period.
(ii) An explanation of how the minimum periodic payment will be
determined and the timing of the payments. If paying only the minimum
periodic payments may not repay any of the principal or may repay less
than the outstanding balance, a statement of this fact, as well as a
statement that a balloon payment may result. A balloon payment results
if paying the minimum periodic payments does not fully amortize the
outstanding balance by a specified date or time, and the consumer must
repay the entire outstanding balance at such time.
(iii) An example, based on a $10,000 outstanding balance and a
recent annual percentage rate, showing the minimum periodic payment,
any balloon payment, and the time it would take to repay the $10,000
outstanding balance if the consumer made only those payments and
obtained no additional extensions of credit. For fixed-rate plans, a
recent annual percentage rate is a rate that has been in effect under
the plan within the twelve months preceding the date the disclosures
are provided to the consumer. For variable-rate plans, a recent annual
percentage rate is the most recent rate provided in the historical
example described in paragraph (d)(12)(xi) of this section or a rate
that has been in effect under the plan since the date of the most
recent rate in the table.
(6) Annual percentage rate. For fixed-rate plans, a recent annual
percentage rate imposed under the plan and a statement that the rate
does not include costs other than interest. A recent annual percentage
rate is a rate that has been in effect under the plan within the twelve
months preceding the date the disclosures are provided to the consumer.
(7) Fees imposed by creditor. An itemization of any fees imposed by
the creditor to open, use, or maintain the plan, stated as a dollar
amount or percentage, and when such fees are payable.
(8) Fees imposed by third parties to open a plan. A good faith
estimate, stated as a single dollar amount or range, of any fees that
may be imposed by persons other than the creditor to open the plan, as
well as a statement that the consumer may receive, upon request, a good
faith itemization of such fees. In lieu of the statement, the
itemization of such fees may be provided.
(9) Negative amortization. A statement that negative amortization
may occur and that negative amortization increases the principal
balance and reduces the consumer's equity in the dwelling.
(10) Transaction requirements. Any limitations on the number of
extensions of credit and the amount of credit that may be obtained
during any time period, as well as any minimum outstanding balance and
minimum draw requirements, stated as dollar amounts or percentages.
(11) Tax implications. A statement that the consumer should consult
a tax advisor regarding the deductibility of interest and charges under
the plan.
(12) Disclosures for variable-rate plans. For a plan in which the
annual percentage rate is variable, the following disclosures, as
applicable:
(i) The fact that the annual percentage rate, payment, or term may
change due to the variable-rate feature.
[[Page 79814]]
(ii) A statement that the annual percentage rate does not include
costs other than interest.
(iii) The index used in making rate adjustments and a source of
information about the index.
(iv) An explanation of how the annual percentage rate will be
determined, including an explanation of how the index is adjusted, such
as by the addition of a margin.
(v) A statement that the consumer should ask about the current
index value, margin, discount or premium, and annual percentage rate.
(vi) A statement that the initial annual percentage rate is not
based on the index and margin used to make later rate adjustments, and
the period of time such initial rate will be in effect.
(vii) The frequency of changes in the annual percentage rate.
(viii) Any rules relating to changes in the index value and the
annual percentage rate and resulting changes in the payment amount,
including, for example, an explanation of payment limitations and rate
carryover.
(ix) A statement of any annual or more frequent periodic
limitations on changes in the annual percentage rate (or a statement
that no annual limitation exists), as well as a statement of the
maximum annual percentage rate that may be imposed under each payment
option.
(x) The minimum periodic payment required when the maximum annual
percentage rate for each payment option is in effect for a $10,000
outstanding balance, and a statement of the earliest date or time the
maximum rate may be imposed.
(xi) An historical example, based on a $10,000 extension of credit,
illustrating how annual percentage rates and payments would have been
affected by index value changes implemented according to the terms of
the plan. The historical example shall be based on the most recent 15
years of index values (selected for the same time period each year) and
shall reflect all significant plan terms, such as negative
amortization, rate carryover, rate discounts, and rate and payment
limitations, that would have been affected by the index movement during
the period.
(xii) A statement that rate information will be provided on or with
each periodic statement.
(e) Brochure. The home equity brochure entitled ``What You Should
Know About Home Equity Lines of Credit'' or a suitable substitute shall
be provided.
(f) Limitations on home equity plans. No creditor may, by contract
or otherwise:
(1) Change the annual percentage rate unless:
(i) Such change is based on an index that is not under the
creditor's control; and
(ii) Such index is available to the general public.
(2) Terminate a plan and demand repayment of the entire outstanding
balance in advance of the original term (except for reverse mortgage
transactions that are subject to paragraph (f)(4) of this section)
unless:
(i) There is fraud or material misrepresentation by the consumer in
connection with the plan;
(ii) The consumer fails to meet the repayment terms of the
agreement for any outstanding balance;
(iii) Any action or inaction by the consumer adversely affects the
creditor's security for the plan, or any right of the creditor in such
security; or
(iv) Federal law dealing with credit extended by a depository
institution to its executive officers specifically requires that as a
condition of the plan the credit shall become due and payable on
demand, provided that the creditor includes such a provision in the
initial agreement.
(3) Change any term, except that a creditor may:
(i) Provide in the initial agreement that it may prohibit
additional extensions of credit or reduce the credit limit during any
period in which the maximum annual percentage rate is reached. A
creditor also may provide in the initial agreement that specified
changes will occur if a specified event takes place (for example, that
the annual percentage rate will increase a specified amount if the
consumer leaves the creditor's employment).
(ii) Change the index and margin used under the plan if the
original index is no longer available, the new index has an historical
movement substantially similar to that of the original index, and the
new index and margin would have resulted in an annual percentage rate
substantially similar to the rate in effect at the time the original
index became unavailable.
(iii) Make a specified change if the consumer specifically agrees
to it in writing at that time.
(iv) Make a change that will unequivocally benefit the consumer
throughout the remainder of the plan.
(v) Make an insignificant change to terms.
(vi) Prohibit additional extensions of credit or reduce the credit
limit applicable to an agreement during any period in which:
(A) The value of the dwelling that secures the plan declines
significantly below the dwelling's appraised value for purposes of the
plan;
(B) The creditor reasonably believes that the consumer will be
unable to fulfill the repayment obligations under the plan because of a
material change in the consumer's financial circumstances;
(C) The consumer is in default of any material obligation under the
agreement;
(D) The creditor is precluded by government action from imposing
the annual percentage rate provided for in the agreement;
(E) The priority of the creditor's security interest is adversely
affected by government action to the extent that the value of the
security interest is less than 120 percent of the credit line; or
(F) The creditor is notified by its regulatory agency that
continued advances constitute an unsafe and unsound practice.
(4) For reverse mortgage transactions that are subject to Sec.
1026.33, terminate a plan and demand repayment of the entire
outstanding balance in advance of the original term except:
(i) In the case of default;
(ii) If the consumer transfers title to the property securing the
note;
(iii) If the consumer ceases using the property securing the note
as the primary dwelling; or
(iv) Upon the consumer's death.
(g) Refund of fees. A creditor shall refund all fees paid by the
consumer to anyone in connection with an application if any term
required to be disclosed under paragraph (d) of this section changes
(other than a change due to fluctuations in the index in a variable-
rate plan) before the plan is opened and, as a result, the consumer
elects not to open the plan.
(h) Imposition of nonrefundable fees. Neither a creditor nor any
other person may impose a nonrefundable fee in connection with an
application until three business days after the consumer receives the
disclosures and brochure required under this section. If the
disclosures and brochure are mailed to the consumer, the consumer is
considered to have received them three business days after they are
mailed.
Sec. 1026.41 [Reserved]
Sec. 1026.42 Valuation independence.
(a) Scope. This section applies to any consumer credit transaction
secured by the consumer's principal dwelling.
(b) Definitions. For purposes of this section:
(1) ``Covered person'' means a creditor with respect to a covered
transaction or
[[Page 79815]]
a person that provides ``settlement services,'' as defined in 12 U.S.C.
2602(3) and implementing regulations, in connection with a covered
transaction.
(2) ``Covered transaction'' means an extension of consumer credit
that is or will be secured by the consumer's principal dwelling, as
defined in Sec. 1026.2(a)(19).
(3) ``Valuation'' means an estimate of the value of the consumer's
principal dwelling in written or electronic form, other than one
produced solely by an automated model or system.
(4) ``Valuation management functions'' means:
(i) Recruiting, selecting, or retaining a person to prepare a
valuation;
(ii) Contracting with or employing a person to prepare a valuation;
(iii) Managing or overseeing the process of preparing a valuation,
including by providing administrative services such as receiving orders
for and receiving a valuation, submitting a completed valuation to
creditors and underwriters, collecting fees from creditors and
underwriters for services provided in connection with a valuation, and
compensating a person that prepares valuations; or
(iv) Reviewing or verifying the work of a person that prepares
valuations.
(c) Valuation of consumer's principal dwelling. (1) Coercion. In
connection with a covered transaction, no covered person shall or shall
attempt to directly or indirectly cause the value assigned to the
consumer's principal dwelling to be based on any factor other than the
independent judgment of a person that prepares valuations, through
coercion, extortion, inducement, bribery, or intimidation of,
compensation or instruction to, or collusion with a person that
prepares valuations or performs valuation management functions.
(i) Examples of actions that violate paragraph (c)(1) include:
(A) Seeking to influence a person that prepares a valuation to
report a minimum or maximum value for the consumer's principal
dwelling;
(B) Withholding or threatening to withhold timely payment to a
person that prepares a valuation or performs valuation management
functions because the person does not value the consumer's principal
dwelling at or above a certain amount;
(C) Implying to a person that prepares valuations that current or
future retention of the person depends on the amount at which the
person estimates the value of the consumer's principal dwelling;
(D) Excluding a person that prepares a valuation from consideration
for future engagement because the person reports a value for the
consumer's principal dwelling that does not meet or exceed a
predetermined threshold; and
(E) Conditioning the compensation paid to a person that prepares a
valuation on consummation of the covered transaction.
(2) Mischaracterization of value. (i) Misrepresentation. In
connection with a covered transaction, no person that prepares
valuations shall materially misrepresent the value of the consumer's
principal dwelling in a valuation. A misrepresentation is material for
purposes of this paragraph (c)(2)(i) if it is likely to significantly
affect the value assigned to the consumer's principal dwelling. A bona
fide error shall not be a misrepresentation.
(ii) Falsification or alteration. In connection with a covered
transaction, no covered person shall falsify and no covered person
other than a person that prepares valuations shall materially alter a
valuation. An alteration is material for purposes of this paragraph
(c)(2)(ii) if it is likely to significantly affect the value assigned
to the consumer's principal dwelling.
(iii) Inducement of mischaracterization. In connection with a
covered transaction, no covered person shall induce a person to violate
paragraph (c)(2)(i) or (ii) of this section.
(3) Permitted actions. Examples of actions that do not violate
paragraph (c)(1) or (c)(2) include:
(i) Asking a person that prepares a valuation to consider
additional, appropriate property information, including information
about comparable properties, to make or support a valuation;
(ii) Requesting that a person that prepares a valuation provide
further detail, substantiation, or explanation for the person's
conclusion about the value of the consumer's principal dwelling;
(iii) Asking a person that prepares a valuation to correct errors
in the valuation;
(iv) Obtaining multiple valuations for the consumer's principal
dwelling to select the most reliable valuation;
(v) Withholding compensation due to breach of contract or
substandard performance of services; and
(vi) Taking action permitted or required by applicable Federal or
state statute, regulation, or agency guidance.
(d) Prohibition on conflicts of interest. (1)(i) In general. No
person preparing a valuation or performing valuation management
functions for a covered transaction may have a direct or indirect
interest, financial or otherwise, in the property or transaction for
which the valuation is or will be performed.
(ii) Employees and affiliates of creditors; providers of multiple
settlement services. In any covered transaction, no person violates
paragraph (d)(1)(i) of this section based solely on the fact that the
person:
(A) Is an employee or affiliate of the creditor; or
(B) Provides a settlement service in addition to preparing
valuations or performing valuation management functions, or based
solely on the fact that the person's affiliate performs another
settlement service.
(2) Employees and affiliates of creditors with assets of more than
$250 million for both of the past two calendar years. For any covered
transaction in which the creditor had assets of more than $250 million
as of December 31st for both of the past two calendar years, a person
subject to paragraph (d)(1)(i) of this section who is employed by or
affiliated with the creditor does not have a conflict of interest in
violation of paragraph (d)(1)(i) of this section based on the person's
employment or affiliate relationship with the creditor if:
(i) The compensation of the person preparing a valuation or
performing valuation management functions is not based on the value
arrived at in any valuation;
(ii) The person preparing a valuation or performing valuation
management functions reports to a person who is not part of the
creditor's loan production function, as defined in paragraph (d)(5)(i)
of this section, and whose compensation is not based on the closing of
the transaction to which the valuation relates; and
(iii) No employee, officer or director in the creditor's loan
production function, as defined in paragraph (d)(5)(i) of this section,
is directly or indirectly involved in selecting, retaining,
recommending or influencing the selection of the person to prepare a
valuation or perform valuation management functions, or to be included
in or excluded from a list of approved persons who prepare valuations
or perform valuation management functions.
(3) Employees and affiliates of creditors with assets of $250
million or less for either of the past two calendar years. For any
covered transaction in which the creditor had assets of $250 million or
less as of December 31st for either of the past two calendar years, a
person subject to paragraph (d)(1)(i) of this section who is employed
by or affiliated with the creditor does not have a conflict of interest
in violation of
[[Page 79816]]
paragraph (d)(1)(i) of this section based on the person's employment or
affiliate relationship with the creditor if:
(i) The compensation of the person preparing a valuation or
performing valuation management functions is not based on the value
arrived at in any valuation; and
(ii) The creditor requires that any employee, officer or director
of the creditor who orders, performs, or reviews a valuation for a
covered transaction abstain from participating in any decision to
approve, not approve, or set the terms of that transaction.
(4) Providers of multiple settlement services. For any covered
transaction, a person who prepares a valuation or performs valuation
management functions in addition to performing another settlement
service for the transaction, or whose affiliate performs another
settlement service for the transaction, does not have a conflict of
interest in violation of paragraph (d)(1)(i) of this section as a
result of the person or the person's affiliate performing another
settlement service for the transaction if:
(i) The creditor had assets of more than $250 million as of
December 31st for both of the past two calendar years and the
conditions in paragraph (d)(2)(i)-(iii) are met; or
(ii) The creditor had assets of $250 million or less as of December
31st for either of the past two calendar years and the conditions in
paragraph (d)(3)(i)-(ii) are met.
(5) Definitions. For purposes of this paragraph (d), the following
definitions apply:
(i) Loan production function. The term ``loan production function''
means an employee, officer, director, department, division, or other
unit of a creditor with responsibility for generating covered
transactions, approving covered transactions, or both.
(ii) Settlement service. The term ``settlement service'' has the
same meaning as in the Real Estate Settlement Procedures Act, 12 U.S.C.
2601 et seq.
(iii) Affiliate. The term ``affiliate'' has the same meaning as in
Regulation Y of the Board of Governors of the Federal Reserve System,
12 CFR 225.2(a).
(e) When extension of credit prohibited. In connection with a
covered transaction, a creditor that knows, at or before consummation,
of a violation of paragraph (c) or (d) of this section in connection
with a valuation shall not extend credit based on the valuation, unless
the creditor documents that it has acted with reasonable diligence to
determine that the valuation does not materially misstate or
misrepresent the value of the consumer's principal dwelling. For
purposes of this paragraph (e), a valuation materially misstates or
misrepresents the value of the consumer's principal dwelling if the
valuation contains a misstatement or misrepresentation that affects the
credit decision or the terms on which credit is extended.
(f) Customary and reasonable compensation. (1) Requirement to
provide customary and reasonable compensation to fee appraisers. In any
covered transaction, the creditor and its agents shall compensate a fee
appraiser for performing appraisal services at a rate that is customary
and reasonable for comparable appraisal services performed in the
geographic market of the property being appraised. For purposes of
paragraph (f) of this section, ``agents'' of the creditor do not
include any fee appraiser as defined in paragraph (f)(4)(i) of this
section.
(2) Presumption of compliance. A creditor and its agents shall be
presumed to comply with paragraph (f)(1) of this section if:
(i) The creditor or its agents compensate the fee appraiser in an
amount that is reasonably related to recent rates paid for comparable
appraisal services performed in the geographic market of the property
being appraised. In determining this amount, a creditor or its agents
shall review the factors below and make any adjustments to recent rates
paid in the relevant geographic market necessary to ensure that the
amount of compensation is reasonable:
(A) The type of property,
(B) The scope of work,
(C) The time in which the appraisal services are required to be
performed,
(D) Fee appraiser qualifications,
(E) Fee appraiser experience and professional record, and
(F) Fee appraiser work quality; and
(ii) The creditor and its agents do not engage in any
anticompetitive acts in violation of state or Federal law that affect
the compensation paid to fee appraisers, including:
(A) Entering into any contracts or engaging in any conspiracies to
restrain trade through methods such as price fixing or market
allocation, as prohibited under section 1 of the Sherman Antitrust Act,
15 U.S.C. 1, or any other relevant antitrust laws; or
(B) Engaging in any acts of monopolization such as restricting any
person from entering the relevant geographic market or causing any
person to leave the relevant geographic market, as prohibited under
section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other
relevant antitrust laws.
(3) Alternative presumption of compliance. A creditor and its
agents shall be presumed to comply with paragraph (f)(1) of this
section if the creditor or its agents determine the amount of
compensation paid to the fee appraiser by relying on information about
rates that:
(i) Is based on objective third-party information, including fee
schedules, studies, and surveys prepared by independent third parties
such as government agencies, academic institutions, and private
research firms;
(ii) Is based on recent rates paid to a representative sample of
providers of appraisal services in the geographic market of the
property being appraised or the fee schedules of those providers; and
(iii) In the case of information based on fee schedules, studies,
and surveys, such fee schedules, studies, or surveys, or the
information derived therefrom, excludes compensation paid to fee
appraisers for appraisals ordered by appraisal management companies, as
defined in paragraph (f)(4)(iii) of this section.
(4) Definitions. For purposes of this paragraph (f), the following
definitions apply:
(i) Fee appraiser. The term ``fee appraiser'' means:
(A) A natural person who is a state-licensed or state-certified
appraiser and receives a fee for performing an appraisal, but who is
not an employee of the person engaging the appraiser; or
(B) An organization that, in the ordinary course of business,
employs state-licensed or state-certified appraisers to perform
appraisals, receives a fee for performing appraisals, and is not
subject to the requirements of section 1124 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C.
3353).
(ii) Appraisal services. The term ``appraisal services'' means the
services required to perform an appraisal, including defining the scope
of work, inspecting the property, reviewing necessary and appropriate
public and private data sources (for example, multiple listing
services, tax assessment records and public land records), developing
and rendering an opinion of value, and preparing and submitting the
appraisal report.
(iii) Appraisal management company. The term ``appraisal management
company'' means any person authorized to perform one or more of the
following actions on behalf of the creditor:
(A) Recruit, select, and retain fee appraisers;
[[Page 79817]]
(B) Contract with fee appraisers to perform appraisal services;
(C) Manage the process of having an appraisal performed, including
providing administrative services such as receiving appraisal orders
and appraisal reports, submitting completed appraisal reports to
creditors and underwriters, collecting fees from creditors and
underwriters for services provided, and compensating fee appraisers for
services performed; or
(D) Review and verify the work of fee appraisers.
(g) Mandatory reporting. (1) Reporting required. Any covered person
that reasonably believes an appraiser has not complied with the Uniform
Standards of Professional Appraisal Practice or ethical or professional
requirements for appraisers under applicable state or Federal statutes
or regulations shall refer the matter to the appropriate state agency
if the failure to comply is material. For purposes of this paragraph
(g)(1), a failure to comply is material if it is likely to
significantly affect the value assigned to the consumer's principal
dwelling.
(2) Timing of reporting. A covered person shall notify the
appropriate state agency within a reasonable period of time after the
person determines that there is a reasonable basis to believe that a
failure to comply required to be reported under paragraph (g)(1) of
this section has occurred.
(3) Definition. For purposes of this paragraph (g), ``state
agency'' means ``state appraiser certifying and licensing agency''
under 12 U.S.C. 3350(1) and any implementing regulations. The
appropriate state agency to which a covered person must refer a matter
under paragraph (g)(1) of this section is the agency for the state in
which the consumer's principal dwelling is located.
Sec. Sec. 1026.43-1026.45 [Reserved]
Subpart F--Special Rules for Private Education Loans
Sec. 1026.46 Special disclosure requirements for private education
loans.
(a) Coverage. The requirements of this subpart apply to private
education loans as defined in Sec. 1026.46(b)(5). A creditor may, at
its option, comply with the requirements of this subpart for an
extension of credit subject to Sec. Sec. 1026.17 and 1026.18 that is
extended to a consumer for expenses incurred after graduation from a
law, medical, dental, veterinary, or other graduate school and related
to relocation, study for a bar or other examination, participation in
an internship or residency program, or similar purposes.
(1) Relation to other subparts in this part. Except as otherwise
specifically provided, the requirements and limitations of this subpart
are in addition to and not in lieu of those contained in other subparts
of this Part.
(2) [Reserved]
(b) Definitions. For purposes of this subpart, the following
definitions apply:
(1) Covered educational institution means:
(i) An educational institution that meets the definition of an
institution of higher education, as defined in paragraph (b)(2) of this
section, without regard to the institution's accreditation status; and
(ii) Includes an agent, officer, or employee of the institution of
higher education. An agent means an institution-affiliated organization
as defined by section 151 of the Higher Education Act of 1965 (20
U.S.C. 1019) or an officer or employee of an institution-affiliated
organization.
(2) Institution of higher education has the same meaning as in
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C.
1001-1002) and the implementing regulations published by the U.S.
Department of Education.
(3) Postsecondary educational expenses means any of the expenses
that are listed as part of the cost of attendance, as defined under
section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), of
a student at a covered educational institution. These expenses include
tuition and fees, books, supplies, miscellaneous personal expenses,
room and board, and an allowance for any loan fee, origination fee, or
insurance premium charged to a student or parent for a loan incurred to
cover the cost of the student's attendance.
(4) Preferred lender arrangement has the same meaning as in section
151 of the Higher Education Act of 1965 (20 U.S.C. 1019).
(5) Private education loan means an extension of credit that:
(i) Is not made, insured, or guaranteed under Title IV of the
Higher Education Act of 1965 (20 U.S.C. 1070 et seq.);
(ii) Is extended to a consumer expressly, in whole or in part, for
postsecondary educational expenses, regardless of whether the loan is
provided by the educational institution that the student attends;
(iii) Does not include open-end credit or any loan that is secured
by real property or a dwelling; and
(iv) Does not include an extension of credit in which the covered
educational institution is the creditor if:
(A) The term of the extension of credit is 90 days or less; or
(B) an interest rate will not be applied to the credit balance and
the term of the extension of credit is one year or less, even if the
credit is payable in more than four installments.
(c) Form of disclosures. (1) Clear and conspicuous. The disclosures
required by this subpart shall be made clearly and conspicuously.
(2) Transaction disclosures. (i) The disclosures required under
Sec. Sec. 1026.47(b) and (c) shall be made in writing, in a form that
the consumer may keep. The disclosures shall be grouped together, shall
be segregated from everything else, and shall not contain any
information not directly related to the disclosures required under
Sec. Sec. 1026.47(b) and (c), which include the disclosures required
under Sec. 1026.18.
(ii) The disclosures may include an acknowledgement of receipt, the
date of the transaction, and the consumer's name, address, and account
number. The following disclosures may be made together with or
separately from other required disclosures: the creditor's identity
under Sec. 1026.18(a), insurance or debt cancellation under Sec.
1026.18(n), and certain security interest charges under Sec.
1026.18(o).
(iii) The term ``finance charge'' and corresponding amount, when
required to be disclosed under Sec. 1026.18(d), and the interest rate
required to be disclosed under Sec. Sec. 1026.47(b)(1)(i) and (c)(1),
shall be more conspicuous than any other disclosure, except the
creditor's identity under Sec. 1026.18(a).
(3) Electronic disclosures. The disclosures required under
Sec. Sec. 1026.47(b) and (c) may be provided to the consumer in
electronic form, subject to compliance with the consumer consent and
other applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). The
disclosures required by Sec. 1026.47(a) may be provided to the
consumer in electronic form on or with an application or solicitation
that is accessed by the consumer in electronic form without regard to
the consumer consent or other provisions of the E-Sign Act. The form
required to be received under Sec. 1026.48(e) may be accepted by the
creditor in electronic form as provided for in that section.
(d) Timing of disclosures. (1) Application or solicitation
disclosures. (i) The disclosures required by Sec. 1026.47(a) shall be
provided on or with any application or solicitation. For purposes of
this subpart, the term solicitation means an offer of credit that does
not require the consumer to complete an application. A ``firm offer of
credit'' as defined in section 603(l) of
[[Page 79818]]
the Fair Credit Reporting Act (15 U.S.C. 1681a(l)) is a solicitation
for purposes of this section.
(ii) The creditor may, at its option, disclose orally the
information in Sec. 1026.47(a) in a telephone application or
solicitation. Alternatively, if the creditor does not disclose orally
the information in Sec. 1026.47(a), the creditor must provide the
disclosures or place them in the mail no later than three business days
after the consumer has applied for the credit, except that, if the
creditor either denies the consumer's application or provides or places
in the mail the disclosures in Sec. 1026.47(b) no later than three
business days after the consumer requests the credit, the creditor need
not also provide the Sec. 1026.47(a) disclosures.
(iii) Notwithstanding paragraph (d)(1)(i) of this section, for a
loan that the consumer may use for multiple purposes including, but not
limited to, postsecondary educational expenses, the creditor need not
provide the disclosures required by Sec. 1026.47(a).
(2) Approval disclosures. The creditor shall provide the
disclosures required by Sec. 1026.47(b) before consummation on or with
any notice of approval provided to the consumer. If the creditor mails
notice of approval, the disclosures must be mailed with the notice. If
the creditor communicates notice of approval by telephone, the creditor
must mail the disclosures within three business days of providing the
notice of approval. If the creditor communicates notice of approval
electronically, the creditor may provide the disclosures in electronic
form in accordance with Sec. 1026.46(d)(3); otherwise the creditor
must mail the disclosures within three business days of communicating
the notice of approval. If the creditor communicates approval in
person, the creditor must provide the disclosures to the consumer at
that time.
(3) Final disclosures. The disclosures required by Sec. 1026.47(c)
shall be provided after the consumer accepts the loan in accordance
with Sec. 1026.48(c)(1).
(4) Receipt of mailed disclosures. If the disclosures under
paragraphs (d)(1), (d)(2) or (d)(3) of this section are mailed to the
consumer, the consumer is considered to have received them three
business days after they are mailed.
(e) Basis of disclosures and use of estimates. (1) Legal
obligation. Disclosures shall reflect the terms of the legal obligation
between the parties.
(2) Estimates. If any information necessary for an accurate
disclosure is unknown to the creditor, the creditor shall make the
disclosure based on the best information reasonably available at the
time the disclosure is provided, and shall state clearly that the
disclosure is an estimate.
(f) Multiple creditors; multiple consumers. If a transaction
involves more than one creditor, only one set of disclosures shall be
given and the creditors shall agree among themselves which creditor
will comply with the requirements that this part imposes on any or all
of them. If there is more than one consumer, the disclosures may be
made to any consumer who is primarily liable on the obligation.
(g) Effect of subsequent events. (1) Approval disclosures. If a
disclosure under Sec. 1026.47(b) becomes inaccurate because of an
event that occurs after the creditor delivers the required disclosures,
the inaccuracy is not a violation of Regulation Z (12 CFR part 1026),
although new disclosures may be required under Sec. 1026.48(c).
(2) Final disclosures. If a disclosure under Sec. 1026.47(c)
becomes inaccurate because of an event that occurs after the creditor
delivers the required disclosures, the inaccuracy is not a violation of
Regulation Z (12 CFR part 1026).
Sec. 1026.47 Content of disclosures.
(a) Application or solicitation disclosures. A creditor shall
provide the disclosures required under paragraph (a) of this section on
or with a solicitation or an application for a private education loan.
(1) Interest Rates. (i) The interest rate or range of interest
rates applicable to the loan and actually offered by the creditor at
the time of application or solicitation. If the rate will depend, in
part, on a later determination of the consumer's creditworthiness or
other factors, a statement that the rate for which the consumer may
qualify will depend on the consumer's creditworthiness and other
factors, if applicable.
(ii) Whether the interest rates applicable to the loan are fixed or
variable.
(iii) If the interest rate may increase after consummation of the
transaction, any limitations on the interest rate adjustments, or lack
thereof; a statement that the consumer's actual rate could be higher or
lower than the rates disclosed under paragraph (a)(1)(i) of this
section, if applicable; and, if the limitation is determined by
applicable law, that fact.
(iv) Whether the applicable interest rates typically will be higher
if the loan is not co-signed or guaranteed.
(2) Fees and default or late payment costs. (i) An itemization of
the fees or range of fees required to obtain the private education
loan.
(ii) Any fees, changes to the interest rate, and adjustments to
principal based on the consumer's defaults or late payments.
(3) Repayment terms. (i) The term of the loan, which is the period
during which regularly scheduled payments of principal and interest
will be due.
(ii) A description of any payment deferral options, or, if the
consumer does not have the option to defer payments, that fact.
(iii) For each payment deferral option applicable while the student
is enrolled at a covered educational institution:
(A) Whether interest will accrue during the deferral period; and
(B) If interest accrues, whether payment of interest may be
deferred and added to the principal balance.
(iv) A statement that if the consumer files for bankruptcy, the
consumer may still be required to pay back the loan.
(4) Cost estimates. An example of the total cost of the loan
calculated as the total of payments over the term of the loan:
(i) Using the highest rate of interest disclosed under paragraph
(a)(1) of this section and including all finance charges applicable to
loans at that rate;
(ii) Using an amount financed of $10,000, or $5000 if the creditor
only offers loans of this type for less than $10,000; and
(iii) Calculated for each payment option.
(5) Eligibility. Any age or school enrollment eligibility
requirements relating to the consumer or cosigner.
(6) Alternatives to private education loans. (i) A statement that
the consumer may qualify for Federal student financial assistance
through a program under Title IV of the Higher Education Act of 1965
(20 U.S.C. 1070 et seq.).
(ii) The interest rates available under each program under Title IV
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) and
whether the rates are fixed or variable.
(iii) A statement that the consumer may obtain additional
information concerning Federal student financial assistance from the
institution of higher education that the student attends, or at the Web
site of the U.S. Department of Education, including an appropriate Web
site address.
(iv) A statement that a covered educational institution may have
school-specific education loan benefits and terms not detailed on the
disclosure form.
(7) Rights of the consumer. A statement that if the loan is
approved, the terms of the loan will be available and will not change
for 30 days except as a result of adjustments to the interest
[[Page 79819]]
rate and other changes permitted by law.
(8) Self-certification information. A statement that, before the
loan may be consummated, the consumer must complete the self-
certification form and that the form may be obtained from the
institution of higher education that the student attends.
(b) Approval disclosures. On or with any notice of approval
provided to the consumer, the creditor shall disclose the information
required under Sec. 1026.18 and the following information:
(1) Interest rate. (i) The interest rate applicable to the loan.
(ii) Whether the interest rate is fixed or variable.
(iii) If the interest rate may increase after consummation of the
transaction, any limitations on the rate adjustments, or lack thereof.
(2) Fees and default or late payment costs. (i) An itemization of
the fees or range of fees required to obtain the private education
loan.
(ii) Any fees, changes to the interest rate, and adjustments to
principal based on the consumer's defaults or late payments.
(3) Repayment terms. (i) The principal amount of the loan for which
the consumer has been approved.
(ii) The term of the loan, which is the period during which
regularly scheduled payments of principal and interest will be due.
(iii) A description of the payment deferral option chosen by the
consumer, if applicable, and any other payment deferral options that
the consumer may elect at a later time.
(iv) Any payments required while the student is enrolled at a
covered educational institution, based on the deferral option chosen by
the consumer.
(v) The amount of any unpaid interest that will accrue while the
student is enrolled at a covered educational institution, based on the
deferral option chosen by the consumer.
(vi) A statement that if the consumer files for bankruptcy, the
consumer may still be required to pay back the loan.
(vii) An estimate of the total amount of payments calculated based
on:
(A) The interest rate applicable to the loan. Compliance with Sec.
1026.18(h) constitutes compliance with this requirement.
(B) The maximum possible rate of interest for the loan or, if a
maximum rate cannot be determined, a rate of 25%.
(C) If a maximum rate cannot be determined, the estimate of the
total amount for repayment must include a statement that there is no
maximum rate and that the total amount for repayment disclosed under
paragraph (b)(3)(vii)(B) of this section is an estimate and will be
higher if the applicable interest rate increases.
(viii) The maximum monthly payment based on the maximum rate of
interest for the loan or, if a maximum rate cannot be determined, a
rate of 25%. If a maximum cannot be determined, a statement that there
is no maximum rate and that the monthly payment amount disclosed is an
estimate and will be higher if the applicable interest rate increases.
(4) Alternatives to private education loans. (i) A statement that
the consumer may qualify for Federal student financial assistance
through a program under Title IV of the Higher Education Act of 1965
(20 U.S.C. 1070 et seq.).
(ii) The interest rates available under each program under Title IV
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.), and
whether the rates are fixed or variable.
(iii) A statement that the consumer may obtain additional
information concerning Federal student financial assistance from the
institution of higher education that the student attends, or at the Web
site of the U.S. Department of Education, including an appropriate Web
site address.
(5) Rights of the consumer. (i) A statement that the consumer may
accept the terms of the loan until the acceptance period under Sec.
1026.48(c)(1) has expired. The statement must include the specific date
on which the acceptance period expires, based on the date upon which
the consumer receives the disclosures required under this subsection
for the loan. The disclosure must also specify the method or methods by
which the consumer may communicate acceptance.
(ii) A statement that, except for changes to the interest rate and
other changes permitted by law, the rates and terms of the loan may not
be changed by the creditor during the period described in paragraph
(b)(5)(i) of this section.
(c) Final disclosures. After the consumer has accepted the loan in
accordance with Sec. 1026.48(c)(1), the creditor shall disclose to the
consumer the information required by Sec. 1026.18 and the following
information:
(1) Interest rate. Information required to be disclosed under Sec.
1026.47(b)(1).
(2) Fees and default or late payment costs. Information required to
be disclosed under Sec. 1026.47(b)(2).
(3) Repayment terms. Information required to be disclosed under
Sec. 1026.47(b)(3).
(4) Cancellation right. A statement that:
(i) The consumer has the right to cancel the loan, without penalty,
at any time before the cancellation period under Sec. 1026.48(d)
expires, and
(ii) Loan proceeds will not be disbursed until after the
cancellation period under Sec. 1026.48(d) expires. The statement must
include the specific date on which the cancellation period expires and
state that the consumer may cancel by that date. The statement must
also specify the method or methods by which the consumer may cancel. If
the creditor permits cancellation by mail, the statement must specify
that the consumer's mailed request will be deemed timely if placed in
the mail not later than the cancellation date specified on the
disclosure. The disclosures required by this paragraph (c)(4) must be
made more conspicuous than any other disclosure required under this
section, except for the finance charge, the interest rate, and the
creditor's identity, which must be disclosed in accordance with the
requirements of Sec. 1026.46(c)(2)(iii).
Sec. 1026.48 Limitations on private education loans.
(a) Co-branding prohibited. (1) Except as provided in paragraph (b)
of this section, a creditor, other than the covered educational
institution itself, shall not use the name, emblem, mascot, or logo of
a covered educational institution, or other words, pictures, or symbols
identified with a covered educational institution, in the marketing of
private education loans in a way that implies that the covered
education institution endorses the creditor's loans.
(2) A creditor's marketing of private education loans does not
imply that the covered education institution endorses the creditor's
loans if the marketing includes a clear and conspicuous disclosure that
is equally prominent and closely proximate to the reference to the
covered educational institution that the covered educational
institution does not endorse the creditor's loans and that the creditor
is not affiliated with the covered educational institution.
(b) Endorsed lender arrangements. If a creditor and a covered
educational institution have entered into an arrangement where the
covered educational institution agrees to endorse the creditor's
private education loans, and such arrangement is not prohibited by
other applicable law or regulation, paragraph (a)(1) of this section
does not apply if the private education loan marketing includes a clear
and conspicuous disclosure that is equally prominent and closely
proximate to the reference to the covered educational institution that
the creditor's loans are
[[Page 79820]]
not offered or made by the covered educational institution, but are
made by the creditor.
(c) Consumer's right to accept. (1) The consumer has the right to
accept the terms of a private education loan at any time within 30
calendar days following the date on which the consumer receives the
disclosures required under Sec. 1026.47(b).
(2) Except for changes permitted under paragraphs (c)(3) and
(c)(4), the rate and terms of the private education loan that are
required to be disclosed under Sec. Sec. 1026.47(b) and (c) may not be
changed by the creditor prior to the earlier of:
(i) The date of disbursement of the loan; or
(ii) The expiration of the 30 calendar day period described in
paragraph (c)(1) of this section if the consumer has not accepted the
loan within that time.
(3) Exceptions not requiring re-disclosure. (i) Notwithstanding
paragraph (c)(2) of this section, nothing in this section prevents the
creditor from:
(A) Withdrawing an offer before consummation of the transaction if
the extension of credit would be prohibited by law or if the creditor
has reason to believe that the consumer has committed fraud in
connection with the loan application;
(B) Changing the interest rate based on adjustments to the index
used for a loan;
(C) Changing the interest rate and terms if the change will
unequivocally benefit the consumer; or
(D) Reducing the loan amount based upon a certification or other
information received from the covered educational institution, or from
the consumer, indicating that the student's cost of attendance has
decreased or the consumer's other financial aid has increased. A
creditor may make corresponding changes to the rate and other terms
only to the extent that the consumer would have received the terms if
the consumer had applied for the reduced loan amount.
(ii) If the creditor changes the rate or terms of the loan under
this paragraph (c)(3), the creditor need not provide the disclosures
required under Sec. 1026.47(b) for the new loan terms, nor need the
creditor provide an additional 30-day period to the consumer to accept
the new terms of the loan under paragraph (c)(1) of this section.
(4) Exceptions requiring re-disclosure. (i) Notwithstanding
paragraphs (c)(2) or (c)(3) of this section, nothing in this section
prevents the creditor, at its option, from changing the rate or terms
of the loan to accommodate a specific request by the consumer. For
example, if the consumer requests a different repayment option, the
creditor may, but need not, offer to provide the requested repayment
option and make any other changes to the rate and terms.
(ii) If the creditor changes the rate or terms of the loan under
this paragraph (c)(4), the creditor shall provide the disclosures
required under Sec. 1026.47(b) and shall provide the consumer the 30-
day period to accept the loan under paragraph (c)(1) of this section.
The creditor shall not make further changes to the rates and terms of
the loan, except as specified in paragraphs (c)(3) and (4) of this
section. Except as permitted under Sec. 1026.48(c)(3), unless the
consumer accepts the loan offered by the creditor in response to the
consumer's request, the creditor may not withdraw or change the rates
or terms of the loan for which the consumer was approved prior to the
consumer's request for a change in loan terms.
(d) Consumer's right to cancel. The consumer may cancel a private
education loan, without penalty, until midnight of the third business
day following the date on which the consumer receives the disclosures
required by Sec. 1026.47(c). No funds may be disbursed for a private
education loan until the three-business day period has expired.
(e) Self-certification form. For a private education loan intended
to be used for the postsecondary educational expenses of a student
while the student is attending an institution of higher education, the
creditor shall obtain from the consumer or the institution of higher
education the form developed by the Secretary of Education under
section 155 of the Higher Education Act of 1965, signed by the
consumer, in written or electronic form, before consummating the
private education loan.
(f) Provision of information by preferred lenders. A creditor that
has a preferred lender arrangement with a covered educational
institution shall provide to the covered educational institution the
information required under Sec. Sec. 1026.47(a)(1) through (5), for
each type of private education loan that the lender plans to offer to
consumers for students attending the covered educational institution
for the period beginning July 1 of the current year and ending June 30
of the following year. The creditor shall provide the information
annually by the later of the 1st day of April, or within 30 days after
entering into, or learning the creditor is a party to, a preferred
lender arrangement.
Subpart G--Special Rules Applicable to Credit Card Accounts and
Open-End Credit Offered to College Students
Sec. 1026.51 Ability to Pay.
(a) General rule. (1)(i) Consideration of ability to pay. A card
issuer must not open a credit card account for a consumer under an
open-end (not home-secured) consumer credit plan, or increase any
credit limit applicable to such account, unless the card issuer
considers the consumer's independent ability to make the required
minimum periodic payments under the terms of the account based on the
consumer's income or assets and current obligations.
(ii) Reasonable policies and procedures. Card issuers must
establish and maintain reasonable written policies and procedures to
consider a consumer's independent income or assets and current
obligations. Reasonable policies and procedures to consider a
consumer's independent ability to make the required payments include
the consideration of at least one of the following: The ratio of debt
obligations to income; the ratio of debt obligations to assets; or the
income the consumer will have after paying debt obligations. It would
be unreasonable for a card issuer to not review any information about a
consumer's income, assets, or current obligations, or to issue a credit
card to a consumer who does not have any independent income or assets.
(2) Minimum periodic payments. (i) Reasonable method. For purposes
of paragraph (a)(1) of this section, a card issuer must use a
reasonable method for estimating the minimum periodic payments the
consumer would be required to pay under the terms of the account.
(ii) Safe harbor. A card issuer complies with paragraph (a)(2)(i)
of this section if it estimates required minimum periodic payments
using the following method:
(A) The card issuer assumes utilization, from the first day of the
billing cycle, of the full credit line that the issuer is considering
offering to the consumer; and
(B) The card issuer uses a minimum payment formula employed by the
issuer for the product the issuer is considering offering to the
consumer or, in the case of an existing account, the minimum payment
formula that currently applies to that account, provided that:
(1) If the applicable minimum payment formula includes interest
charges, the card issuer estimates those charges using an interest rate
that the
[[Page 79821]]
issuer is considering offering to the consumer for purchases or, in the
case of an existing account, the interest rate that currently applies
to purchases; and
(2) If the applicable minimum payment formula includes mandatory
fees, the card issuer must assume that such fees have been charged to
the account.
(b) Rules affecting young consumers. (1) Applications from young
consumers. A card issuer may not open a credit card account under an
open-end (not home-secured) consumer credit plan for a consumer less
than 21 years old, unless the consumer has submitted a written
application and the card issuer has:
(i) Financial information indicating the consumer has an
independent ability to make the required minimum periodic payments on
the proposed extension of credit in connection with the account,
consistent with paragraph (a) of this section; or
(ii)(A) A signed agreement of a cosigner, guarantor, or joint
applicant who is at least 21 years old to be either secondarily liable
for any debt on the account incurred by the consumer before the
consumer has attained the age of 21 or jointly liable with the consumer
for any debt on the account, and
(B) Financial information indicating such cosigner, guarantor, or
joint applicant has the independent ability to make the required
minimum periodic payments on such debts, consistent with paragraph (a)
of this section.
(2) Credit line increases for young consumers. If a credit card
account has been opened pursuant to paragraph (b)(1)(ii) of this
section, no increase in the credit limit may be made on such account
before the consumer attains the age of 21 unless the cosigner,
guarantor, or joint accountholder who assumed liability at account
opening agrees in writing to assume liability on the increase.
Sec. 1026.52 Limitations on fees.
(a) Limitations prior to account opening and during first year
after account opening. (1) General rule. Except as provided in
paragraph (a)(2) of this section, the total amount of fees a consumer
is required to pay with respect to a credit card account under an open-
end (not home-secured) consumer credit plan prior to account opening
and during the first year after account opening must not exceed 25
percent of the credit limit in effect when the account is opened. For
purposes of this paragraph, an account is considered open no earlier
than the date on which the account may first be used by the consumer to
engage in transactions.
(2) Fees not subject to limitations. Paragraph (a) of this section
does not apply to:
(i) Late payment fees, over-the-limit fees, and returned-payment
fees; or
(ii) Fees that the consumer is not required to pay with respect to
the account.
(3) Rule of construction. Paragraph (a) of this section does not
authorize the imposition or payment of fees or charges otherwise
prohibited by law.
(b) Limitations on penalty fees. A card issuer must not impose a
fee for violating the terms or other requirements of a credit card
account under an open-end (not home-secured) consumer credit plan
unless the dollar amount of the fee is consistent with paragraphs
(b)(1) and (b)(2) of this section.
(1) General rule. Except as provided in paragraph (b)(2) of this
section, a card issuer may impose a fee for violating the terms or
other requirements of a credit card account under an open-end (not
home-secured) consumer credit plan if the dollar amount of the fee is
consistent with either paragraph (b)(1)(i) or (b)(1)(ii) of this
section.
(i) Fees based on costs. A card issuer may impose a fee for
violating the terms or other requirements of an account if the card
issuer has determined that the dollar amount of the fee represents a
reasonable proportion of the total costs incurred by the card issuer as
a result of that type of violation. A card issuer must reevaluate this
determination at least once every twelve months. If as a result of the
reevaluation the card issuer determines that a lower fee represents a
reasonable proportion of the total costs incurred by the card issuer as
a result of that type of violation, the card issuer must begin imposing
the lower fee within 45 days after completing the reevaluation. If as a
result of the reevaluation the card issuer determines that a higher fee
represents a reasonable proportion of the total costs incurred by the
card issuer as a result of that type of violation, the card issuer may
begin imposing the higher fee after complying with the notice
requirements in Sec. 1026.9.
(ii) Safe harbors. A card issuer may impose a fee for violating the
terms or other requirements of an account if the dollar amount of the
fee does not exceed, as applicable:
(A) $25.00;
(B) $35.00 if the card issuer previously imposed a fee pursuant to
paragraph (b)(1)(ii)(A) of this section for a violation of the same
type that occurred during the same billing cycle or one of the next six
billing cycles; or
(C) Three percent of the delinquent balance on a charge card
account that requires payment of outstanding balances in full at the
end of each billing cycle if the card issuer has not received the
required payment for two or more consecutive billing cycles.
(D) The amounts in paragraphs (b)(1)(ii)(A) and (b)(1)(ii)(B) of
this section will be adjusted annually by the Bureau to reflect changes
in the Consumer Price Index.
(2) Prohibited fees. (i) Fees that exceed dollar amount associated
with violation. (A) Generally. A card issuer must not impose a fee for
violating the terms or other requirements of a credit card account
under an open-end (not home-secured) consumer credit plan that exceeds
the dollar amount associated with the violation.
(B) No dollar amount associated with violation. A card issuer must
not impose a fee for violating the terms or other requirements of a
credit card account under an open-end (not home-secured) consumer
credit plan when there is no dollar amount associated with the
violation. For purposes of paragraph (b)(2)(i) of this section, there
is no dollar amount associated with the following violations:
(1) Transactions that the card issuer declines to authorize;
(2) Account inactivity; and
(3) The closure or termination of an account.
(ii) Multiple fees based on a single event or transaction. A card
issuer must not impose more than one fee for violating the terms or
other requirements of a credit card account under an open-end (not
home-secured) consumer credit plan based on a single event or
transaction. A card issuer may, at its option, comply with this
prohibition by imposing no more than one fee for violating the terms or
other requirements of an account during a billing cycle.
Sec. 1026.53 Allocation of payments.
(a) General rule. Except as provided in paragraph (b) of this
section, when a consumer makes a payment in excess of the required
minimum periodic payment for a credit card account under an open-end
(not home-secured) consumer credit plan, the card issuer must allocate
the excess amount first to the balance with the highest annual
percentage rate and any remaining portion to the other balances in
descending order based on the applicable annual percentage rate.
(b) Special rules. (1) Accounts with balances subject to deferred
interest or similar program. When a balance on a credit card account
under an open-end
[[Page 79822]]
(not home-secured) consumer credit plan is subject to a deferred
interest or similar program that provides that a consumer will not be
obligated to pay interest that accrues on the balance if the balance is
paid in full prior to the expiration of a specified period of time:
(i) Last two billing cycles. The card issuer must allocate any
amount paid by the consumer in excess of the required minimum periodic
payment consistent with paragraph (a) of this section, except that,
during the two billing cycles immediately preceding expiration of the
specified period, the excess amount must be allocated first to the
balance subject to the deferred interest or similar program and any
remaining portion allocated to any other balances consistent with
paragraph (a) of this section; or
(ii) Consumer request. The card issuer may at its option allocate
any amount paid by the consumer in excess of the required minimum
periodic payment among the balances on the account in the manner
requested by the consumer.
(2) Accounts with secured balances. When a balance on a credit card
account under an open-end (not home-secured) consumer credit plan is
secured, the card issuer may at its option allocate any amount paid by
the consumer in excess of the required minimum periodic payment to that
balance if requested by the consumer.
Sec. 1026.54 Limitations on the imposition of finance charges.
(a) Limitations on imposing finance charges as a result of the loss
of a grace period. (1) General rule. Except as provided in paragraph
(b) of this section, a card issuer must not impose finance charges as a
result of the loss of a grace period on a credit card account under an
open-end (not home-secured) consumer credit plan if those finance
charges are based on:
(i) Balances for days in billing cycles that precede the most
recent billing cycle; or
(ii) Any portion of a balance subject to a grace period that was
repaid prior to the expiration of the grace period.
(2) Definition of grace period. For purposes of paragraph (a)(1) of
this section, ``grace period'' has the same meaning as in Sec.
1026.5(b)(2)(ii)(B)(3).
(b) Exceptions. Paragraph (a) of this section does not apply to:
(1) Adjustments to finance charges as a result of the resolution of
a dispute under Sec. 1026.12 or Sec. 1026.13; or
(2) Adjustments to finance charges as a result of the return of a
payment.
Sec. 1026.55 Limitations on increasing annual percentage rates, fees,
and charges.
(a) General rule. Except as provided in paragraph (b) of this
section, a card issuer must not increase an annual percentage rate or a
fee or charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) on a credit card account under an open-end
(not home-secured) consumer credit plan.
(b) Exceptions. A card issuer may increase an annual percentage
rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to an exception
set forth in this paragraph even if that increase would not be
permitted under a different exception.
(1) Temporary rate, fee, or charge exception. A card issuer may
increase an annual percentage rate or a fee or charge required to be
disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
upon the expiration of a specified period of six months or longer,
provided that:
(i) Prior to the commencement of that period, the card issuer
disclosed in writing to the consumer, in a clear and conspicuous
manner, the length of the period and the annual percentage rate, fee,
or charge that would apply after expiration of the period; and
(ii) Upon expiration of the specified period:
(A) The card issuer must not apply an annual percentage rate, fee,
or charge to transactions that occurred prior to the period that
exceeds the annual percentage rate, fee, or charge that applied to
those transactions prior to the period;
(B) If the disclosures required by paragraph (b)(1)(i) of this
section are provided pursuant to Sec. 1026.9(c), the card issuer must
not apply an annual percentage rate, fee, or charge to transactions
that occurred within 14 days after provision of the notice that exceeds
the annual percentage rate, fee, or charge that applied to that
category of transactions prior to provision of the notice; and
(C) The card issuer must not apply an annual percentage rate, fee,
or charge to transactions that occurred during the period that exceeds
the increased annual percentage rate, fee, or charge disclosed pursuant
to paragraph (b)(1)(i) of this section.
(2) Variable rate exception. A card issuer may increase an annual
percentage rate when:
(i) The annual percentage rate varies according to an index that is
not under the card issuer's control and is available to the general
public; and
(ii) The increase in the annual percentage rate is due to an
increase in the index.
(3) Advance notice exception. A card issuer may increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) after complying with the
applicable notice requirements in Sec. 1026.9(b), (c), or (g),
provided that:
(i) If a card issuer discloses an increased annual percentage rate,
fee, or charge pursuant to Sec. 1026.9(b), the card issuer must not
apply that rate, fee, or charge to transactions that occurred prior to
provision of the notice;
(ii) If a card issuer discloses an increased annual percentage
rate, fee, or charge pursuant to Sec. 1026.9(c) or (g), the card
issuer must not apply that rate, fee, or charge to transactions that
occurred prior to or within 14 days after provision of the notice; and
(iii) This exception does not permit a card issuer to increase an
annual percentage rate or a fee or charge required to be disclosed
under Sec. 1026.6(b)(2)(ii), (iii), or (xii) during the first year
after the account is opened, while the account is closed, or while the
card issuer does not permit the consumer to use the account for new
transactions. For purposes of this paragraph, an account is considered
open no earlier than the date on which the account may first be used by
the consumer to engage in transactions.
(4) Delinquency exception. A card issuer may increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) due to the card issuer
not receiving the consumer's required minimum periodic payment within
60 days after the due date for that payment, provided that:
(i) The card issuer must disclose in a clear and conspicuous manner
in the notice of the increase pursuant to Sec. 1026.9(c) or (g):
(A) A statement of the reason for the increase; and
(B) That the increased annual percentage rate, fee, or charge will
cease to apply if the card issuer receives six consecutive required
minimum periodic payments on or before the payment due date beginning
with the first payment due following the effective date of the
increase; and
(ii) If the card issuer receives six consecutive required minimum
periodic payments on or before the payment due date beginning with the
first payment due following the effective date of the increase, the
card issuer must reduce any annual percentage rate, fee, or charge
increased pursuant to this
[[Page 79823]]
exception to the annual percentage rate, fee, or charge that applied
prior to the increase with respect to transactions that occurred prior
to or within 14 days after provision of the Sec. 1026.9(c) or (g)
notice.
(5) Workout and temporary hardship arrangement exception. A card
issuer may increase an annual percentage rate or a fee or charge
required to be disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) due to the consumer's completion of a workout or temporary
hardship arrangement or the consumer's failure to comply with the terms
of such an arrangement, provided that:
(i) Prior to commencement of the arrangement (except as provided in
Sec. 1026.9(c)(2)(v)(D)), the card issuer has provided the consumer
with a clear and conspicuous written disclosure of the terms of the
arrangement (including any increases due to the completion or failure
of the arrangement); and
(ii) Upon the completion or failure of the arrangement, the card
issuer must not apply to any transactions that occurred prior to
commencement of the arrangement an annual percentage rate, fee, or
charge that exceeds the annual percentage rate, fee, or charge that
applied to those transactions prior to commencement of the arrangement.
(6) Servicemembers Civil Relief Act exception. If an annual
percentage rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (iii), or (xii) has been decreased pursuant to 50
U.S.C. app. 527 or a similar Federal or state statute or regulation, a
card issuer may increase that annual percentage rate, fee, or charge
once 50 U.S.C. app. 527 or the similar statute or regulation no longer
applies, provided that the card issuer must not apply to any
transactions that occurred prior to the decrease an annual percentage
rate, fee, or charge that exceeds the annual percentage rate, fee, or
charge that applied to those transactions prior to the decrease.
(c) Treatment of protected balances. (1) Definition of protected
balance. For purposes of this paragraph, ``protected balance'' means
the amount owed for a category of transactions to which an increased
annual percentage rate or an increased fee or charge required to be
disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
cannot be applied after the annual percentage rate, fee, or charge for
that category of transactions has been increased pursuant to paragraph
(b)(3) of this section.
(2) Repayment of protected balance. The card issuer must not
require repayment of the protected balance using a method that is less
beneficial to the consumer than one of the following methods:
(i) The method of repayment for the account before the effective
date of the increase;
(ii) An amortization period of not less than five years, beginning
no earlier than the effective date of the increase; or
(iii) A required minimum periodic payment that includes a
percentage of the balance that is equal to no more than twice the
percentage required before the effective date of the increase.
(d) Continuing application. This section continues to apply to a
balance on a credit card account under an open-end (not home-secured)
consumer credit plan after:
(1) The account is closed or acquired by another creditor; or
(2) The balance is transferred from a credit card account under an
open-end (not home-secured) consumer credit plan issued by a creditor
to another credit account issued by the same creditor or its affiliate
or subsidiary (unless the account to which the balance is transferred
is subject to Sec. 1026.40).
(e) Promotional waivers or rebates of interest, fees, and other
charges. If a card issuer promotes the waiver or rebate of finance
charges due to a periodic interest rate or fees or charges required to
be disclosed under Sec. 1026.6(b)(2)(ii), (iii), or (xii) and applies
the waiver or rebate to a credit card account under an open-end (not
home-secured) consumer credit plan, any cessation of the waiver or
rebate on that account constitutes an increase in an annual percentage
rate, fee, or charge for purposes of this section.
Sec. 1026.56 Requirements for over-the-limit transactions.
(a) Definition. For purposes of this section, the term ``over-the-
limit transaction'' means any extension of credit by a card issuer to
complete a transaction that causes a consumer's credit card account
balance to exceed the credit limit.
(b) Opt-in requirement. (1) General. A card issuer shall not assess
a fee or charge on a consumer's credit card account under an open-end
(not home-secured) consumer credit plan for an over-the-limit
transaction unless the card issuer:
(i) Provides the consumer with an oral, written or electronic
notice, segregated from all other information, describing the
consumer's right to affirmatively consent, or opt in, to the card
issuer's payment of an over-the-limit transaction;
(ii) Provides a reasonable opportunity for the consumer to
affirmatively consent, or opt in, to the card issuer's payment of over-
the-limit transactions;
(iii) Obtains the consumer's affirmative consent, or opt-in, to the
card issuer's payment of such transactions;
(iv) Provides the consumer with confirmation of the consumer's
consent in writing, or if the consumer agrees, electronically; and
(v) Provides the consumer notice in writing of the right to revoke
that consent following the assessment of an over-the-limit fee or
charge.
(2) Completion of over-the-limit transactions without consumer
consent. Notwithstanding the absence of a consumer's affirmative
consent under paragraph (b)(1)(iii) of this section, a card issuer may
pay any over-the-limit transaction on a consumer's account provided
that the card issuer does not impose any fee or charge on the account
for paying that over-the-limit transaction.
(c) Method of election. A card issuer may permit a consumer to
consent to the card issuer's payment of any over-the-limit transaction
in writing, orally, or electronically, at the card issuer's option. The
card issuer must also permit the consumer to revoke his or her consent
using the same methods available to the consumer for providing consent.
(d) Timing and placement of notices. (1) Initial notice. (i)
General. The notice required by paragraph (b)(1)(i) of this section
shall be provided prior to the assessment of any over-the-limit fee or
charge on a consumer's account.
(ii) Oral or electronic consent. If a consumer consents to the card
issuer's payment of any over-the-limit transaction by oral or
electronic means, the card issuer must provide the notice required by
paragraph (b)(1)(i) of this section immediately prior to obtaining that
consent.
(2) Confirmation of opt-in. The notice required by paragraph
(b)(1)(iv) of this section may be provided no later than the first
periodic statement sent after the consumer has consented to the card
issuer's payment of over-the-limit transactions.
(3) Notice of right of revocation. The notice required by paragraph
(b)(1)(v) of this section shall be provided on the front of any page of
each periodic statement that reflects the assessment of an over-the-
limit fee or charge on a consumer's account.
(e) Content. (1) Initial notice. The notice required by paragraph
(b)(1)(i) of this section shall include all applicable items in this
paragraph (e)(1) and may
[[Page 79824]]
not contain any information not specified in or otherwise permitted by
this paragraph.
(i) Fees. The dollar amount of any fees or charges assessed by the
card issuer on a consumer's account for an over-the-limit transaction;
(ii) APRs. Any increased periodic rate(s) (expressed as an annual
percentage rate(s)) that may be imposed on the account as a result of
an over-the-limit transaction; and
(iii) Disclosure of opt-in right. An explanation of the consumer's
right to affirmatively consent to the card issuer's payment of over-
the-limit transactions, including the method(s) by which the consumer
may consent.
(2) Subsequent notice. The notice required by paragraph (b)(1)(v)
of this section shall describe the consumer's right to revoke any
consent provided under paragraph (b)(1)(iii) of this section, including
the method(s) by which the consumer may revoke.
(3) Safe harbor. Use of Model Forms G-25(A) or G-25(B) of Appendix
G to this part, or substantially similar notices, constitutes
compliance with the notice content requirements of paragraph (e) of
this section.
(f) Joint relationships. If two or more consumers are jointly
liable on a credit card account under an open-end (not home-secured)
consumer credit plan, the card issuer shall treat the affirmative
consent of any of the joint consumers as affirmative consent for that
account. Similarly, the card issuer shall treat a revocation of consent
by any of the joint consumers as revocation of consent for that
account.
(g) Continuing right to opt in or revoke opt-in. A consumer may
affirmatively consent to the card issuer's payment of over-the-limit
transactions at any time in the manner described in the notice required
by paragraph (b)(1)(i) of this section. Similarly, the consumer may
revoke the consent at any time in the manner described in the notice
required by paragraph (b)(1)(v) of this section.
(h) Duration of opt-in. A consumer's affirmative consent to the
card issuer's payment of over-the-limit transactions is effective until
revoked by the consumer, or until the card issuer decides for any
reason to cease paying over-the-limit transactions for the consumer.
(i) Time to comply with revocation request. A card issuer must
comply with a consumer's revocation request as soon as reasonably
practicable after the card issuer receives it.
(j) Prohibited practices. Notwithstanding a consumer's affirmative
consent to a card issuer's payment of over-the-limit transactions, a
card issuer is prohibited from engaging in the following practices:
(1) Fees or charges imposed per cycle. (i) General rule. A card
issuer may not impose more than one over-the-limit fee or charge on a
consumer's credit card account per billing cycle, and, in any event,
only if the credit limit was exceeded during the billing cycle. In
addition, except as provided in paragraph (j)(1)(ii) of this section, a
card issuer may not impose an over-the-limit fee or charge on the
consumer's credit card account for more than three billing cycles for
the same over-the-limit transaction where the consumer has not reduced
the account balance below the credit limit by the payment due date for
either of the last two billing cycles.
(ii) Exception. The prohibition in paragraph (j)(1)(i) of this
section on imposing an over-the-limit fee or charge in more than three
billing cycles for the same over-the-limit transaction(s) does not
apply if another over-the-limit transaction occurs during either of the
last two billing cycles.
(2) Failure to promptly replenish. A card issuer may not impose an
over-the-limit fee or charge solely because of the card issuer's
failure to promptly replenish the consumer's available credit following
the crediting of the consumer's payment under Sec. 1026.10.
(3) Conditioning. A card issuer may not condition the amount of a
consumer's credit limit on the consumer affirmatively consenting to the
card issuer's payment of over-the-limit transactions if the card issuer
assesses a fee or charge for such service.
(4) Over-the-limit fees attributed to fees or interest. A card
issuer may not impose an over-the-limit fee or charge for a billing
cycle if a consumer exceeds a credit limit solely because of fees or
interest charged by the card issuer to the consumer's account during
that billing cycle. For purposes of this paragraph (j)(4), the relevant
fees or interest charges are charges imposed as part of the plan under
Sec. 1026.6(b)(3).
Sec. 1026.57 Reporting and marketing rules for college student open-
end credit.
(a) Definitions. (1) College student credit card. The term
``college student credit card'' as used in this section means a credit
card issued under a credit card account under an open-end (not home-
secured) consumer credit plan to any college student.
(2) College student. The term ``college student'' as used in this
section means a consumer who is a full-time or part-time student of an
institution of higher education.
(3) Institution of higher education. The term ``institution of
higher education'' as used in this section has the same meaning as in
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C.
1001 and 1002).
(4) Affiliated organization. The term ``affiliated organization''
as used in this section means an alumni organization or foundation
affiliated with or related to an institution of higher education.
(5) College credit card agreement. The term ``college credit card
agreement'' as used in this section means any business, marketing or
promotional agreement between a card issuer and an institution of
higher education or an affiliated organization in connection with which
college student credit cards are issued to college students currently
enrolled at that institution.
(b) Public disclosure of agreements. An institution of higher
education shall publicly disclose any contract or other agreement made
with a card issuer or creditor for the purpose of marketing a credit
card.
(c) Prohibited inducements. No card issuer or creditor may offer a
college student any tangible item to induce such student to apply for
or open an open-end consumer credit plan offered by such card issuer or
creditor, if such offer is made:
(1) On the campus of an institution of higher education;
(2) Near the campus of an institution of higher education; or
(3) At an event sponsored by or related to an institution of higher
education.
(d) Annual report to the Bureau. (1) Requirement to report. Any
card issuer that was a party to one or more college credit card
agreements in effect at any time during a calendar year must submit to
the Bureau an annual report regarding those agreements in the form and
manner prescribed by the Bureau.
(2) Contents of report. The annual report to the Bureau must
include the following:
(i) Identifying information about the card issuer and the
agreements submitted, including the issuer's name, address, and
identifying number (such as an RSSD ID number or tax identification
number);
(ii) A copy of any college credit card agreement to which the card
issuer was a party that was in effect at any time during the period
covered by the report;
(iii) A copy of any memorandum of understanding in effect at any
time during the period covered by the report between the card issuer
and an institution of higher education or affiliated organization that
directly or indirectly relates to the college credit card agreement or
that controls or
[[Page 79825]]
directs any obligations or distribution of benefits between any such
entities;
(iv) The total dollar amount of any payments pursuant to a college
credit card agreement from the card issuer to an institution of higher
education or affiliated organization during the period covered by the
report, and the method or formula used to determine such amounts;
(v) The total number of credit card accounts opened pursuant to any
college credit card agreement during the period covered by the report;
and
(vi) The total number of credit card accounts opened pursuant to
any such agreement that were open at the end of the period covered by
the report.
(3) Timing of reports. Except for the initial report described in
this paragraph (d)(3), a card issuer must submit its annual report for
each calendar year to the Bureau by the first business day on or after
March 31 of the following calendar year.
Sec. 1026.58 Internet posting of credit card agreements.
(a) Applicability. The requirements of this section apply to any
card issuer that issues credit cards under a credit card account under
an open-end (not home-secured) consumer credit plan.
(b) Definitions. (1) Agreement. For purposes of this section,
``agreement'' or ``credit card agreement'' means the written document
or documents evidencing the terms of the legal obligation, or the
prospective legal obligation, between a card issuer and a consumer for
a credit card account under an open-end (not home-secured) consumer
credit plan. ``Agreement'' or ``credit card agreement'' also includes
the pricing information, as defined in Sec. 1026.58(b)(7).
(2) Amends. For purposes of this section, an issuer ``amends'' an
agreement if it makes a substantive change (an ``amendment'') to the
agreement. A change is substantive if it alters the rights or
obligations of the card issuer or the consumer under the agreement. Any
change in the pricing information, as defined in Sec. 1026.58(b)(7),
is deemed to be substantive.
(3) Business day. For purposes of this section, ``business day''
means a day on which the creditor's offices are open to the public for
carrying on substantially all of its business functions.
(4) Card issuer. For purposes of this section, ``card issuer'' or
``issuer'' means the entity to which a consumer is legally obligated,
or would be legally obligated, under the terms of a credit card
agreement.
(5) Offers. For purposes of this section, an issuer ``offers'' or
``offers to the public'' an agreement if the issuer is soliciting or
accepting applications for accounts that would be subject to that
agreement.
(6) Open account. For purposes of this section, an account is an
``open account'' or ``open credit card account'' if it is a credit card
account under an open-end (not home-secured) consumer credit plan and
either:
(i) The cardholder can obtain extensions of credit on the account;
or
(ii) There is an outstanding balance on the account that has not
been charged off. An account that has been suspended temporarily (for
example, due to a report by the cardholder of unauthorized use of the
card) is considered an ``open account'' or ``open credit card
account.''
(7) Pricing information. For purposes of this section, ``pricing
information'' means the information listed in Sec. 1026.6(b)(2)(i)
through (b)(2)(xii). Pricing information does not include temporary or
promotional rates and terms or rates and terms that apply only to
protected balances.
(8) Private label credit card account and private label credit card
plan. For purposes of this section:
(i) ``private label credit card account'' means a credit card
account under an open-end (not home-secured) consumer credit plan with
a credit card that can be used to make purchases only at a single
merchant or an affiliated group of merchants; and
(ii) ``private label credit card plan'' means all of the private
label credit card accounts issued by a particular issuer with credit
cards usable at the same single merchant or affiliated group of
merchants.
(c) Submission of agreements to Bureau. (1) Quarterly submissions.
A card issuer must make quarterly submissions to the Bureau, in the
form and manner specified by the Bureau. Quarterly submissions must be
sent to the Bureau no later than the first business day on or after
January 31, April 30, July 31, and October 31 of each year. Each
submission must contain:
(i) Identifying information about the card issuer and the
agreements submitted, including the issuer's name, address, and
identifying number (such as an RSSD ID number or tax identification
number);
(ii) The credit card agreements that the card issuer offered to the
public as of the last business day of the preceding calendar quarter
that the card issuer has not previously submitted to the Bureau;
(iii) Any credit card agreement previously submitted to the Bureau
that was amended during the preceding calendar quarter and that the
card issuer offered to the public as of the last business day of the
preceding calendar quarter, as described in Sec. 1026.58(c)(3); and
(iv) Notification regarding any credit card agreement previously
submitted to the Bureau that the issuer is withdrawing, as described in
Sec. 1026.58(c)(4), (c)(5), (c)(6), and (c)(7).
(2) [Reserved]
(3) Amended agreements. If a credit card agreement has been
submitted to the Bureau, the agreement has not been amended and the
card issuer continues to offer the agreement to the public, no
additional submission regarding that agreement is required. If a credit
card agreement that previously has been submitted to the Bureau is
amended and the card issuer offered the amended agreement to the public
as of the last business day of the calendar quarter in which the change
became effective, the card issuer must submit the entire amended
agreement to the Bureau, in the form and manner specified by the
Bureau, by the first quarterly submission deadline after the last day
of the calendar quarter in which the change became effective.
(4) Withdrawal of agreements. If a card issuer no longer offers to
the public a credit card agreement that previously has been submitted
to the Bureau, the card issuer must notify the Bureau, in the form and
manner specified by the Bureau, by the first quarterly submission
deadline after the last day of the calendar quarter in which the issuer
ceased to offer the agreement.
(5) De minimis exception. (i) A card issuer is not required to
submit any credit card agreements to the Bureau if the card issuer had
fewer than 10,000 open credit card accounts as of the last business day
of the calendar quarter.
(ii) If an issuer that previously qualified for the de minimis
exception ceases to qualify, the card issuer must begin making
quarterly submissions to the Bureau no later than the first quarterly
submission deadline after the date as of which the issuer ceased to
qualify.
(iii) If a card issuer that did not previously qualify for the de
minimis exception qualifies for the de minimis exception, the card
issuer must continue to make quarterly submissions to the Bureau until
the issuer notifies the Bureau that the card issuer is withdrawing all
agreements it previously submitted to the Bureau.
(6) Private label credit card exception. (i) A card issuer is not
required to
[[Page 79826]]
submit to the Bureau a credit card agreement if, as of the last
business day of the calendar quarter, the agreement:
(A) Is offered for accounts under one or more private label credit
card plans each of which has fewer than 10,000 open accounts; and
(B) Is not offered to the public other than for accounts under such
a plan.
(ii) If an agreement that previously qualified for the private
label credit card exception ceases to qualify, the card issuer must
submit the agreement to the Bureau no later than the first quarterly
submission deadline after the date as of which the agreement ceased to
qualify.
(iii) If an agreement that did not previously qualify for the
private label credit card exception qualifies for the exception, the
card issuer must continue to make quarterly submissions to the Bureau
with respect to that agreement until the issuer notifies the Bureau
that the agreement is being withdrawn.
(7) Product testing exception. (i) A card issuer is not required to
submit to the Bureau a credit card agreement if, as of the last
business day of the calendar quarter, the agreement:
(A) Is offered as part of a product test offered to only a limited
group of consumers for a limited period of time;
(B) Is used for fewer than 10,000 open accounts; and
(C) Is not offered to the public other than in connection with such
a product test.
(ii) If an agreement that previously qualified for the product
testing exception ceases to qualify, the card issuer must submit the
agreement to the Bureau no later than the first quarterly submission
deadline after the date as of which the agreement ceased to qualify.
(iii) If an agreement that did not previously qualify for the
product testing exception qualifies for the exception, the card issuer
must continue to make quarterly submissions to the Bureau with respect
to that agreement until the issuer notifies the Bureau that the
agreement is being withdrawn.
(8) Form and content of agreements submitted to the Bureau. (i)
Form and content generally. (A) Each agreement must contain the
provisions of the agreement and the pricing information in effect as of
the last business day of the preceding calendar quarter.
(B) Agreements must not include any personally identifiable
information relating to any cardholder, such as name, address,
telephone number, or account number.
(C) The following are not deemed to be part of the agreement for
purposes of Sec. 1026.58, and therefore are not required to be
included in submissions to the Bureau:
(1) Disclosures required by state or Federal law, such as affiliate
marketing notices, privacy policies, billing rights notices, or
disclosures under the E-Sign Act;
(2) Solicitation materials;
(3) Periodic statements;
(4) Ancillary agreements between the issuer and the consumer, such
as debt cancellation contracts or debt suspension agreements;
(5) Offers for credit insurance or other optional products and
other similar advertisements; and
(6) Documents that may be sent to the consumer along with the
credit card or credit card agreement such as a cover letter, a
validation sticker on the card, or other information about card
security.
(D) Agreements must be presented in a clear and legible font.
(ii) Pricing information. (A) Pricing information must be set forth
in a single addendum to the agreement. The addendum must contain all of
the pricing information, as defined by Sec. 1026.58(b)(7). The
addendum may, but is not required to, contain any other information
listed in Sec. 1026.6(b), provided that information is complete and
accurate as of the applicable date under Sec. 1026.58. The addendum
may not contain any other information.
(B) Pricing information that may vary from one cardholder to
another depending on the cardholder's creditworthiness or state of
residence or other factors must be disclosed either by setting forth
all the possible variations (such as purchase APRs of 13 percent, 15
percent, 17 percent, and 19 percent) or by providing a range of
possible variations (such as purchase APRs ranging from 13 percent to
19 percent).
(C) If a rate included in the pricing information is a variable
rate, the issuer must identify the index or formula used in setting the
rate and the margin. Rates that may vary from one cardholder to another
must be disclosed by providing the index and the possible margins (such
as the prime rate plus 5 percent, 8 percent, 10 percent, or 12 percent)
or range of margins (such as the prime rate plus from 5 to 12 percent).
The value of the rate and the value of the index are not required to be
disclosed.
(iii) Optional variable terms addendum. Provisions of the agreement
other than the pricing information that may vary from one cardholder to
another depending on the cardholder's creditworthiness or state of
residence or other factors may be set forth in a single addendum to the
agreement separate from the pricing information addendum.
(iv) Integrated agreement. Issuers may not provide provisions of
the agreement or pricing information in the form of change-in-terms
notices or riders (other than the pricing information addendum and the
optional variable terms addendum). Changes in provisions or pricing
information must be integrated into the text of the agreement, the
pricing information addendum or the optional variable terms addendum,
as appropriate.
(d) Posting of agreements offered to the public. (1) Except as
provided below, a card issuer must post and maintain on its publicly
available Web site the credit card agreements that the issuer is
required to submit to the Bureau under Sec. 1026.58(c). With respect
to an agreement offered solely for accounts under one or more private
label credit card plans, an issuer may fulfill this requirement by
posting and maintaining the agreement in accordance with the
requirements of this section on the publicly available Web site of at
least one of the merchants at which credit cards issued under each
private label credit card plan with 10,000 or more open accounts may be
used.
(2) Except as provided in Sec. 1026.58(d), agreements posted
pursuant to Sec. 1026.58(d) must conform to the form and content
requirements for agreements submitted to the Bureau specified in Sec.
1026.58(c)(8).
(3) Agreements posted pursuant to Sec. 1026.58(d) may be posted in
any electronic format that is readily usable by the general public.
Agreements must be placed in a location that is prominent and readily
accessible by the public and must be accessible without submission of
personally identifiable information.
(4) The card issuer must update the agreements posted on its Web
site pursuant to Sec. 1026.58(d) at least as frequently as the
quarterly schedule required for submission of agreements to the Bureau
under Sec. 1026.58(c). If the issuer chooses to update the agreements
on its Web site more frequently, the agreements posted on the issuer's
Web site may contain the provisions of the agreement and the pricing
information in effect as of a date other than the last business day of
the preceding calendar quarter.
(e) Agreements for all open accounts. (1) Availability of
individual cardholder's agreement. With respect to any open credit card
account, a card issuer must either:
(i) Post and maintain the cardholder's agreement on its Web site;
or
(ii) Promptly provide a copy of the cardholder's agreement to the
cardholder upon the cardholder's request. If the card issuer makes an
agreement available upon request, the issuer must provide the
cardholder with
[[Page 79827]]
the ability to request a copy of the agreement both by using the
issuer's Web site (such as by clicking on a clearly identified box to
make the request) and by calling a readily available telephone line the
number for which is displayed on the issuer's Web site and clearly
identified as to purpose. The card issuer must send to the cardholder
or otherwise make available to the cardholder a copy of the
cardholder's agreement in electronic or paper form no later than 30
days after the issuer receives the cardholder's request.
(2) Special rule for issuers without interactive Web sites. An
issuer that does not maintain a Web site from which cardholders can
access specific information about their individual accounts, instead of
complying with Sec. 1026.58(e)(1), may make agreements available upon
request by providing the cardholder with the ability to request a copy
of the agreement by calling a readily available telephone line, the
number for which is displayed on the issuer's Web site and clearly
identified as to purpose or included on each periodic statement sent to
the cardholder and clearly identified as to purpose. The issuer must
send to the cardholder or otherwise make available to the cardholder a
copy of the cardholder's agreement in electronic or paper form no later
than 30 days after the issuer receives the cardholder's request.
(3) Form and content of agreements. (i) Except as provided in Sec.
1026.58(e), agreements posted on the card issuer's Web site pursuant to
Sec. 1026.58(e)(1)(i) or made available upon the cardholder's request
pursuant to Sec. 1026.58(e)(1)(ii) or (e)(2) must conform to the form
and content requirements for agreements submitted to the Bureau
specified in Sec. 1026.58(c)(8).
(ii) If the card issuer posts an agreement on its Web site or
otherwise provides an agreement to a cardholder electronically under
Sec. 1026.58(e), the agreement may be posted or provided in any
electronic format that is readily usable by the general public and must
be placed in a location that is prominent and readily accessible to the
cardholder.
(iii) Agreements posted or otherwise provided pursuant to Sec.
1026.58(e) may contain personally identifiable information relating to
the cardholder, such as name, address, telephone number, or account
number, provided that the issuer takes appropriate measures to make the
agreement accessible only to the cardholder or other authorized
persons.
(iv) Agreements posted or otherwise provided pursuant to Sec.
1026.58(e) must set forth the specific provisions and pricing
information applicable to the particular cardholder. Provisions and
pricing information must be complete and accurate as of a date no more
than 60 days prior to:
(A) The date on which the agreement is posted on the card issuer's
Web site under Sec. 1026.58(e)(1)(i); or
(B) The date the cardholder's request is received under Sec.
1026.58(e)(1)(ii) or (e)(2).
(v) Agreements provided upon cardholder request pursuant to Sec.
1026.58(e)(1)(ii) or (e)(2) may be provided by the issuer in either
electronic or paper form, regardless of the form of the cardholder's
request.
(f) E-Sign Act requirements. Card issuers may provide credit card
agreements in electronic form under Sec. 1026.58(d) and (e) without
regard to the consumer notice and consent requirements of section
101(c) of the Electronic Signatures in Global and National Commerce Act
(E-Sign Act) (15 U.S.C. 7001 et seq.).
Sec. 1026.59 Reevaluation of rate increases.
(a) General rule.(1) Evaluation of increased rate. If a card issuer
increases an annual percentage rate that applies to a credit card
account under an open-end (not home-secured) consumer credit plan,
based on the credit risk of the consumer, market conditions, or other
factors, or increased such a rate on or after January 1, 2009, and 45
days' advance notice of the rate increase is required pursuant to Sec.
1026.9(c)(2) or (g), the card issuer must:
(i) Evaluate the factors described in paragraph (d) of this
section; and
(ii) Based on its review of such factors, reduce the annual
percentage rate applicable to the consumer's account, as appropriate.
(2) Rate reductions. (i) Timing. If a card issuer is required to
reduce the rate applicable to an account pursuant to paragraph (a)(1)
of this section, the card issuer must reduce the rate not later than 45
days after completion of the evaluation described in paragraph (a)(1).
(ii) Applicability of rate reduction. Any reduction in an annual
percentage rate required pursuant to paragraph (a)(1) of this section
shall apply to:
(A) Any outstanding balances to which the increased rate described
in paragraph (a)(1) of this section has been applied; and
(B) New transactions that occur after the effective date of the
rate reduction that would otherwise have been subject to the increased
rate.
(b) Policies and procedures. A card issuer must have reasonable
written policies and procedures in place to conduct the review
described in paragraph (a) of this section.
(c) Timing. A card issuer that is subject to paragraph (a) of this
section must conduct the review described in paragraph (a)(1) of this
section not less frequently than once every six months after the rate
increase.
(d) Factors. (1) In general. Except as provided in paragraph (d)(2)
of this section, a card issuer must review either:
(i) The factors on which the increase in an annual percentage rate
was originally based; or
(ii) The factors that the card issuer currently considers when
determining the annual percentage rates applicable to similar new
credit card accounts under an open-end (not home-secured) consumer
credit plan.
(2) Rate increases imposed between January 1, 2009 and February 21,
2010. For rate increases imposed between January 1, 2009 and February
21, 2010, an issuer must consider the factors described in paragraph
(d)(1)(ii) when conducting the first two reviews required under
paragraph (a) of this section, unless the rate increase subject to
paragraph (a) of this section was based solely upon factors specific to
the consumer, such as a decline in the consumer's credit risk, the
consumer's delinquency or default, or a violation of the terms of the
account.
(e) Rate increases due to delinquency. If an issuer increases a
rate applicable to a consumer's account pursuant to Sec. 1026.55(b)(4)
based on the card issuer not receiving the consumer's required minimum
periodic payment within 60 days after the due date, the issuer is not
required to perform the review described in paragraph (a) of this
section prior to the sixth payment due date after the effective date of
the increase. However, if the annual percentage rate applicable to the
consumer's account is not reduced pursuant to Sec. 1026.55(b)(4)(ii),
the card issuer must perform the review described in paragraph (a) of
this section. The first such review must occur no later than six months
after the sixth payment due following the effective date of the rate
increase.
(f) Termination of obligation to review factors. The obligation to
review factors described in paragraph (a) and (d) of this section
ceases to apply:
(1) If the issuer reduces the annual percentage rate applicable to
a credit card account under an open-end (not home-secured) consumer
credit plan to the rate applicable immediately prior to the increase,
or, if the rate applicable immediately prior to the increase was a
variable rate, to a variable rate
[[Page 79828]]
determined by the same formula (index and margin) that was used to
calculate the rate applicable immediately prior to the increase; or
(2) If the issuer reduces the annual percentage rate to a rate that
is lower than the rate described in paragraph (f)(1) of this section.
(g) Acquired accounts. (1) General. Except as provided in paragraph
(g)(2) of this section, this section applies to credit card accounts
that have been acquired by the card issuer from another card issuer. A
card issuer that complies with this section by reviewing the factors
described in paragraph (d)(1)(i) must review the factors considered by
the card issuer from which it acquired the accounts in connection with
the rate increase.
(2) Review of acquired portfolio. If, not later than six months
after the acquisition of such accounts, a card issuer reviews all of
the credit card accounts it acquires in accordance with the factors
that it currently considers in determining the rates applicable to its
similar new credit card accounts:
(i) Except as provided in paragraph (g)(2)(iii), the card issuer is
required to conduct reviews described in paragraph (a) of this section
only for rate increases that are imposed as a result of its review
under this paragraph. See Sec. Sec. 1026.9 and 1026.55 for additional
requirements regarding rate increases on acquired accounts.
(ii) Except as provided in paragraph (g)(2)(iii) of this section,
the card issuer is not required to conduct reviews in accordance with
paragraph (a) of this section for any rate increases made prior to the
card issuer's acquisition of such accounts.
(iii) If as a result of the card issuer's review, an account is
subject to, or continues to be subject to, an increased rate as a
penalty, or due to the consumer's delinquency or default, the
requirements of paragraph (a) of this section apply.
(h) Exceptions. (1) Servicemembers Civil Relief Act exception. The
requirements of this section do not apply to increases in an annual
percentage rate that was previously decreased pursuant to 50 U.S.C.
app. 527, provided that such a rate increase is made in accordance with
Sec. 1026.55(b)(6).
(2) Charged off accounts. The requirements of this section do not
apply to accounts that the card issuer has charged off in accordance
with loan-loss provisions.
Sec. 1026.60 Credit and charge card applications and solicitations.
(a) General rules. The card issuer shall provide the disclosures
required under this section on or with a solicitation or an application
to open a credit or charge card account.
(1) Definition of solicitation. For purposes of this section, the
term solicitation means an offer by the card issuer to open a credit or
charge card account that does not require the consumer to complete an
application. A ``firm offer of credit'' as defined in section 603(l) of
the Fair Credit Reporting Act (15 U.S.C. 1681a(l)) for a credit or
charge card is a solicitation for purposes of this section.
(2) Form of disclosures; tabular format. (i) The disclosures in
paragraphs (b)(1) through (5) (except for (b)(1)(iv)(B)) and (b)(7)
through (15) of this section made pursuant to paragraph (c), (d)(2),
(e)(1) or (f) of this section generally shall be in the form of a table
with headings, content, and format substantially similar to any of the
applicable tables found in G-10 in Appendix G to this part.
(ii) The table described in paragraph (a)(2)(i) of this section
shall contain only the information required or permitted by this
section. Other information may be presented on or with an application
or solicitation, provided such information appears outside the required
table.
(iii) Disclosures required by paragraphs (b)(1)(iv)(B),
(b)(1)(iv)(C) and (b)(6) of this section must be placed directly
beneath the table.
(iv) When a tabular format is required, any annual percentage rate
required to be disclosed pursuant to paragraph (b)(1) of this section,
any introductory rate required to be disclosed pursuant to paragraph
(b)(1)(ii) of this section, any rate that will apply after a premium
initial rate expires required to be disclosed under paragraph
(b)(1)(iii) of this section, and any fee or percentage amounts or
maximum limits on fee amounts disclosed pursuant to paragraphs (b)(2),
(b)(4), (b)(8) through (b)(13) of this section must be disclosed in
bold text. However, bold text shall not be used for: The amount of any
periodic fee disclosed pursuant to paragraph (b)(2) of this section
that is not an annualized amount; and other annual percentage rates or
fee amounts disclosed in the table.
(v) For an application or a solicitation that is accessed by the
consumer in electronic form, the disclosures required under this
section may be provided to the consumer in electronic form on or with
the application or solicitation.
(vi)(A) Except as provided in paragraph (a)(2)(vi)(B) of this
section, the table described in paragraph (a)(2)(i) of this section
must be provided in a prominent location on or with an application or a
solicitation.
(B) If the table described in paragraph (a)(2)(i) of this section
is provided electronically, it must be provided in close proximity to
the application or solicitation.
(3) Fees based on a percentage. If the amount of any fee required
to be disclosed under this section is determined on the basis of a
percentage of another amount, the percentage used and the
identification of the amount against which the percentage is applied
may be disclosed instead of the amount of the fee.
(4) Fees that vary by state. Card issuers that impose fees referred
to in paragraphs (b)(8) through (12) of this section that vary by state
may, at the issuer's option, disclose in the table required by
paragraph (a)(2)(i) of this section: The specific fee applicable to the
consumer's account; or the range of the fees, if the disclosure
includes a statement that the amount of the fee varies by state and
refers the consumer to a disclosure provided with the table where the
amount of the fee applicable to the consumer's account is disclosed. A
card issuer may not list fees for multiple states in the table.
(5) Exceptions. This section does not apply to:
(i) Home-equity plans accessible by a credit or charge card that
are subject to the requirements of Sec. 1026.40;
(ii) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(iii) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines;
(iv) Lines of credit accessed solely by account numbers;
(v) Additions of a credit or charge card to an existing open-end
plan;
(vi) General purpose applications unless the application, or
material accompanying it, indicates that it can be used to open a
credit or charge card account; or
(vii) Consumer-initiated requests for applications.
(b) Required disclosures. The card issuer shall disclose the items
in this paragraph on or with an application or a solicitation in
accordance with the requirements of paragraphs (c), (d), (e)(1) or (f)
of this section. A credit card issuer shall disclose all applicable
items in this paragraph except for paragraph (b)(7) of this section. A
charge card issuer shall disclose the applicable
[[Page 79829]]
items in paragraphs (b)(2), (4), (7) through (12), and (15) of this
section.
(1) Annual percentage rate. Each periodic rate that may be used to
compute the finance charge on an outstanding balance for purchases, a
cash advance, or a balance transfer, expressed as an annual percentage
rate (as determined by Sec. 1026.14(b)). When more than one rate
applies for a category of transactions, the range of balances to which
each rate is applicable shall also be disclosed. The annual percentage
rate for purchases disclosed pursuant to this paragraph shall be in at
least 16-point type, except for the following: Oral disclosures of the
annual percentage rate for purchases; or a penalty rate that may apply
upon the occurrence of one or more specific events.
(i) Variable rate information. If a rate disclosed under paragraph
(b)(1) of this section is a variable rate, the card issuer shall also
disclose the fact that the rate may vary and how the rate is
determined. In describing how the applicable rate will be determined,
the card issuer must identify the type of index or formula that is used
in setting the rate. The value of the index and the amount of the
margin that are used to calculate the variable rate shall not be
disclosed in the table. A disclosure of any applicable limitations on
rate increases shall not be included in the table.
(ii) Discounted initial rate. If the initial rate is an
introductory rate, as that term is defined in Sec. 1026.16(g)(2)(ii),
the card issuer must disclose in the table the introductory rate, the
time period during which the introductory rate will remain in effect,
and must use the term ``introductory'' or ``intro'' in immediate
proximity to the introductory rate. The card issuer also must disclose
the rate that would otherwise apply to the account pursuant to
paragraph (b)(1) of this section. Where the rate is not tied to an
index or formula, the card issuer must disclose the rate that will
apply after the introductory rate expires. In a variable-rate account,
the card issuer must disclose a rate based on the applicable index or
formula in accordance with the accuracy requirements set forth in
paragraphs (c)(2), (d)(3), or (e)(4) of this section, as applicable.
(iii) Premium initial rate. If the initial rate is temporary and is
higher than the rate that will apply after the temporary rate expires,
the card issuer must disclose the premium initial rate pursuant to
paragraph (b)(1) of this section and the time period during which the
premium initial rate will remain in effect. Consistent with paragraph
(b)(1) of this section, the premium initial rate for purchases must be
in at least 16-point type. The issuer must also disclose in the table
the rate that will apply after the premium initial rate expires, in at
least 16-point type.
(iv) Penalty rates. (A) In general. Except as provided in paragraph
(b)(1)(iv)(B) and (C) of this section, if a rate may increase as a
penalty for one or more events specified in the account agreement, such
as a late payment or an extension of credit that exceeds the credit
limit, the card issuer must disclose pursuant to this paragraph (b)(1)
the increased rate that may apply, a brief description of the event or
events that may result in the increased rate, and a brief description
of how long the increased rate will remain in effect.
(B) Introductory rates. If the issuer discloses an introductory
rate, as that term is defined in Sec. 1026.16(g)(2)(ii), in the table
or in any written or electronic promotional materials accompanying
applications or solicitations subject to paragraph (c) or (e) of this
section, the issuer must briefly disclose directly beneath the table
the circumstances, if any, under which the introductory rate may be
revoked, and the type of rate that will apply after the introductory
rate is revoked.
(C) Employee preferential rates. If a card issuer discloses in the
table a preferential annual percentage rate for which only employees of
the card issuer, employees of a third party, or other individuals with
similar affiliations with the card issuer or third party, such as
executive officers, directors, or principal shareholders are eligible,
the card issuer must briefly disclose directly beneath the table the
circumstances under which such preferential rate may be revoked, and
the rate that will apply after such preferential rate is revoked.
(v) Rates that depend on consumer's creditworthiness. If a rate
cannot be determined at the time disclosures are given because the rate
depends, at least in part, on a later determination of the consumer's
creditworthiness, the card issuer must disclose the specific rates or
the range of rates that could apply and a statement that the rate for
which the consumer may qualify at account opening will depend on the
consumer's creditworthiness, and other factors if applicable. If the
rate that depends, at least in part, on a later determination of the
consumer's creditworthiness is a penalty rate, as described in
paragraph (b)(1)(iv) of this section, the card issuer at its option may
disclose the highest rate that could apply, instead of disclosing the
specific rates or the range of rates that could apply.
(vi) APRs that vary by state. Issuers imposing annual percentage
rates that vary by state may, at the issuer's option, disclose in the
table: the specific annual percentage rate applicable to the consumer's
account; or the range of the annual percentage rates, if the disclosure
includes a statement that the annual percentage rate varies by state
and refers the consumer to a disclosure provided with the table where
the annual percentage rate applicable to the consumer's account is
disclosed. A card issuer may not list annual percentage rates for
multiple states in the table.
(2) Fees for issuance or availability. (i) Any annual or other
periodic fee that may be imposed for the issuance or availability of a
credit or charge card, including any fee based on account activity or
inactivity; how frequently it will be imposed; and the annualized
amount of the fee.
(ii) Any non-periodic fee that relates to opening an account. A
card issuer must disclose that the fee is a one-time fee.
(3) Fixed finance charge; minimum interest charge. Any fixed
finance charge and a brief description of the charge. Any minimum
interest charge if it exceeds $1.00 that could be imposed during a
billing cycle, and a brief description of the charge. The $1.00
threshold amount shall be adjusted periodically by the Bureau to
reflect changes in the Consumer Price Index. The Bureau shall calculate
each year a price level adjusted minimum interest charge using the
Consumer Price Index in effect on June 1 of that year. When the
cumulative change in the adjusted minimum value derived from applying
the annual Consumer Price level to the current minimum interest charge
threshold has risen by a whole dollar, the minimum interest charge will
be increased by $1.00. The issuer may, at its option, disclose in the
table minimum interest charges below this threshold.
(4) Transaction charges. Any transaction charge imposed by the card
issuer for the use of the card for purchases.
(5) Grace period. The date by which or the period within which any
credit extended for purchases may be repaid without incurring a finance
charge due to a periodic interest rate and any conditions on the
availability of the grace period. If no grace period is provided, that
fact must be disclosed. If the length of the grace period varies, the
card issuer may disclose the range of days, the minimum number of days,
or the average number of days in the grace period, if the disclosure is
identified as a range, minimum, or average. In
[[Page 79830]]
disclosing in the tabular format a grace period that applies to all
types of purchases, the phrase ``How to Avoid Paying Interest on
Purchases'' shall be used as the heading for the row describing the
grace period. If a grace period is not offered on all types of
purchases, in disclosing this fact in the tabular format, the phrase
``Paying Interest'' shall be used as the heading for the row describing
this fact.
(6) Balance computation method. The name of the balance computation
method listed in paragraph (g) of this section that is used to
determine the balance for purchases on which the finance charge is
computed, or an explanation of the method used if it is not listed. In
determining which balance computation method to disclose, the card
issuer shall assume that credit extended for purchases will not be
repaid within the grace period, if any.
(7) Statement on charge card payments. A statement that charges
incurred by use of the charge card are due when the periodic statement
is received.
(8) Cash advance fee. Any fee imposed for an extension of credit in
the form of cash or its equivalent.
(9) Late payment fee. Any fee imposed for a late payment.
(10) Over-the-limit fee. Any fee imposed for exceeding a credit
limit.
(11) Balance transfer fee. Any fee imposed to transfer an
outstanding balance.
(12) Returned-payment fee. Any fee imposed by the card issuer for a
returned payment.
(13) Required insurance, debt cancellation or debt suspension
coverage. (i) A fee for insurance described in Sec. 1026.4(b)(7) or
debt cancellation or suspension coverage described in Sec.
1026.4(b)(10), if the insurance or debt cancellation or suspension
coverage is required as part of the plan; and
(ii) A cross reference to any additional information provided about
the insurance or coverage accompanying the application or solicitation,
as applicable.
(14) Available credit. If a card issuer requires fees for the
issuance or availability of credit described in paragraph (b)(2) of
this section, or requires a security deposit for such credit, and the
total amount of those required fees and/or security deposit that will
be imposed and charged to the account when the account is opened is 15
percent or more of the minimum credit limit for the card, a card issuer
must disclose the available credit remaining after these fees or
security deposit are debited to the account, assuming that the consumer
receives the minimum credit limit. In determining whether the 15
percent threshold test is met, the issuer must only consider fees for
issuance or availability of credit, or a security deposit, that are
required. If fees for issuance or availability are optional, these fees
should not be considered in determining whether the disclosure must be
given. Nonetheless, if the 15 percent threshold test is met, the issuer
in providing the disclosure must disclose the amount of available
credit calculated by excluding those optional fees, and the available
credit including those optional fees. This paragraph does not apply
with respect to fees or security deposits that are not debited to the
account.
(15) Web site reference. A reference to the Web site established by
the Bureau and a statement that consumers may obtain on the Web site
information about shopping for and using credit cards. Until January 1,
2013, issuers may substitute for this reference a reference to the Web
site established by the Board of Governors of the Federal Reserve
System.
(c) Direct mail and electronic applications and solicitations. (1)
General. The card issuer shall disclose the applicable items in
paragraph (b) of this section on or with an application or solicitation
that is mailed to consumers or provided to consumers in electronic
form.
(2) Accuracy. (i) Disclosures in direct mail applications and
solicitations must be accurate as of the time the disclosures are
mailed. An accurate variable annual percentage rate is one in effect
within 60 days before mailing.
(ii) Disclosures provided in electronic form must be accurate as of
the time they are sent, in the case of disclosures sent to a consumer's
email address, or as of the time they are viewed by the public, in the
case of disclosures made available at a location such as a card
issuer's Web site. An accurate variable annual percentage rate provided
in electronic form is one in effect within 30 days before it is sent to
a consumer's email address, or viewed by the public, as applicable.
(d) Telephone applications and solicitations. (1) Oral disclosure.
The card issuer shall disclose orally the information in paragraphs
(b)(1) through (7) and (b)(14) of this section, to the extent
applicable, in a telephone application or solicitation initiated by the
card issuer.
(2) Alternative disclosure. The oral disclosure under paragraph
(d)(1) of this section need not be given if the card issuer either:
(i)(A) Does not impose a fee described in paragraph (b)(2) of this
section; or
(B) Imposes such a fee but provides the consumer with a right to
reject the plan consistent with Sec. 1026.5(b)(1)(iv); and
(ii) The card issuer discloses in writing within 30 days after the
consumer requests the card (but in no event later than the delivery of
the card) the following:
(A) The applicable information in paragraph (b) of this section;
and
(B) As applicable, the fact that the consumer has the right to
reject the plan and not be obligated to pay fees described in paragraph
(b)(2) or any other fees or charges until the consumer has used the
account or made a payment on the account after receiving a billing
statement.
(3) Accuracy. (i) The oral disclosures under paragraph (d)(1) of
this section must be accurate as of the time they are given.
(ii) The alternative disclosures under paragraph (d)(2) of this
section generally must be accurate as of the time they are mailed or
delivered. A variable annual percentage rate is one that is accurate if
it was:
(A) In effect at the time the disclosures are mailed or delivered;
or
(B) In effect as of a specified date (which rate is then updated
from time to time, but no less frequently than each calendar month).
(e) Applications and solicitations made available to general
public. The card issuer shall provide disclosures, to the extent
applicable, on or with an application or solicitation that is made
available to the general public, including one contained in a catalog,
magazine, or other generally available publication. The disclosures
shall be provided in accordance with paragraph (e)(1) or (e)(2) of this
section.
(1) Disclosure of required credit information. The card issuer may
disclose in a prominent location on the application or solicitation the
following:
(i) The applicable information in paragraph (b) of this section;
(ii) The date the required information was printed, including a
statement that the required information was accurate as of that date
and is subject to change after that date; and
(iii) A statement that the consumer should contact the card issuer
for any change in the required information since it was printed, and a
toll-free telephone number or a mailing address for that purpose.
(2) No disclosure of credit information. If none of the items in
paragraph (b) of this section is provided on or with the application or
[[Page 79831]]
solicitation, the card issuer may state in a prominent location on the
application or solicitation the following:
(i) There are costs associated with the use of the card; and
(ii) The consumer may contact the card issuer to request specific
information about the costs, along with a toll-free telephone number
and a mailing address for that purpose.
(3) Prompt response to requests for information. Upon receiving a
request for any of the information referred to in this paragraph, the
card issuer shall promptly and fully disclose the information
requested.
(4) Accuracy. The disclosures given pursuant to paragraph (e)(1) of
this section must be accurate as of the date of printing. A variable
annual percentage rate is accurate if it was in effect within 30 days
before printing.
(f) In-person applications and solicitations. A card issuer shall
disclose the information in paragraph (b) of this section, to the
extent applicable, on or with an application or solicitation that is
initiated by the card issuer and given to the consumer in person. A
card issuer complies with the requirements of this paragraph if the
issuer provides disclosures in accordance with paragraph (c)(1) or
(e)(1) of this section.
(g) Balance computation methods defined. The following methods may
be described by name. Methods that differ due to variations such as the
allocation of payments, whether the finance charge begins to accrue on
the transaction date or the date of posting the transaction, the
existence or length of a grace period, and whether the balance is
adjusted by charges such as late payment fees, annual fees and unpaid
finance charges do not constitute separate balance computation methods.
(1)(i) Average daily balance (including new purchases). This
balance is figured by adding the outstanding balance (including new
purchases and deducting payments and credits) for each day in the
billing cycle, and then dividing by the number of days in the billing
cycle.
(ii) Average daily balance (excluding new purchases). This balance
is figured by adding the outstanding balance (excluding new purchases
and deducting payments and credits) for each day in the billing cycle,
and then dividing by the number of days in the billing cycle.
(2) Adjusted balance. This balance is figured by deducting payments
and credits made during the billing cycle from the outstanding balance
at the beginning of the billing cycle.
(3) Previous balance. This balance is the outstanding balance at
the beginning of the billing cycle.
(4) Daily balance. For each day in the billing cycle, this balance
is figured by taking the beginning balance each day, adding any new
purchases, and subtracting any payment and credits.
Appendix A to Part 1026--Effect on State Laws
Request for Determination
A request for a determination that a state law is inconsistent
or that a state law is substantially the same as the Act and
regulation shall be in writing and addressed to the Executive
Secretary, Bureau of Consumer Financial Protection, 1700 G Street
NW., Washington, DC 20006. The request shall be made pursuant to the
procedures herein.
Supporting Documents
A request for a determination shall include the following items:
(1) The text of the state statute, regulation, or other document
that is the subject of the request.
(2) Any other statute, regulation, or judicial or administrative
opinion that implements, interprets, or applies the relevant
provision.
(3) A comparison of the state law with the corresponding
provision of the Federal law, including a full discussion of the
basis for the requesting party's belief that the state provision is
either inconsistent or substantially the same.
(4) Any other information that the requesting party believes may
assist the Bureau in its determination.
Public Notice of Determination
Notice that the Bureau intends to make a determination (either
on request or on its own motion) will be published in the Federal
Register, with an opportunity for public comment, unless the Bureau
finds that notice and opportunity for comment would be
impracticable, unnecessary, or contrary to the public interest and
publishes its reasons for such decision.
Subject to the Bureau's rules on Disclosure of Records and
Information (12 CFR Part 1070), all requests made, including any
documents and other material submitted in support of the requests,
will be made available for public inspection and copying.
Notice After Determination
Notice of a final determination will be published in the Federal
Register, and the Bureau will furnish a copy of such notice to the
party who made the request and to the appropriate state official.
Reversal of Determination
The Bureau reserves the right to reverse a determination for any
reason bearing on the coverage or effect of state or Federal law.
Notice of reversal of a determination will be published in the
Federal Register and a copy furnished to the appropriate state
official.
Appendix B to Part 1026--State Exemptions
Application
Any state may apply to the Bureau for a determination that a
class of transactions subject to state law is exempt from the
requirements of the Act and this part. An application shall be in
writing and addressed to the Executive Secretary, Bureau of Consumer
Financial Protection, 1700 G Street, NW., Washington, DC 20006, and
shall be signed by the appropriate state official. The application
shall be made pursuant to the procedures herein.
Supporting Documents
An application shall be accompanied by:
(1) The text of the state statute or regulation that is the
subject of the application, and any other statute, regulation, or
judicial or administrative opinion that implements, interprets, or
applies it.
(2) A comparison of the state law with the corresponding
provisions of the Federal law.
(3) The text of the state statute or regulation that provides
for civil and criminal liability and administrative enforcement of
the state law.
(4) A statement of the provisions for enforcement, including an
identification of the state office that administers the relevant
law, information on the funding and the number and qualifications of
personnel engaged in enforcement, and a description of the
enforcement procedures to be followed, including information on
examination procedures, practices, and policies. If an exemption
application extends to federally chartered institutions, the
applicant must furnish evidence that arrangements have been made
with the appropriate Federal agencies to ensure adequate enforcement
of state law in regard to such creditors.
(5) A statement of reasons to support the applicant's claim that
an exemption should be granted.
Public Notice of Application
Notice of an application will be published, with an opportunity
for public comment, in the Federal Register, unless the Bureau finds
that notice and opportunity for comment would be impracticable,
unnecessary, or contrary to the public interest and publishes its
reasons for such decision.
Subject to the Bureau's rules on Disclosure of Records and
Information (12 CFR Part 1070), all applications made, including any
documents and other material submitted in support of the
applications, will be made available for public inspection and
copying.
Favorable Determination
If the Bureau determines on the basis of the information before
it that an exemption should be granted, notice of the exemption will
be published in the Federal Register, and a copy furnished to the
applicant and to each Federal official responsible for
administrative enforcement.
The appropriate state official shall inform the Bureau within 30
days of any change in its relevant law or regulations. The official
shall file with the Bureau such periodic reports as the Bureau may
require.
[[Page 79832]]
The Bureau will inform the appropriate state official of any
subsequent amendments to the Federal law, regulation,
interpretations, or enforcement policies that might require an
amendment to state law, regulation, interpretations, or enforcement
procedures.
Adverse Determination
If the Bureau makes an initial determination that an exemption
should not be granted, the Bureau will afford the applicant a
reasonable opportunity to demonstrate further that an exemption is
proper. If the Bureau ultimately finds that an exemption should not
be granted, notice of an adverse determination will be published in
the Federal Register and a copy furnished to the applicant.
Revocation of Exemption
The Bureau reserves the right to revoke an exemption if at any
time it determines that the standards required for an exemption are
not met.
Before taking such action, the Bureau will notify the
appropriate state official of its intent, and will afford the
official such opportunity as it deems appropriate in the
circumstances to demonstrate that revocation is improper. If the
Bureau ultimately finds that revocation is proper, notice of the
Bureau's intention to revoke such exemption will be published in the
Federal Register with a reasonable period of time for interested
persons to comment.
Notice of revocation of an exemption will be published in the
Federal Register. A copy of such notice will be furnished to the
appropriate state official and to the Federal officials responsible
for enforcement. Upon revocation of an exemption, creditors in that
state shall then be subject to the requirements of the Federal law.
Appendix C to Part 1026--Issuance of Official Interpretations
Official Interpretations
Interpretations of this part issued by officials of the Bureau
provide the protection afforded under section 130(f) of the Act.
Except in unusual circumstances, such interpretations will not be
issued separately but will be incorporated in an official commentary
to the regulation which will be amended periodically.
Requests for Issuance of Official Interpretations
A request for an official interpretation shall be in writing and
addressed to the Assistant Director, Office of Regulations, Division
of Research, Markets, and Regulations, Bureau of Consumer Financial
Protection, 1700 G Street, NW., Washington, DC 20006. The request
shall contain a complete statement of all relevant facts concerning
the issue, including copies of all pertinent documents.
Scope of Interpretations
No interpretations will be issued approving creditors' forms,
statements, or calculation tools or methods. This restriction does
not apply to forms, statements, tools, or methods whose use is
required or sanctioned by a government agency.
Appendix D to Part 1026--Multiple Advance Construction Loans
Section 1026.17(c)(6) permits creditors to treat multiple
advance loans to finance construction of a dwelling that may be
permanently financed by the same creditor either as a single
transaction or as more than one transaction. If the actual schedule
of advances is not known, the following methods may be used to
estimate the interest portion of the finance charge and the annual
percentage rate and to make disclosures. If the creditor chooses to
disclose the construction phase separately, whether interest is
payable periodically or at the end of construction, part I may be
used. If the creditor chooses to disclose the construction and the
permanent financing as one transaction, part II may be used.
Part I--Construction Period Disclosed Separately
A. If interest is payable only on the amount actually advanced
for the time it is outstanding:
1. Estimated interest--Assume that one-half of the commitment
amount is outstanding at the contract interest rate for the entire
construction period.
2. Estimated annual percentage rate--Assume a single payment
loan that matures at the end of the construction period. The finance
charge is the sum of the estimated interest and any prepaid finance
charge. The amount financed for computation purposes is determined
by subtracting any prepaid finance charge from one-half of the
commitment amount.
3. Repayment schedule--The number and amounts of any interest
payments may be omitted in disclosing the payment schedule under
Sec. 1026.18(g). The fact that interest payments are required and
the timing of such payments shall be disclosed.
4. Amount financed--The amount financed for disclosure purposes
is the entire commitment amount less any prepaid finance charge.
B. If interest is payable on the entire commitment amount
without regard to the dates or amounts of actual disbursement:
1. Estimated interest--Assume that the entire commitment amount
is outstanding at the contract interest rate for the entire
construction period.
2. Estimated annual percentage rate--Assume a single payment
loan that matures at the end of the construction period. The finance
charge is the sum of the estimated interest and any prepaid finance
charge. The amount financed for computation purposes is determined
by subtracting any prepaid finance charge from one-half of the
commitment amount.
3. Repayment schedule--Interest payments shall be disclosed in
making the repayment schedule disclosure under Sec. 1026.18(g).
4. Amount financed--The amount financed for disclosure purposes
is the entire commitment amount less any prepaid finance charge.
[[Page 79833]]
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Part II--Construction and Permanent Financing Disclosed as One
Transaction
A. The creditor shall estimate the interest payable during the
construction period to be included in the total finance charge as
follows:
1. If interest is payable only on the amount actually advanced
for the time it is outstanding, assume that one-half of the
commitment amount is outstanding at the contract interest rate for
the entire construction period.
2. If interest is payable on the entire commitment amount
without regard to the dates or amounts of actual disbursements,
assume that the entire commitment amount is outstanding at the
contract rate for the entire construction period.
B. The creditor shall compute the estimated annual percentage
rate as follows:
1. Estimated interest payable during the construction period
shall be treated for computation purposes as a prepaid finance
charge (although it shall not be treated as a prepaid finance charge
for disclosure purposes).
2. The number of payment shall not include any payments of
interest only that are made during the construction period.
3. The first payment period shall consist of one-half of the
construction period plus the period between the end of the
construction period and the amortization payment.
C. The creditor shall disclose the repayment schedule as
follows:
1. For loans under paragraph A.1. of Part II, without reflecting
the number or amounts of payments of interest only that are made
during the construction period. The fact that interest payments must
be made and the timing of such payments shall be disclosed.
2. For loans under paragraph A.2. of Part II, including any
payments of interest only that are made during the construction
period.
D. The creditor shall disclose the amount financed as the entire
commitment amount less any prepaid finance charge.
BILLING CODE 4810-AM-P
[[Page 79834]]
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[GRAPHIC] [TIFF OMITTED] TR22DE11.002
BILLING CODE 4810-AM-C
[[Page 79835]]
Appendix E to Part 1026--Rules for Card Issuers That Bill on a
Transaction-by-Transaction Basis
The following provisions of Subpart B apply if credit cards are
issued and the card issuer and the seller are the same or related
persons; no finance charge is imposed; consumers are billed in full
for each use of the card on a transaction-by-transaction basis, by
means of an invoice or other statement reflecting each use of the
card; and no cumulative account is maintained which reflects the
transactions by each consumer during a period of time, such as a
month. The term ``related person'' refers to, for example, a
franchised or licensed seller of a creditor's product or service or
a seller who assigns or sells sales accounts to a creditor or
arranges for credit under a plan that allows the consumer to use the
credit only in transactions with that seller. A seller is not
related to the creditor merely because the seller and the creditor
have an agreement authorizing the seller to honor the creditor's
credit card.
1. Section 1026.6(a)(5) or Sec. 1026.6(b)(5)(iii).
2. Section 1026.6(a)(2) or Sec. 1026.6(b)(3)(ii)(B), as
applicable. The disclosure required by Sec. 1026.6(a)(2) or Sec.
1026.6(b)(3)(ii)(B) shall be limited to those charges that are or
may be imposed as a result of the deferral of payment by use of the
card, such as late payment or delinquency charges. A tabular format
is not required.
3. Section 1026.6(a)(4) or Sec. 1026.6(b)(5)(ii).
4. Section 1026.7(a)(2) or Sec. 1026.7(b)(2), as applicable;
Sec. 1026.7(a)(9) or Sec. 1026.7(b)(9), as applicable. Creditors
may comply by placing the required disclosures on the invoice or
statement sent to the consumer for each transaction.
5. Section 1026.9(a). Creditors may comply by mailing or
delivering the statement required by Sec. 1026.6(a)(5) or Sec.
1026.6(b)(5)(iii) (see Appendix G-3 and G-3(A) to this part) to each
consumer receiving a transaction invoice during a one-month period
chosen by the card issuer or by sending either the statement
prescribed by Sec. 1026.6(a)(5) or Sec. 1026.6(b)(5)(iii), or an
alternative billing error rights statement substantially similar to
that in Appendix G-4 and G-4(A) to this part, with each invoice sent
to a consumer.
6. Section 1026.9(c). A tabular format is not required.
7. Section 1026.10.
8. Section 1026.11(a). This section applies when a card issuer
receives a payment or other credit that exceeds by more than $1 the
amount due, as shown on the transaction invoice. The requirement to
credit amounts to an account may be complied with by other
reasonable means, such as by a credit memorandum. Since no periodic
statement is provided, a notice of the credit balance shall be sent
to the consumer within a reasonable period of time following its
occurrence unless a refund of the credit balance is mailed or
delivered to the consumer within seven business days of its receipt
by the card issuer.
9. Section 1026.12 including Sec. 1026.12(c) and (d), as
applicable. Section 1026.12(e) is inapplicable.
10. Section 1026.13, as applicable. All references to ``periodic
statement'' shall be read to indicate the invoice or other statement
for the relevant transaction. All actions with regard to correcting
and adjusting a consumer's account may be taken by issuing a refund
or a new invoice, or by other appropriate means consistent with the
purposes of the section.
11. Section 1026.15, as applicable.
Appendix F to Part 1026--Optional Annual Percentage Rate Computations
for Creditors Offering Open-End Credit Plans Secured by a Consumer's
Dwelling
In determining the denominator of the fraction under Sec.
1026.14(c)(3), no amount will be used more than once when adding the
sum of the balances subject to periodic rates to the sum of the
amounts subject to specific transaction charges. (Where a portion of
the finance charge is determined by application of one or more daily
periodic rates, the phrase ``sum of the balances'' shall also mean
the ``average of daily balances.'') In every case, the full amount
of transactions subject to specific transaction charges shall be
included in the denominator. Other balances or parts of balances
shall be included according to the manner of determining the balance
subject to a periodic rate, as illustrated in the following examples
of accounts on monthly billing cycles:
1. Previous balance--none.
A specific transaction of $100 occurs on the first day of the
billing cycle. The average daily balance is $100. A specific
transaction charge of 3% is applicable to the specific transaction.
The periodic rate is 1[frac12]% applicable to the average daily
balance. The numerator is the amount of the finance charge, which is
$4.50. The denominator is the amount of the transaction (which is
$100), plus the amount by which the balance subject to the periodic
rate exceeds the amount of the specific transactions (such excess in
this case is 0), totaling $100.
The annual percentage rate is the quotient (which is 4[frac12]%)
multiplied by 12 (the number of months in a year), i.e., 54%.
2. Previous balance--$100.
A specific transaction of $100 occurs at the midpoint of the
billing cycle. The average daily balance is $150. A specific
transaction charge of 3% is applicable to the specific transaction.
The periodic rate is 1[frac12]% applicable to the average daily
balance. The numerator is the amount of the finance charge which is
$5.25. The denominator is the amount of the transaction (which is
$100), plus the amount by which the balance subject to the periodic
rate exceeds the amount of the specific transaction (such excess in
this case is $50), totaling $150. As explained in example 1, the
annual percentage rate is 3[frac12]% x 12 = 42%.
3. If, in example 2, the periodic rate applies only to the
previous balance, the numerator is $4.50 and the denominator is $200
(the amount of the transaction, $100, plus the balance subject only
to the periodic rate, the $100 previous balance). As explained in
example 1, the annual percentage rate is 2[frac14]% x 12 = 27%.
4. If, in example 2, the periodic rate applies only to an
adjusted balance (previous balance less payments and credits) and
the consumer made a payment of $50 at the midpoint of the billing
cycle, the numerator is $3.75 and the denominator is $150 (the
amount of the transaction, $100, plus the balance subject to the
periodic rate, the $50 adjusted balance). As explained in example 1,
the annual percentage rate is 2[frac12]% x 12 = 30%.
5. Previous balance--$100.
A specific transaction (check) of $100 occurs at the midpoint of
the billing cycle. The average daily balance is $150. The specific
transaction charge is $.25 per check. The periodic rate is
1[frac12]% applied to the average daily balance. The numerator is
the amount of the finance charge, which is $2.50 and includes the
$.25 check charge and the $2.25 resulting from the application of
the periodic rate. The denominator is the full amount of the
specific transaction (which is $100) plus the amount by which the
average daily balance exceeds the amount of the specific transaction
(which in this case is $50), totaling $150. As explained in example
1, the annual percentage rate would be 1-2/3% x 12 = 20%.
6. Previous balance--none.
A specific transaction of $100 occurs at the midpoint of the
billing cycle. The average daily balance is $50. The specific
transaction charge is 3% of the transaction amount or $3.00. The
periodic rate is 1[frac12]% per month applied to the average daily
balance. The numerator is the amount of the finance charge, which is
$3.75, including the $3.00 transaction charge and $.75 resulting
from application of the periodic rate. The denominator is the full
amount of the specific transaction ($100) plus the amount by which
the balance subject to the periodic rate exceeds the amount of the
transaction ($0). Where the specific transaction amount exceeds the
balance subject to the periodic rate, the resulting number is
considered to be zero rather than a negative number ($50 - $100 = -
$50). The denominator, in this case, is $100. As explained in
example 1, the annual percentage rate is 3[frac34]% x 12 = 45%.
Appendix G to Part 1026--Open-End Model Forms and Clauses
G-1 Balance Computation Methods Model Clauses (Home-equity Plans)
(Sec. Sec. 1026.6 and 1026.7)
G-1(A) Balance Computation Methods Model Clauses (Plans other than
Home-equity Plans) (Sec. Sec. 1026.6 and 1026.7)
G-2 Liability for Unauthorized Use Model Clause (Home-equity Plans)
(Sec. 1026.12)
G-2(A) Liability for Unauthorized Use Model Clause (Plans Other Than
Home-equity Plans) (Sec. 1026.12)
G-3 Long-Form Billing-Error Rights Model Form (Home-equity Plans)
(Sec. Sec. 1026.6 and 1026.9)
G-3(A Long-Form Billing-Error Rights Model Form (Plans Other Than
Home-equity Plans) (Sec. Sec. 1026.6 and 1026.9)
G-4 Alternative Billing-Error Rights Model Form (Home-equity Plans)
(Sec. 1026.9)
G-4(A Alternative Billing-Error Rights Model Form (Plans Other Than
Home-equity Plans) (Sec. 1026.9)
G-5 Rescission Model Form (When Opening an Account) (Sec. 1026.15)
[[Page 79836]]
G-6 Rescission Model Form (For Each Transaction) (Sec. 1026.15)
G-7 Rescission Model Form (When Increasing the Credit Limit) (Sec.
1026.15)
G-8 Rescission Model Form (When Adding a Security Interest) (Sec.
1026.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec.
1026.15)
G-10(A) Applications and Solicitations Model Form (Credit Cards)
(Sec. 1026.60(b))
G-10(B) Applications and Solicitations Sample (Credit Cards) (Sec.
1026.60(b))
G-10(C) Applications and Solicitations Sample (Credit Cards)
(Sec. 1026.60(b))
G-10(D) Applications and Solicitations Model Form (Charge Cards)
(Sec. 1026.60(b))
G-10(E) Applications and Solicitations Sample (Charge Cards) (Sec.
1026.60(b))
G-11 Applications and Solicitations Made Available to General Public
Model Clauses (Sec. 1026.60(e))
G-12 Reserved
G-13(A) Change in Insurance Provider Model Form (Combined Notice)
(Sec. 1026.9(f))
G-13(B) Change in Insurance Provider Model Form (Sec. 1026.9(f)(2))
G-14A Home-equity Sample
G-14B Home-equity Sample
G-1 Home-equity Model Clauses
G-16(A) Debt Suspension Model Clause (Sec. 1026.4(d)(3))
G-16(B) Debt Suspension Sample (Sec. 1026.4(d)(3))
G-17(A) Account-opening Model Form (Sec. 1026.6(b)(2))
G-17(B) Account-opening Sample (Sec. 1026.6(b)(2))
G-17(C) Account-opening Sample (Sec. 1026.6(b)(2))
G-17(D) Account-opening Sample (Sec. 1026.6(b)(2))
G-18(A) Transactions; Interest Charges; Fees Sample (Sec.
1026.7(b))
G-18(B) Late Payment Fee Sample (Sec. 1026.7(b))
G-18(C)(1) Minimum Payment Warning (When Amortization Occurs and the
36-Month Disclosures Are Required) (Sec. 1026.7(b))
G-18(C)(2) Minimum Payment Warning (When Amortization Occurs and the
36-Month Disclosures Are Not Required) (Sec. 1026.7(b))
G-18(C)(3) Minimum Payment Warning (When Negative or No Amortization
Occurs) (Sec. 1026.7(b))
G-18(D) Periodic Statement New Balance, Due Date, Late Payment and
Minimum Payment Sample (Credit cards) (Sec. 1026.7(b))
G-18(E) [Reserved]
G-18(F) Periodic Statement Form
G-18(G) Periodic Statement Form
G-18(H) Deferred Interest Periodic Statement Clause
G-19 Checks Accessing a Credit Card Account Sample (Sec.
1026.9(b)(3))
G-20 Change-in-Terms Sample (Increase in Annual Percentage Rate)
(Sec. 1026.9(c)(2))
G-21 Change-in-Terms Sample (Increase in Fees) (Sec. 1026.9(c)(2))
G-22 Penalty Rate Increase Sample (Payment 60 or Fewer Days Late)
(Sec. 1026.9(g)(3))
G-23 Penalty Rate Increase Sample (Payment More Than 60 Days Late)
(Sec. 1026.9(g)(3))
G-24 Deferred Interest Offer Clauses (Sec. 1026.16(h))
G-25(A) Consent Form for Over-the-Limit Transactions (Sec. 1026.56)
G-25(B) Revocation Notice for Periodic Statement Regarding Over-the-
Limit Transactions (Sec. 1026.56)
G-1--Balance Computation Methods Model Clauses (Home-Equity Plans)
(a) Adjusted Balance Method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``adjusted balance'' of your
account. We get the ``adjusted balance'' by taking the balance you
owed at the end of the previous billing cycle and subtracting [any
unpaid finance charges and] any payments and credits received during
the present billing cycle.
(b) Previous Balance Method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the beginning of
each billing cycle [minus any unpaid finance charges]. We do not
subtract any payments or credits received during the billing cycle.
[The amount of payments and credits to your account this billing
cycle was $ --------.]
(c) Average Daily Balance Method (Excluding Current Transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (excluding current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day and
subtract any payments or credits [and any unpaid finance charges].
We do not add in any new [purchases/advances/loans]. This gives us
the daily balance. Then, we add all the daily balances for the
billing cycle together and divide the total by the number of days in
the billing cycle. This gives us the ``average daily balance.''
(d) Average Daily Balance Method (Including Current Transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (including current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day,
add any new [purchases/advances/loans], and subtract any payments or
credits, [and unpaid finance charges]. This gives us the daily
balance. Then, we add up all the daily balances for the billing
cycle and divide the total by the number of days in the billing
cycle. This gives us the ``average daily balance.''
(e) Ending Balance Method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the end of each
billing cycle (including new purchases and deducting payments and
credits made during the billing cycle).
(f) Daily Balance Method (Including Current Transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``daily balance'' of your account
for each day in the billing cycle. To get the ``daily balance'' we
take the beginning balance of your account each day, add any new
[purchases/advances/fees], and subtract [any unpaid finance charges
and] any payments or credits. This gives us the daily balance.
G-1(A)--Balance Computation Methods Model Clauses (Plans Other Than
Home-Equity Plans)
(a) Adjusted Balance Method
We figure the interest charge on your account by applying the
periodic rate to the ``adjusted balance'' of your account. We get
the ``adjusted balance'' by taking the balance you owed at the end
of the previous billing cycle and subtracting [any unpaid interest
or other finance charges and] any payments and credits received
during the present billing cycle.
(b) Previous Balance Method
We figure the interest charge on your account by applying the
periodic rate to the amount you owe at the beginning of each billing
cycle. We do not subtract any payments or credits received during
the billing cycle.
(c) Average Daily Balance Method (Excluding Current Transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``average daily balance'' of your account. To
get the ``average daily balance'' we take the beginning balance of
your account each day and subtract [any unpaid interest or other
finance charges and] any payments or credits. We do not add in any
new [purchases/advances/fees]. This gives us the daily balance.
Then, we add all the daily balances for the billing cycle together
and divide the total by the number of days in the billing cycle.
This gives us the ``average daily balance.''
(d) Average Daily Balance Method (Including Current Transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``average daily balance'' of your account. To
get the ``average daily balance'' we take the beginning balance of
your account each day, add any new [purchases/advances/fees], and
subtract [any unpaid interest or other finance charges and] any
payments or credits. This gives us the daily balance. Then, we add
up all the daily balances for the billing cycle and divide the total
by the number of days in the billing cycle. This gives us the
``average daily balance.''
(e) Ending Balance Method
We figure the interest charge on your account by applying the
periodic rate to the amount you owe at the end of each billing cycle
(including new [purchases/advances/fees] and deducting payments and
credits made during the billing cycle).
(f) Daily Balance Method (Including Current Transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``daily balance'' of your account for each day
in the billing cycle. To get the ``daily balance'' we take the
beginning balance of your account each day, add any new [purchases/
advances/fees], and subtract [any unpaid interest or other finance
charges and] any payments or credits. This gives us the daily
balance.
[[Page 79837]]
G-2--Liability for Unauthorized Use Model Clause (Home-Equity Plans)
You may be liable for the unauthorized use of your credit card
[or other term that describes the credit card]. You will not be
liable for unauthorized use that occurs after you notify [name of
card issuer or its designee] at [address], orally or in writing, of
the loss, theft, or possible unauthorized use. [You may also contact
us on the Web: [Creditor Web or email address]] In any case, your
liability will not exceed [insert $50 or any lesser amount under
agreement with the cardholder].
G-2(A)--Liability for Unauthorized Use Model Clause (Plans Other
Than Home-Equity Plans)
If you notice the loss or theft of your credit card or a
possible unauthorized use of your card, you should write to us
immediately at: [address] [address listed on your bill],
or call us at [telephone number].
[You may also contact us on the Web: [Creditor Web or email
address]]
You will not be liable for any unauthorized use that occurs
after you notify us. You may, however, be liable for unauthorized
use that occurs before your notice to us. In any case, your
liability will not exceed [insert $50 or any lesser amount under
agreement with the cardholder].
G-3--Long-Form Billing-Error Rights Model Form (Home-Equity Plans)
YOUR BILLING RIGHTS
KEEP THIS NOTICE FOR FUTURE USE
This notice contains important information about your rights and
our responsibilities under the Fair Credit Billing Act.
Notify Us in Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[address] [the address listed on your bill]. Write to us as soon as
possible. We must hear from you no later than 60 days after we sent
you the first bill on which the error or problem appeared. [You may
also contact us on the Web: [Creditor Web or email address]] You can
telephone us, but doing so will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why you
believe there is an error. If you need more information, describe
the item you are not sure about.
If you have authorized us to pay your credit card bill
automatically from your savings or checking account, you can stop
the payment on any amount you think is wrong. To stop the payment
your letter must reach us three business days before the automatic
payment is scheduled to occur.
Your Rights and Our Responsibilities After We Receive Your Written
Notice
We must acknowledge your letter within 30 days, unless we have
corrected the error by then. Within 90 days, we must either correct
the error or explain why we believe the bill was correct.
After we receive your letter, we cannot try to collect any
amount you question, or report you as delinquent. We can continue to
bill you for the amount you question, including finance charges, and
we can apply any unpaid amount against your credit limit. You do not
have to pay any questioned amount while we are investigating, but
you are still obligated to pay the parts of your bill that are not
in question.
If we find that we made a mistake on your bill, you will not
have to pay any finance charges related to any questioned amount. If
we didn't make a mistake, you may have to pay finance charges, and
you will have to make up any missed payments on the questioned
amount. In either case, we will send you a statement of the amount
you owe and the date that it is due.
If you fail to pay the amount that we think you owe, we may
report you as delinquent. However, if our explanation does not
satisfy you and you write to us within ten days telling us that you
still refuse to pay, we must tell anyone we report you to that you
have a question about your bill. And, we must tell you the name of
anyone we reported you to. We must tell anyone we report you to that
the matter has been settled between us when it finally is.
If we don't follow these rules, we can't collect the first $50
of the questioned amount, even if your bill was correct.
Special Rule for Credit Card Purchases
If you have a problem with the quality of property or services
that you purchased with a credit card, and you have tried in good
faith to correct the problem with the merchant, you may have the
right not to pay the remaining amount due on the property or
services.
There are two limitations on this right:
(a) You must have made the purchase in your home state or, if
not within your home state within 100 miles of your current mailing
address; and
(b) The purchase price must have been more than $50.
These limitations do not apply if we own or operate the
merchant, or if we mailed you the advertisement for the property or
services.
G-3(A)--Long-Form Billing-Error Rights Model Form (Plans Other
Than Home-Equity Plans)
Your Billing Rights: Keep This Document For Future Use
This notice tells you about your rights and our responsibilities
under the Fair Credit Billing Act.
What To Do If You Find A Mistake On Your Statement
If you think there is an error on your statement, write to us
at:
[Creditor Name]
[Creditor Address]
[You may also contact us on the Web: [Creditor Web or email
address]]
In your letter, give us the following information:
Account information: Your name and account number.
Dollar amount: The dollar amount of the suspected
error.
Description of problem: If you think there is an error
on your bill, describe what you believe is wrong and why you believe
it is a mistake.
You must contact us:
Within 60 days after the error appeared on your
statement.
At least 3 business days before an automated payment is
scheduled, if you want to stop payment on the amount you think is
wrong.
You must notify us of any potential errors in writing [or
electronically]. You may call us, but if you do we are not required
to investigate any potential errors and you may have to pay the
amount in question.
What Will Happen After We Receive Your Letter
When we receive your letter, we must do two things:
1. Within 30 days of receiving your letter, we must tell you
that we received your letter. We will also tell you if we have
already corrected the error.
2. Within 90 days of receiving your letter, we must either
correct the error or explain to you why we believe the bill is
correct.
While we investigate whether or not there has been an error:
We cannot try to collect the amount in question, or
report you as delinquent on that amount.
The charge in question may remain on your statement,
and we may continue to charge you interest on that amount.
While you do not have to pay the amount in question,
you are responsible for the remainder of your balance.
We can apply any unpaid amount against your credit
limit.
After we finish our investigation, one of two things will
happen:
If we made a mistake: You will not have to pay the
amount in question or any interest or other fees related to that
amount.
If we do not believe there was a mistake: You will have
to pay the amount in question, along with applicable interest and
fees. We will send you a statement of the amount you owe and the
date payment is due. We may then report you as delinquent if you do
not pay the amount we think you owe.
If you receive our explanation but still believe your bill is
wrong, you must write to us within 10 days telling us that you still
refuse to pay. If you do so, we cannot report you as delinquent
without also reporting that you are questioning your bill. We must
tell you the name of anyone to whom we reported you as delinquent,
and we must let those organizations know when the matter has been
settled between us.
If we do not follow all of the rules above, you do not have to
pay the first $50 of the amount you question even if your bill is
correct.
Your Rights If You Are Dissatisfied With Your Credit Card Purchases
If you are dissatisfied with the goods or services that you have
purchased with your credit card, and you have tried in good faith to
correct the problem with the merchant, you may have the right not to
pay the remaining amount due on the purchase.
[[Page 79838]]
To use this right, all of the following must be true:
1. The purchase must have been made in your home state or within
100 miles of your current mailing address, and the purchase price
must have been more than $50. (Note: Neither of these are necessary
if your purchase was based on an advertisement we mailed to you, or
if we own the company that sold you the goods or services.)
2. You must have used your credit card for the purchase.
Purchases made with cash advances from an ATM or with a check that
accesses your credit card account do not qualify.
3. You must not yet have fully paid for the purchase.
If all of the criteria above are met and you are still
dissatisfied with the purchase, contact us in writing [or
electronically] at:
[Creditor Name]
[Creditor Address]
[[Creditor Web or email address]]
While we investigate, the same rules apply to the disputed
amount as discussed above. After we finish our investigation, we
will tell you our decision. At that point, if we think you owe an
amount and you do not pay, we may report you as delinquent.
G-4--Alternative Billing-Error Rights Model Form (Home-Equity Plans)
BILLING RIGHTS SUMMARY
In Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[address] [the address shown on your bill] as soon as possible. [You
may also contact us on the Web: [Creditor Web or email address].] We
must hear from you no later than 60 days after we sent you the first
bill on which the error or problem appeared. You can telephone us,
but doing so will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why you
believe there is an error. If you need more information, describe
the item you are unsure about.
You do not have to pay any amount in question while we are
investigating, but you are still obligated to pay the parts of your
bill that are not in question. While we investigate your question,
we cannot report you as delinquent or take any action to collect the
amount you question.
Special Rule for Credit Card Purchases
If you have a problem with the quality of goods or services that
you purchased with a credit card, and you have tried in good faith
to correct the problem with the merchant, you may not have to pay
the remaining amount due on the goods or services. You have this
protection only when the purchase price was more than $50 and the
purchase was made in your home state or within 100 miles of your
mailing address. (If we own or operate the merchant, or if we mailed
you the advertisement for the property or services, all purchases
are covered regardless of amount or location of purchase.)
G-4(A)--Alternative Billing-Error Rights Model Form (Plans Other Than
Home-Equity Plans)
What To Do If You Think You Find A Mistake On Your Statement
If you think there is an error on your statement, write to us
at:
[Creditor Name]
[Creditor Address]
[You may also contact us on the Web: [Creditor Web or email
address]]
In your letter, give us the following information:
Account information: Your name and account number.
Dollar amount: The dollar amount of the suspected
error.
Description of Problem: If you think there is an error
on your bill, describe what you believe is wrong and why you believe
it is a mistake.
You must contact us within 60 days after the error appeared on
your statement.
You must notify us of any potential errors in writing [or
electronically]. You may call us, but if you do we are not required
to investigate any potential errors and you may have to pay the
amount in question.
While we investigate whether or not there has been an error, the
following are true:
We cannot try to collect the amount in question, or
report you as delinquent on that amount.
The charge in question may remain on your statement,
and we may continue to charge you interest on that amount. But, if
we determine that we made a mistake, you will not have to pay the
amount in question or any interest or other fees related to that
amount.
While you do not have to pay the amount in question,
you are responsible for the remainder of your balance.
We can apply any unpaid amount against your credit
limit.
Your Rights If You Are Dissatisfied With Your Credit Card Purchases
If you are dissatisfied with the goods or services that you have
purchased with your credit card, and you have tried in good faith to
correct the problem with the merchant, you may have the right not to
pay the remaining amount due on the purchase.
To use this right, all of the following must be true:
1. The purchase must have been made in your home state or within
100 miles of your current mailing address, and the purchase price
must have been more than $50. (Note: Neither of these is necessary
if your purchase was based on an advertisement we mailed to you, or
if we own the company that sold you the goods or services.)
2. You must have used your credit card for the purchase.
Purchases made with cash advances from an ATM or with a check that
accesses your credit card account do not qualify.
3. You must not yet have fully paid for the purchase.
If all of the criteria above are met and you are still
dissatisfied with the purchase, contact us in writing [or
electronically] at:
[Creditor Name]
[Creditor Address]
[[Creditor Web address]]
While we investigate, the same rules apply to the disputed
amount as discussed above. After we finish our investigation, we
will tell you our decision. At that point, if we think you owe an
amount and you do not pay we may report you as delinquent.
BILLING CODE 4810-AM-P
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G-11--Applications and Solicitations Made Available to the General
Public Model Clauses
(a) Disclosure of Required Credit Information
The information about the costs of the card described in this
[application]/[solicitation] is accurate as of (month/year). This
information may have changed after that date. To find out what may
have changed, [call us at (telephone number)][write to us at
(address)].
(b) No Disclosure of Credit Information
There are costs associated with the use of this card. To obtain
information about these costs, call us at (telephone number) or
write to us at (address).
G-12 [Reserved]
G-13(A)--Change in Insurance Provider Model Form (Combined Notice)
The credit card account you have with us is insured. This is to
notify you that we plan to replace your current coverage with
insurance coverage from a different insurer.
[[Page 79848]]
If we obtain insurance for your account from a different
insurer, you may cancel the insurance.
[Your premium rate will increase to $ ---- per ----.]
[Your coverage will be affected by the following:
[ ] The elimination of a type of coverage previously provided to
you. [(explanation)] [See ---- of the attached policy for details.]
[ ] A lowering of the age at which your coverage will terminate
or will become more restrictive. [(explanation)] [See ---- of the
attached policy or certificate for details.]
[ ] A decrease in your maximum insurable loan balance, maximum
periodic benefit payment, maximum number of payments, or any other
decrease in the dollar amount of your coverage or benefits.
[(explanation)] [See ---- of the attached policy or certificate for
details.]
[ ] A restriction on the eligibility for benefits for you or
others. [(explanation)] [See ---- of the attached policy or
certificate for details.]
[ ] A restriction in the definition of ``disability'' or other
key term of coverage. [(explanation)] [See ---- of the attached
policy or certificate for details.]
[ ] The addition of exclusions or limitations that are broader
or other than those under the current coverage. [(explanation)] [See
---- of the attached policy or certificate for details.]
[ ] An increase in the elimination (waiting) period or a change
to nonretroactive coverage. [(explanation)] [See ---- of the
attached policy or certificate for details).]
[The name and mailing address of the new insurer providing the
coverage for your account is (name and address).]
G-13(B)--Change in Insurance Provider Model Form
We have changed the insurer providing the coverage for your
account. The new insurer's name and address are (name and address).
A copy of the new policy or certificate is attached.
You may cancel the insurance for your account.
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G-16(A) Debt Suspension Model Clause
Please enroll me in the optional [insert name of program], and
bill my account the fee of [how cost is determined]. I understand
that enrollment is not required to obtain credit. I also understand
that depending on the event, the protection may only temporarily
suspend my duty to make minimum payments, not reduce the balance I
owe. I understand that my balance will actually grow during the
suspension period as interest continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here]. X------------
--------
G-16(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $.83 per $100 of my month-end account balance. I
understand that enrollment is not required to obtain credit. I also
understand that depending on the event, the protection may only
temporarily suspend my duty to make minimum payments, not reduce the
balance I owe. I understand that my balance will actually grow
during the suspension period as interest continues to accumulate.
To Enroll, Initial Here. X--------------------
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G-18(B)--Late Payment Fee Sample
Late Payment Warning: If we do not receive your minimum payment
by the date listed above, you may have to pay a $35 late fee and
your APRs may be increased up to the Penalty APR of 28.99%.
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G-18(E) [Reserved]
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G-18(H)--Deferred Interest Periodic Statement Clause
[You must pay your promotional balance in full by [date] to
avoid paying accrued interest charges.]
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BILLING CODE 4810-AM-C
[[Page 79870]]
G-24--Deferred Interest Offer Clauses
(a) For Credit Card Accounts Under an Open-End (Not Home-Secured)
Consumer Credit Plan
[Interest will be charged to your account from the purchase date
if the purchase balance is not paid in full within the/by [deferred
interest period/date] or if you make a late payment.]
(b) For Other Open-End Plans
[Interest will be charged to your account from the purchase date
if the purchase balance is not paid in full within the/by [deferred
interest period/date] or if your account is otherwise in default.]
G-25(A)--Consent Form for Over-the-Credit Limit Transactions
Your Choice Regarding Over-the-Credit Limit Coverage
Unless you tell us otherwise, we will decline any transaction
that causes you to go over your credit limit. If you want us to
authorize these transactions, you can request over-the-credit limit
coverage.
If you have over-the-credit limit coverage and you go over your
credit limit, we will charge you a fee of up to $35. We may also
increase your APRs to the Penalty APR of XX.XX%. You will only pay
one fee per billing cycle, even if you go over your limit multiple
times in the same cycle.
Even if you request over-the-credit limit coverage, in some
cases we may still decline a transaction that would cause you to go
over your limit, such as if you are past due or significantly over
your credit limit.
If you want over-the-limit coverage and to allow us to authorize
transactions that go over your credit limit, please:
--Call us at [telephone number];
--Visit [Web site]; or
--Check or initial the box below, and return the form to us at
[address].
--------------------
-- I want over-the-limit coverage. I understand that if I go
over my credit limit, my APRs may be increased and I will be charged
a fee of up to $35. [I have the right to cancel this coverage at any
time.]
[-- I do not want over-the-limit coverage. I understand that
transactions that exceed my credit limit will not be authorized.]
Printed Name:----------------------------------------------------------
Date:------------------------------------------------------------------
[Account Number]:------------------------------------------------------
G-25(B)--Revocation Notice for Periodic Statement Regarding Over-the-
Credit Limit Transactions
You currently have over-the-credit limit coverage on your
account, which means that we pay transactions that cause you go to
over your credit limit. If you do go over your credit limit, we will
charge you a fee of up to $35. We may also increase your APRs. To
remove over-the-credit-limit coverage from your account, call us at
1-800-xxxxxxx or visit [insert Web site].
[You may also write us at: [insert address].]
[You may also check or initial the box below and return this
form to us at: [insert address].
-- I want to cancel over-the-limit coverage for my account.
Printed Name:----------------------------------------------------------
Date:------------------------------------------------------------------
[Account Number]:------------------------------------------------------
Appendix H to Part 1026--Closed-End Model Forms and Clauses
H-1 Credit Sale Model Form (Sec. 1026.18)
H-2 Loan Model Form (Sec. 1026.18)
H-3 Amount Financed Itemization Model Form (Sec. 1026.18(c))
H-4(A) Variable-Rate Model Clauses (Sec. 1026.18(f)(1))
H-4(B) Variable-Rate Model Clauses (Sec. 1026.18(f)(2))
H-4(C) Variable-Rate Model Clauses (Sec. 1026.19(b))
H-4(D) Variable-Rate Model Clauses (Sec. 1026.20(c))
H-4(E) Fixed-Rate Mortgage Interest Rate and Payment Summary Model
Clause (Sec. 1026.18(s))
H-4(F) Adjustable-Rate Mortgage or Step-Rate Mortgage Interest Rate
and Payment Summary Model Clause (Sec. 1026.18(s))
H-4(G) Mortgage with Negative Amortization Interest Rate and Payment
Summary Model Clause (Sec. 1026.18(s))
H-4(H) Fixed-Rate Mortgage with Interest-Only Interest Rate and
Payment Summary Model Clause (Sec. 1026.18(s))
H-4(I) Adjustable-Rate Mortgage Introductory Rate Disclosure Model
Clause (Sec. 1026.18(s)(2)(iii))
H-4(J) Balloon Payment Disclosure Model Clause (Sec. 1026.18(s)(5))
H-4(K) No Guarantee to Refinance Statement Model Clause (Sec.
1026.18(t))
H-5 Demand Feature Model Clauses (Sec. 1026.18(i))
H-6 Assumption Policy Model Clause (Sec. 1026.18(q))
H-7 Required Deposit Model Clause (Sec. 1026.18(r))
H-8 Rescission Model Form (General) (Sec. 1026.23)
H-9 Rescission Model Form (Refinancing (with Original Creditor))
(Sec. 1026.23)
H-10 Credit Sale Sample
H-11 Installment Loan Sample
H-12 Refinancing Sample
H-13 Mortgage with Demand Feature Sample
H-14 Variable-Rate Mortgage Sample (Sec. 1026.19(b))
H-15 Graduated-Payment Mortgage Sample
H-16 Mortgage Sample
H-17(A) Debt Suspension Model Clause
H-17(B) Debt Suspension Sample
H-18 Private Education Loan Application and Solicitation Model Form
H-19 Private Education Loan Approval Model Form
H-20 Private Education Loan Final Model Form
H-21 Private Education Loan Application and Solicitation Sample
H-22 Private Education Loan Approval Sample
H-23 Private Education Loan Final Sample
BILLING CODE 4810-AM-P
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H-4(C)--Variable-Rate Model Clauses
This disclosure describes the features of the adjustable-rate
mortgage (ARM) program you are considering. Information on other ARM
programs is available upon request.
How Your Interest Rate and Payment Are Determined
Your interest rate will be based on [an index plus a
margin] [a formula].
Your payment will be based on the interest rate, loan
balance, and loan term.
--[The interest rate will be based on (identification of index)
plus our margin. Ask for our current interest rate and margin.]
[[Page 79874]]
--[The interest rate will be based on (identification of
formula). Ask us for our current interest rate.]
--Information about the index [formula for rate adjustments] is
published [can be found] ------------.
--[The initial interest rate is not based on the (index) (formula)
used to make later adjustments. Ask us for the amount of current
interest rate discounts.]
How Your Interest Rate Can Change
Your interest rate can change (frequency).
[Your interest rate cannot increase or decrease more
than ---- percentage points at each adjustment.]
Your interest rate cannot increase [or decrease] more
than ---- percentage points over the term of the loan.
How Your Payment Can Change
Your payment can change (frequency) based on changes in
the interest rate.
[Your payment cannot increase more than (amount or
percentage) at each adjustment.]
You will be notified in writing -------- days before
the due date of a payment at a new level. This notice will contain
information about your interest rates, payment amount, and loan
balance.
[You will be notified once each year during which
interest rate adjustments, but no payment adjustments, have been
made to your loan. This notice will contain information about your
interest rates, payment amount, and loan balance.]
[For example, on a $10,000 [term] loan with an initial
interest rate of -------- [(the rate shown in the interest rate
column below for the year 19 --------)] [(in effect (month) (year)],
the maximum amount that the interest rate can rise under this
program is -------- percentage points, to --------%, and the monthly
payment can rise from a first-year payment of $-------- to a maximum
of $-------- in the ---------- year. To see what your payments would
be, divide your mortgage amount by $10,000; then multiply the
monthly payment by that amount. (For example, the monthly payment
for a mortgage amount of $60,000 would be: $60,000 / $10,000 = 6; 6
x -------- = $-------- per month.)]
[Example
The example below shows how your payments would have changed
under this ARM program based on actual changes in the index from
1982 to 1996. This does not necessarily indicate how your index will
change in the future.
The example is based on the following assumptions:
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H-4(I)--Introductory Rate Model Clause
[Introductory Rate Notice
You have a discounted introductory rate of -------- % that ends
after (period).
In the (period in sequence), even if market rates do not change,
this rate will increase to ---- %.]
H-4(J)--Balloon Payment Model Clause
[Final Balloon Payment due (date): $------------]
H-4(K)--``No-Guarantee-to-Refinance'' Statement Model Clause
There is no guarantee that you will be able to refinance to
lower your rate and payments.
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H-9--Rescission Model Form (Refinancing With Original Creditor)
NOTICE OF RIGHT TO CANCEL
Your Right To Cancel
You are entering into a new transaction to increase the amount
of credit previously provided to you. Your home is the security for
this new transaction. You have a legal right under Federal law to
cancel this new transaction, without cost, within three business
days from whichever of the following events occurs last:
(1) the date of this new transaction, which is ------------; or
(2) the date you received your new Truth in Lending disclosures;
or
(3) the date you received this notice of your right to cancel.
If you cancel this new transaction, it will not affect any
amount that you presently owe. Your home is the security for that
amount. Within 20 calendar days after we receive your notice of
cancellation of this new transaction, we must take the steps
necessary to reflect the fact that your home does not secure the
increase of credit. We must also return any money you have given to
us or anyone else in connection with this new transaction.
You may keep any money we have given you in this new transaction
until we have done the things mentioned above, but you must then
offer to return the money at the address below.
If we do not take possession of the money within 20 calendar
days of your offer, you may keep it without further obligation.
[[Page 79881]]
How To Cancel
If you decide to cancel this new transaction, you may do so by
notifying us in writing, at
-----------------------------------------------------------------------
(Creditor's name and business address).
You may use any written statement that is signed and dated by
you and states your intention to cancel, or you may use this notice
by dating and signing below. Keep one copy of this notice because it
contains important information about your rights.
If you cancel by mail or telegram, you must send the notice no
later than midnight of
-----------------------------------------------------------------------
(Date)-----------------------------------------------------------------
(or midnight of the third business day following the latest of the
three events listed above).
If you send or deliver your written notice to cancel some other
way, it must be delivered to the above address no later than that
time.
I WISH TO CANCEL
Consumer's Signature---------------------------------------------------
Date-------------------------------------------------------------------
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H-14--Variable-Rate Mortgage Sample
This disclosure describes the features of the adjustable-rate
mortgage (ARM) program you are considering. Information on other ARM
programs is available upon request.
How Your Interest Rate and Payment Are Determined
Your interest rate will be based on an index rate plus
a margin.
Your payment will be based on the interest rate, loan
balance, and loan term.
--The interest rate will be based on the weekly average yield on
United States Treasury securities adjusted to a constant maturity of
1 year (your index), plus our margin. Ask us for our current
interest rate and margin.
--Information about the index rate is published weekly in the Wall
Street Journal.
Your interest rate will equal the index rate plus our
margin unless your interest rate ``caps'' limit the amount of change
in the interest rate.
How Your Interest Rate Can Change
Your interest rate can change yearly.
Your interest rate cannot increase or decrease more
than 2 percentage points per year.
Your interest rate cannot increase or decrease more
than 5 percentage points over the term of the loan.
How Your Monthly Payment Can Change
Your monthly payment can increase or decrease
substantially based on annual changes in the interest rate.
[For example, on a $10,000, 30-year loan with an
initial interest rate of 12.41 percent in effect in July 1996, the
maximum amount that the interest rate can rise under this program is
5 percentage points, to 17.41 percent, and the monthly payment can
rise from a first-year payment of $106.03 to a maximum of $145.34 in
the fourth year. To see what your payment is, divide your mortgage
amount by $10,000; then multiply the monthly payment by that amount.
(For example, the monthly payment for a mortgage amount of $60,000
would be: $60,000 / $10,000 = 6; 6 x 106.03 = $636.18 per month.)
You will be notified in writing 25 days before the
annual payment adjustment may be made. This notice will contain
information about your interest rates, payment amount and loan
balance.]
Example
The example below shows how your payments would have changed
under this ARM program based on actual changes in the index from
1982 to 1996. This does not necessarily indicate how your index will
change in the future. The example is based on the following
assumptions:
BILLING CODE 4810-AM-P
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Note: To see what your payments would have been during that
period, divide your mortgage amount by $10,000; then multiply the
monthly payment by that amount. (For example, in 1996 the monthly
payment for a mortgage amount of $60,000 taken out in 1982 would be:
$60,000/$10,000=6; 6x$106.73=$640.38.)
You will be notified in writing 25 days before the
annual payment adjustment may be made. This notice will contain
information about your interest rates, payment amount and loan
balance.]
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H-17(A) Debt Suspension Model Clause
Please enroll me in the optional [insert name of program], and
bill my account the fee of [insert charge for the initial term of
coverage]. I understand that enrollment is not required to obtain
credit. I also understand that depending on the event, the
protection may only temporarily suspend my duty to make minimum
payments, not reduce the balance I owe. I understand that my balance
will actually grow during the suspension period as interest
continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here].
X----------------------------------------------------------------------
H-17(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $200.00. I understand that enrollment is not
required to obtain credit. I also understand that depending on the
event, the protection may only temporarily suspend my duty to make
minimum payments, not reduce the balance I owe. I understand that my
balance will actually grow during the suspension period as interest
continues to accumulate.
To Enroll, Initial Here.
X----------------------------------------------------------------------
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BILLING CODE 4810-AM-C
Appendix I to Part 1026--[Reserved]
Appendix J to Part 1026--Annual Percentage Rate Computations for
Closed-End Credit Transactions
(a) Introduction
(1) Section 1026.22(a) of Regulation Z provides that the annual
percentage rate for other than open-end credit transactions shall be
determined in accordance with either the actuarial method or the
United States Rule method. This appendix contains an explanation of
the actuarial method as well as equations, instructions and examples
of how this method applies to single advance and multiple advance
transactions.
(2) Under the actuarial method, at the end of each unit-period
(or fractional unit-period) the unpaid balance of the amount
financed is increased by the finance charge earned during that
period and is decreased by the total payment (if any) made at the
end of that period. The determination of unit-periods and fractional
unit-periods shall be consistent with the definitions and rules in
paragraphs (b)(3), (4) and (5) of this section and the general
equation in paragraph (b)(8) of this section.
(3) In contrast, under the United States Rule method, at the end
of each payment period, the unpaid balance of the amount financed is
increased by the finance charge earned during that payment period
and is decreased by the payment made at the end of that payment
period. If the payment is less than the finance charge earned, the
adjustment of the unpaid balance of the amount financed is postponed
until the end of the next payment period. If at that time the sum of
the two payments is still less than the total earned finance charge
for the two payment periods, the adjustment of the unpaid balance of
the amount financed is postponed still another payment period, and
so forth.
(B) Instructions and Equations for the Actuarial Method
(1) General Rule
The annual percentage rate shall be the nominal annual
percentage rate determined by multiplying the unit-period rate by
the number of unit-periods in a year.
(2) Term of the Transaction
The term of the transaction begins on the date of its
consummation, except that if the finance charge or any portion of it
is earned beginning on a later date, the term begins on the later
date. The term ends on the date the last payment is due, except that
if an advance is scheduled after that date, the term ends on the
later date. For computation purposes, the length of the term shall
be equal to the time interval between any point in time on the
beginning date to the same point in time on the ending date.
(3) Definitions of Time Intervals
(i) A period is the interval of time between advances or between
payments and includes the interval of time between the date the
finance charge begins to be earned and the date of the first advance
thereafter or the date of the first payment thereafter, as
applicable.
(ii) A common period is any period that occurs more than once in
a transaction.
(iii) A standard interval of time is a day, week, semimonth,
month, or a multiple of a week or a month up to, but not exceeding,
1 year.
(iv) All months shall be considered equal. Full months shall be
measured from any point in time on a given date of a given month to
the same point in time on the same date of another month. If a
series of payments (or advances) is scheduled for the last day of
each month, months shall be measured from the last day of the given
month to the last day of another month. If payments (or advances)
are scheduled for the 29th or 30th of each month, the last day of
February shall be used when applicable.
(4) Unit-Period
(i) In all transactions other than a single advance, single
payment transaction, the unit-period shall be that common period,
not to exceed 1 year, that occurs most frequently in the
transaction, except that
(A) If 2 or more common periods occur with equal frequency, the
smaller of such common periods shall be the unit-period; or
(B) If there is no common period in the transaction, the unit-
period shall be that period which is the average of all periods
rounded to the nearest whole standard interval of time. If the
average is equally near 2 standard intervals of time, the lower
shall be the unit-period.
(ii) In a single advance, single payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed 1
year.
(5) Number of Unit-Periods Between 2 Given Dates
(i) The number of days between 2 dates shall be the number of
24-hour intervals between any point in time on the first date to the
same point in time on the second date.
(ii) If the unit-period is a month, the number of full unit-
periods between 2 dates shall be the number of months measured back
from the later date. The remaining fraction of a unit-period shall
be the number of days measured forward from the earlier date to the
beginning of the first full unit-period, divided by 30. If the unit-
period is a month, there are 12 unit-periods per year.
(iii) If the unit-period is a semimonth or a multiple of a month
not exceeding 11 months, the number of days between 2 dates shall be
30 times the number of full months measured back from the later
date, plus the number of remaining days. The number of full unit-
periods and the remaining fraction of a unit-period shall be
determined by dividing such number of days by 15 in the case of a
semimonthly unit-period or by the appropriate multiple of 30 in the
case of a multimonthly unit-period. If the unit-period is a
semimonth, the number of unit-periods
[[Page 79901]]
per year shall be 24. If the number of unit-periods is a multiple of
a month, the number of unit-periods per year shall be 12 divided by
the number of months per unit-period.
(iv) If the unit-period is a day, a week, or a multiple of a
week, the number of full unit-periods and the remaining fractions of
a unit-period shall be determined by dividing the number of days
between the 2 given dates by the number of days per unit-period. If
the unit-period is a day, the number of unit-periods per year shall
be 365. If the unit-period is a week or a multiple of a week, the
number of unit-periods per year shall be 52 divided by the number of
weeks per unit-period.
(v) If the unit-period is a year, the number of full unit-
periods between 2 dates shall be the number of full years (each
equal to 12 months) measured back from the later date. The remaining
fraction of a unit-period shall be
(A) The remaining number of months divided by 12 if the
remaining interval is equal to a whole number of months, or
(B) The remaining number of days divided by 365 if the remaining
interval is not equal to a whole number of months.
(vi) In a single advance, single payment transaction in which
the term is less than a year and is equal to a whole number of
months, the number of unit-periods in the term shall be 1, and the
number of unit-periods per year shall be 12 divided by the number of
months in the term or 365 divided by the number of days in the term.
(vii) In a single advance, single payment transaction in which
the term is less than a year and is not equal to a whole number of
months, the number of unit-periods in the term shall be 1, and the
number of unit-periods per year shall be 365 divided by the number
of days in the term.
(6) Percentage Rate for a Fraction of a Unit-Period
The percentage rate of finance charge for a fraction (less than
1) of a unit-period shall be equal to such fraction multiplied by
the percentage rate of finance charge per unit-period.
BILLING CODE 4810-AM-P
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BILLING CODE 4810-AM-C
Appendix K to Part 1026--Total Annual Loan Cost Rate Computations for
Reverse Mortgage Transactions
(a) Introduction. Creditors are required to disclose a series of
total annual loan cost rates for each reverse mortgage transaction.
This appendix contains the equations creditors must use in computing
the total annual loan cost rate for various transactions, as well as
instructions, explanations, and examples for various transactions.
This appendix is modeled after Appendix J of this part (Annual
Percentage Rates Computations for Closed-end Credit Transactions);
creditors should consult Appendix J of this part for additional
guidance in using the formulas for reverse mortgages.
(b) Instructions and equations for the total annual loan cost
rate. (1) General rule. The total annual loan cost rate shall be the
nominal total annual loan cost rate
[[Page 79911]]
determined by multiplying the unit-period rate by the number of
unit-periods in a year.
(2) Term of the transaction. For purposes of total annual loan
cost disclosures, the term of a reverse mortgage transaction is
assumed to begin on the first of the month in which consummation is
expected to occur. If a loan cost or any portion of a loan cost is
initially incurred beginning on a date later than consummation, the
term of the transaction is assumed to begin on the first of the
month in which that loan cost is incurred. For purposes of total
annual loan cost disclosures, the term ends on each of the assumed
loan periods specified in Sec. 1026.33(c)(6).
(3) Definitions of time intervals. (i) A period is the interval
of time between advances.
(ii) A common period is any period that occurs more than once in
a transaction.
(iii) A standard interval of time is a day, week, semimonth,
month, or a multiple of a week or a month up to, but not exceeding,
1 year.
(iv) All months shall be considered to have an equal number of
days.
(4) Unit-period. (i) In all transactions other than single-
advance, single-payment transactions, the unit-period shall be that
common period, not to exceed one year, that occurs most frequently
in the transaction, except that:
(A) If two or more common periods occur with equal frequency,
the smaller of such common periods shall be the unit-period; or
(B) If there is no common period in the transaction, the unit-
period shall be that period which is the average of all periods
rounded to the nearest whole standard interval of time. If the
average is equally near two standard intervals of time, the lower
shall be the unit-period.
(ii) In a single-advance, single-payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed
one year.
(5) Number of unit-periods between two given dates. (i) The
number of days between two dates shall be the number of 24-hour
intervals between any point in time on the first date to the same
point in time on the second date.
(ii) If the unit-period is a month, the number of full unit-
periods between two dates shall be the number of months. If the
unit-period is a month, the number of unit-periods per year shall be
12.
(iii) If the unit-period is a semimonth or a multiple of a month
not exceeding 11 months, the number of days between two dates shall
be 30 times the number of full months. The number of full unit-
periods shall be determined by dividing the number of days by 15 in
the case of a semimonthly unit-period or by the appropriate multiple
of 30 in the case of a multimonthly unit-period. If the unit-period
is a semimonth, the number of unit-periods per year shall be 24. If
the number of unit-periods is a multiple of a month, the number of
unit-periods per year shall be 12 divided by the number of months
per unit-period.
(iv) If the unit-period is a day, a week, or a multiple of a
week, the number of full unit-periods shall be determined by
dividing the number of days between the two given dates by the
number of days per unit-period. If the unit-period is a day, the
number of unit-periods per year shall be 365. If the unit-period is
a week or a multiple of a week, the number of unit-periods per year
shall be 52 divided by the number of weeks per unit-period.
(v) If the unit-period is a year, the number of full unit-
periods between two dates shall be the number of full years (each
equal to 12 months).
(6) Symbols. The symbols used to express the terms of a
transaction in the equation set forth in paragraph (b)(8) of this
appendix are defined as follows:
Aj = The amount of each periodic or lump-sum advance to
the consumer under the reverse mortgage transaction.
i = Percentage rate of the total annual loan cost per unit-period,
expressed as a decimal equivalent.
j = The number of unit-periods until the jth advance.
n = The number of unit-periods between consummation and repayment of
the debt.
Pn = Min (Baln, Valn). This is the
maximum amount that the creditor can be repaid at the specified loan
term.
Baln = Loan balance at time of repayment, including all
costs and fees incurred by the consumer (including any shared
appreciation or shared equity amount) compounded to time n at the
creditor's contract rate of interest.
Valn = Val0(1 + [sigma])\y\, where
Val0 is the property value at consummation, [sigma] is
the assumed annual rate of appreciation for the dwelling, and y is
the number of years in the assumed term. Valn must be
reduced by the amount of any equity reserved for the consumer by
agreement between the parties, or by 7 percent (or the amount or
percentage specified in the credit agreement), if the amount
required to be repaid is limited to the net proceeds of sale.
[sigma] = The summation operator.
Symbols used in the examples shown in this appendix are defined
as follows:
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w = The number of unit-periods per year.
I = wi x 100 = the nominal total annual loan cost rate.
(7) General equation. The total annual loan cost rate for a
reverse mortgage transaction must be determined by first solving the
following formula, which sets forth the relationship between the
advances to the consumer and the amount owed to the creditor under
the terms of the reverse mortgage agreement for the loan cost rate
per unit-period (the loan cost rate per unit-period is then
multiplied by the number of unit-periods per year to obtain the
total annual loan cost rate I; that is, I = wi):
[GRAPHIC] [TIFF OMITTED] TR22DE11.073
[[Page 79912]]
(8) Solution of general equation by iteration process. (i) The
general equation in paragraph (b)(7) of this appendix, when applied
to a simple transaction for a reverse mortgage loan of equal monthly
advances of $350 each, and with a total amount owed of $14,313.08 at
an assumed repayment period of two years, takes the special form:
[GRAPHIC] [TIFF OMITTED] TR22DE11.074
Using the iteration procedures found in steps 1 through 4 of
(b)(9)(i) of Appendix J of this part, the total annual loan cost
rate, correct to two decimals, is 48.53%.
(ii) In using these iteration procedures, it is expected that
calculators or computers will be programmed to carry all available
decimals throughout the calculation and that enough iterations will
be performed to make virtually certain that the total annual loan
cost rate obtained, when rounded to two decimals, is correct. Total
annual loan cost rates in the examples below were obtained by using
a 10-digit programmable calculator and the iteration procedure
described in Appendix J of this part.
(9) Assumption for discretionary cash advances. If the consumer
controls the timing of advances made after consummation (such as in
a credit line arrangement), the creditor must use the general
formula in paragraph (b)(7) of this appendix. The total annual loan
cost rate shall be based on the assumption that 50 percent of the
principal loan amount is advanced at closing, or in the case of an
open-end transaction, at the time the consumer becomes obligated
under the plan. Creditors shall assume the advances are made at the
interest rate then in effect and that no further advances are made
to, or repayments made by, the consumer during the term of the
transaction or plan.
(10) Assumption for variable-rate reverse mortgage transactions.
If the interest rate for a reverse mortgage transaction may increase
during the loan term and the amount or timing is not known at
consummation, creditors shall base the disclosures on the initial
interest rate in effect at the time the disclosures are provided.
(11) Assumption for closing costs. In calculating the total
annual loan cost rate, creditors shall assume all closing and other
consumer costs are financed by the creditor.
(c) Examples of total annual loan cost rate computations. (1)
Lump-sum advance at consummation.
Lump-sum advance to consumer at consummation: $30,000
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 11.60%
Estimated time of repayment (based on life expectancy of a consumer
at age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 4%
P10 = Min (103,385.84, 137,662.72)
[GRAPHIC] [TIFF OMITTED] TR22DE11.075
i = .1317069438
Total annual loan cost rate (100(.1317069438 x 1)) = 13.17%
(2) Monthly advance beginning at consummation.
Monthly advance to consumer, beginning at consummation: $492.51
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 9.00%
Estimated time of repayment (based on life expectancy of a consumer
at age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR22DE11.076
Total annual loan cost rate (100(.009061140 x 12)) = 10.87%
(3) Lump sum advance at consummation and monthly advances
thereafter.
Lump sum advance to consumer at consummation: $10,000
Monthly advance to consumer, beginning at consummation: $725
Total of consumer's loan costs financed at consummation: $4,500
Contract rate of interest: 8.5%
Estimated time of repayment (based on life expectancy of a consumer
at age 75): 12 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR22DE11.077
[[Page 79913]]
Total annual loan cost rate (100(.007708844 x 12)) = 9.25%
(d) Reverse mortgage model form and sample form. (1) Model form.
Total Annual Loan Cost Rate
Loan Terms
Age of youngest borrower:
Appraised property value:
Interest rate:
Monthly advance:
Initial draw:
Line of credit:
Initial Loan Charges
Closing costs:
Mortgage insurance premium:
Annuity cost:
Monthly Loan Charges
Servicing fee:
Other Charges:
Mortgage insurance:
Shared Appreciation:
Repayment Limits
----------------------------------------------------------------------------------------------------------------
Total annual loan cost rate
Assumed annual appreciation ---------------------------------------------------------------------------
(percent) [ ]-year loan [ ]-year loan [ ]-year loan
2-year loan term term] term term
----------------------------------------------------------------------------------------------------------------
0................................... ................. [ ] ................. .................
4................................... ................. [ ] ................. .................
8................................... ................. [ ] ................. .................
----------------------------------------------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you
keep the loan and how much your house appreciates in value.
Generally, the longer you keep a reverse mortgage, the lower the
total annual loan cost rate will be.
This table shows the estimated cost of your reverse mortgage
loan, expressed as an annual rate. It illustrates the cost for three
[four] loan terms: 2 years, [half of life expectancy for someone
your age,] that life expectancy, and 1.4 times that life expectancy.
The table also shows the cost of the loan, assuming the value of
your home appreciates at three different rates: 0%, 4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically
include principal, interest, closing costs, mortgage insurance
premiums, annuity costs, and servicing costs (but not costs when you
sell the home).
The rates in this table are estimates. Your actual cost may
differ if, for example, the amount of your loan advances varies or
the interest rate on your mortgage changes.
Signing an Application or Receiving These Disclosures Does Not
Require You To Complete This Loan
(2) Sample Form.
Total Annual Loan Cost Rate
Loan Terms
Age of youngest borrower: 75
Appraised property value: $100,000
Interest rate: 9%
Monthly advance: $301.80
Initial draw: $1,000
Line of credit: $4,000
Initial Loan Charges
Closing costs: $5,000
Mortgage insurance premium: None
Annuity cost: None
Monthly Loan Charges
Servicing fee: None
Other Charges
Mortgage insurance: None
Shared Appreciation: None
Repayment Limits
Net proceeds estimated at 93% of projected home sale
----------------------------------------------------------------------------------------------------------------
Total annual loan cost rate
Assumed annual appreciation ---------------------------------------------------------------------------
(percent) 2-year loan term 6-year loan term 12-year loan term 17-year loan term
(percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
0................................... 39.00 [14.94] 9.86 3.87
4................................... 39.00 [14.94] 11.03 10.14
8................................... 39.00 [14.94] 11.03 10.20
----------------------------------------------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you
keep the loan and how much your house appreciates in value.
Generally, the longer you keep a reverse mortgage, the lower the
total annual loan cost rate will be.
This table shows the estimated cost of your reverse mortgage
loan, expressed as an annual rate. It illustrates the cost for three
[four] loan terms: 2 years, [half of life expectancy for someone
your age,] that life expectancy, and 1.4 times that life expectancy.
The table also shows the cost of the loan, assuming the value of
your home appreciates at three different rates: 0%, 4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically
include principal, interest, closing costs, mortgage insurance
premiums, annuity costs, and servicing costs (but not disposition
costs--costs when you sell the home).
The rates in this table are estimates. Your actual cost may
differ if, for example, the amount of your loan advances varies or
the interest rate on your mortgage changes.
Signing an Application or Receiving These Disclosures Does Not
Require You To Complete This Loan
Appendix L to Part 1026--Assumed Loan Periods for Computations of Total
Annual Loan Cost Rates
(a) Required tables. In calculating the total annual loan cost
rates in accordance with Appendix K of this part, creditors shall
assume three loan periods, as determined by the following table.
(b) Loan periods. (1) Loan Period 1 is a two-year loan period.
(2) Loan Period 2 is the life expectancy in years of the
youngest borrower to become obligated on the reverse mortgage loan,
as shown in the U.S. Decennial Life Tables for 1979-1981 for
females, rounded to the nearest whole year.
(3) Loan Period 3 is the life expectancy figure in Loan Period
3, multiplied by 1.4 and rounded to the nearest full year (life
expectancy figures at .5 have been rounded up to 1).
(4) At the creditor's option, an additional period may be
included, which is the life expectancy figure in Loan Period 2,
multiplied by .5 and rounded to the nearest full year (life
expectancy figures at .5 have been rounded up to 1).
----------------------------------------------------------------------------------------------------------------
[Optional loan Loan period 2
Age of youngest borrower Loan period 1 period (in (life expectancy) Loan period 3
(in years) years)] (in years) (in years)
----------------------------------------------------------------------------------------------------------------
62.................................. 2 [11] 21 29
63.................................. 2 [10] 20 28
[[Page 79914]]
64.................................. 2 [10] 19 27
65.................................. 2 [9] 18 25
66.................................. 2 [9] 18 25
67.................................. 2 [9] 17 24
68.................................. 2 [8] 16 22
69.................................. 2 [8] 16 22
70.................................. 2 [8] 15 21
71.................................. 2 [7] 14 20
72.................................. 2 [7] 13 18
73.................................. 2 [7] 13 18
74.................................. 2 [6] 12 17
75.................................. 2 [6] 12 17
76.................................. 2 [6] 11 15
77.................................. 2 [5] 10 14
78.................................. 2 [5] 10 14
79.................................. 2 [5] 9 13
80.................................. 2 [5] 9 13
81.................................. 2 [4] 8 11
82.................................. 2 [4] 8 11
83.................................. 2 [4] 7 10
84.................................. 2 [4] 7 10
85.................................. 2 [3] 6 8
86.................................. 2 [3] 6 8
87.................................. 2 [3] 6 8
88.................................. 2 [3] 5 7
89.................................. 2 [3] 5 7
90.................................. 2 [3] 5 7
91.................................. 2 [2] 4 6
92.................................. 2 [2] 4 6
93.................................. 2 [2] 4 6
94.................................. 2 [2] 4 6
95 and over......................... 2 [2] 3 4
----------------------------------------------------------------------------------------------------------------
Appendix M1 to Part 1026--Repayment Disclosures
(a) Definitions. (1) ``Promotional terms'' means terms of a
cardholder's account that will expire in a fixed period of time, as
set forth by the card issuer.
(2) ``Deferred interest or similar plan'' means a plan where a
consumer will not be obligated to pay interest that accrues on
balances or transactions if those balances or transactions are paid
in full prior to the expiration of a specified period of time.
(b) Calculating minimum payment repayment estimates. (1) Minimum
payment formulas. When calculating the minimum payment repayment
estimate, card issuers must use the minimum payment formula(s) that
apply to a cardholder's account. If more than one minimum payment
formula applies to an account, the issuer must apply each minimum
payment formula to the portion of the balance to which the formula
applies. In this case, the issuer must disclose the longest
repayment period calculated. For example, assume that an issuer uses
one minimum payment formula to calculate the minimum payment amount
for a general revolving feature, and another minimum payment formula
to calculate the minimum payment amount for special purchases, such
as a ``club plan purchase.'' Also, assume that based on a consumer's
balances in these features and the annual percentage rates that
apply to such features, the repayment period calculated pursuant to
this Appendix for the general revolving feature is 5 years, while
the repayment period calculated for the special purchase feature is
3 years. This issuer must disclose 5 years as the repayment period
for the entire balance to the consumer. If any promotional terms
related to payments apply to a cardholder's account, such as a
deferred billing plan where minimum payments are not required for 12
months, card issuers may assume no promotional terms apply to the
account. For example, assume that a promotional minimum payment of
$10 applies to an account for six months, and then after the
promotional period expires, the minimum payment is calculated as 2
percent of the outstanding balance on the account or $20 whichever
is greater. An issuer may assume during the promotional period that
the $10 promotional minimum payment does not apply, and instead
calculate the minimum payment disclosures based on the minimum
payment formula of 2 percent of the outstanding balance or $20,
whichever is greater. Alternatively, during the promotional period,
an issuer in calculating the minimum payment repayment estimate may
apply the promotional minimum payment until it expires and then
apply the minimum payment formula that applies after the promotional
minimum payment expires. In the above example, an issuer could
calculate the minimum payment repayment estimate during the
promotional period by applying the $10 promotional minimum payment
for the first six months and then applying the 2 percent or $20
(whichever is greater) minimum payment formula after the promotional
minimum payment expires. In calculating the minimum payment
repayment estimate during a promotional period, an issuer may not
assume that the promotional minimum payment will apply until the
outstanding balance is paid off by making only minimum payments
(assuming the repayment estimate is longer than the promotional
period). In the above example, the issuer may not calculate the
minimum payment repayment estimate during the promotional period by
assuming that the $10 promotional minimum payment will apply beyond
the six months until the outstanding balance is repaid.
(2) Annual percentage rate. When calculating the minimum payment
repayment estimate, a card issuer must use the annual percentage
rates that apply to a cardholder's account, based on the portion of
the balance to which the rate applies. If any promotional terms
related to annual percentage rates apply to a cardholder's account,
other than deferred interest or similar plans, a card issuer in
calculating the minimum payment repayment estimate during the
promotional period must apply the promotional annual percentage
rate(s) until it expires and then must apply the rate that applies
after the promotional rate(s) expires. If the rate that applies
after the promotional rate(s) expires is a variable rate, a card
issuer must calculate that rate based on the applicable index or
formula. This variable rate is accurate if it was in effect within
the last 30 days before the minimum payment repayment estimate is
provided. For deferred interest plans or similar plans, if minimum
payments under the deferred interest or similar plan will repay the
balances or transactions in full prior to the expiration of the
specified period of time, a
[[Page 79915]]
card issuer must assume that the consumer will not be obligated to
pay the accrued interest. This means, in calculating the minimum
payment repayment estimate, the card issuer must apply a zero
percent annual percentage rate to the balance subject to the
deferred interest or similar plan. If, however, minimum payments
under the deferred interest plan or similar plan may not repay the
balances or transactions in full prior to the expiration of the
specified period of time, a card issuer must assume that a consumer
will not repay the balances or transactions in full prior to the
expiration of the specified period of time and thus the consumer
will be obligated to pay the accrued interest. This means, in
calculating the minimum payment repayment estimate, the card issuer
must apply the annual percentage rate at which interest is accruing
to the balance subject to the deferred interest or similar plan.
(3) Beginning balance. When calculating the minimum payment
repayment estimate, a card issuer must use as the beginning balance
the outstanding balance on a consumer's account as of the closing
date of the last billing cycle. When calculating the minimum payment
repayment estimate, a card issuer may round the beginning balance as
described above to the nearest whole dollar.
(4) Assumptions. When calculating the minimum payment repayment
estimate, a card issuer for each of the terms below, may either make
the following assumption about that term, or use the account term
that applies to a consumer's account.
(i) Only minimum monthly payments are made each month. In
addition, minimum monthly payments are made each month--for example,
a debt cancellation or suspension agreement, or skip payment feature
does not apply to the account.
(ii) No additional extensions of credit are obtained, such as
new purchases, transactions, fees, charges or other activity. No
refunds or rebates are given.
(iii) The annual percentage rate or rates that apply to a
cardholder's account will not change, through either the operation
of a variable rate or the change to a rate, except as provided in
paragraph (b)(2) of this Appendix. For example, if a penalty annual
percentage rate currently applies to a consumer's account, a card
issuer may assume that the penalty annual percentage rate will apply
to the consumer's account indefinitely, even if the consumer may
potentially return to a non-penalty annual percentage rate in the
future under the account agreement.
(iv) There is no grace period.
(v) The final payment pays the account in full (i.e., there is
no residual finance charge after the final month in a series of
payments).
(vi) The average daily balance method is used to calculate the
balance.
(vii) All months are the same length and leap year is ignored. A
monthly or daily periodic rate may be assumed. If a daily periodic
rate is assumed, the issuer may either assume (1) a year is 365 days
long, and all months are 30.41667 days long, or (2) a year is 360
days long, and all months are 30 days long.
(viii) Payments are credited either on the last day of the month
or the last day of the billing cycle.
(ix) Payments are allocated to lower annual percentage rate
balances before higher annual percentage rate balances.
(x) The account is not past due and the account balance does not
exceed the credit limit.
(xi) When calculating the minimum payment repayment estimate,
the assumed payments, current balance and interest charges for each
month may be rounded to the nearest cent, as shown in Appendix M2 to
this part.
(5) Tolerance. A minimum payment repayment estimate shall be
considered accurate if it is not more than 2 months above or below
the minimum payment repayment estimate determined in accordance with
the guidance in this Appendix (prior to rounding described in Sec.
1026.7(b)(12)(i)(B) and without use of the assumptions listed in
paragraph (b)(4) of this Appendix to the extent a card issuer
chooses instead to use the account terms that apply to a consumer's
account). For example, assume the minimum payment repayment estimate
calculated using the guidance in this Appendix is 28 months (2
years, 4 months), and the minimum payment repayment estimate
calculated by the issuer is 30 months (2 years, 6 months). The
minimum payment repayment estimate should be disclosed as 2 years,
due to the rounding rule set forth in Sec. 1026.7(b)(12)(i)(B).
Nonetheless, based on the 30-month estimate, the issuer disclosed 3
years, based on that rounding rule. The issuer would be in
compliance with this guidance by disclosing 3 years, instead of 2
years, because the issuer's estimate is within the 2 months'
tolerance, prior to rounding. In addition, even if an issuer's
estimate is more than 2 months above or below the minimum payment
repayment estimate calculated using the guidance in this Appendix,
so long as the issuer discloses the correct number of years to the
consumer based on the rounding rule set forth in Sec.
1026.7(b)(12)(i)(B), the issuer would be in compliance with this
guidance. For example, assume the minimum payment repayment estimate
calculated using the guidance in this Appendix is 32 months (2
years, 8 months), and the minimum payment repayment estimate
calculated by the issuer is 38 months (3 years, 2 months). Under the
rounding rule set forth in Sec. 1026.7(b)(12)(i)(B), both of these
estimates would be rounded and disclosed to the consumer as 3 years.
Thus, if the issuer disclosed 3 years to the consumer, the issuer
would be in compliance with this guidance even though the minimum
payment repayment estimate calculated by the issuer is outside the 2
months' tolerance amount.
(c) Calculating the minimum payment total cost estimate. When
calculating the minimum payment total cost estimate, a card issuer
must total the dollar amount of the interest and principal that the
consumer would pay if he or she made minimum payments for the length
of time calculated as the minimum payment repayment estimate under
paragraph (b) of this Appendix. The minimum payment total cost
estimate is deemed to be accurate if it is based on a minimum
payment repayment estimate that is within the tolerance guidance set
forth in paragraph (b)(5) of this Appendix. For example, assume the
minimum payment repayment estimate calculated using the guidance in
this Appendix is 28 months (2 years, 4 months), and the minimum
payment repayment estimate calculated by the issuer is 30 months (2
years, 6 months). The minimum payment total cost estimate will be
deemed accurate even if it is based on the 30 month estimate for
length of repayment, because the issuer's minimum payment repayment
estimate is within the 2 months' tolerance, prior to rounding. In
addition, assume the minimum payment repayment estimate calculated
under this Appendix is 32 months (2 years, 8 months), and the
minimum payment repayment estimate calculated by the issuer is 38
months (3 years, 2 months). Under the rounding rule set forth in
Sec. 1026.7(b)(12)(i)(B), both of these estimates would be rounded
and disclosed to the consumer as 3 years. If the issuer based the
minimum payment total cost estimate on 38 months (or any other
minimum payment repayment estimate that would be rounded to 3
years), the minimum payment total cost estimate would be deemed to
be accurate.
(d) Calculating the estimated monthly payment for repayment in
36 months. (1) In general. When calculating the estimated monthly
payment for repayment in 36 months, a card issuer must calculate the
estimated monthly payment amount that would be required to pay off
the outstanding balance shown on the statement within 36 months,
assuming the consumer paid the same amount each month for 36 months.
(2) Weighted annual percentage rate. In calculating the
estimated monthly payment for repayment in 36 months, an issuer may
use a weighted annual percentage rate that is based on the annual
percentage rates that apply to a cardholder's account and the
portion of the balance to which the rate applies, as shown in
Appendix M2 to this part. If a card issuer uses a weighted annual
percentage rate and any promotional terms related to annual
percentage rates apply to a cardholder's account, other than
deferred interest plans or similar plans, in calculating the
weighted annual percentage rate, the issuer must calculate a
weighted average of the promotional rate and the rate that will
apply after the promotional rate expires based on the percentage of
36 months each rate will apply, as shown in Appendix M2 to this
part. For deferred interest plans or similar plans, if minimum
payments under the deferred interest or similar plan will repay the
balances or transactions in full prior to the expiration of the
specified period of time, if a card issuer uses a weighted annual
percentage rate, the card issuer must assume that the consumer will
not be obligated to pay the accrued interest. This means, in
calculating the weighted annual percentage rate, the card issuer
must apply a zero percent annual percentage rate to the balance
subject to the deferred interest or similar plan. If, however,
minimum payments under the deferred interest plan or similar plan
may not repay the balances or transactions in full prior to the
expiration of the specified period of time, a card issuer in
calculating the weighted annual percentage rate must assume that a
consumer will not repay the balances or transactions in full
[[Page 79916]]
prior to the expiration of the specified period of time and thus the
consumer will be obligated to pay the accrued interest. This means,
in calculating the weighted annual percentage rate, the card issuer
must apply the annual percentage rate at which interest is accruing
to the balance subject to the deferred interest or similar plan. A
card issuer may use a method of calculating the estimated monthly
payment for repayment in 36 months other than a weighted annual
percentage rate, so long as the calculation results in the same
payment amount each month and so long as the total of the payments
would pay off the outstanding balance shown on the periodic
statement within 36 months.
(3) Assumptions. In calculating the estimated monthly payment
for repayment in 36 months, a card issuer must use the same terms
described in paragraph (b) of this Appendix, as appropriate.
(4) Tolerance. An estimated monthly payment for repayment in 36
months shall be considered accurate if it is not more than 10
percent above or below the estimated monthly payment for repayment
in 36 months determined in accordance with the guidance in this
Appendix (after rounding described in Sec.
1026.7(b)(12)(i)(F)(1)(i)).
(e) Calculating the total cost estimate for repayment in 36
months. When calculating the total cost estimate for repayment in 36
months, a card issuer must total the dollar amount of the interest
and principal that the consumer would pay if he or she made the
estimated monthly payment calculated under paragraph (d) of this
appendix each month for 36 months. The total cost estimate for
repayment in 36 months shall be considered accurate if it is based
on the estimated monthly payment for repayment in 36 months that is
calculated in accordance with paragraph (d) of this appendix.
(f) Calculating the savings estimate for repayment in 36 months.
When calculating the savings estimate for repayment in 36 months, if
a card issuer chooses under Sec. 1026.7(b)(12)(i) to round the
disclosures to the nearest whole dollar when disclosing them on the
periodic statement, the card issuer must calculate the savings
estimate for repayment in 36 months by subtracting the total cost
estimate for repayment in 36 months calculated under paragraph (e)
of this appendix (rounded to the nearest whole dollar) from the
minimum payment total cost estimate calculated under paragraph (c)
of this appendix (rounded to the nearest whole dollar). If a card
issuer chooses under Sec. 1026.7(b)(12)(i), however, to round the
disclosures to the nearest cent when disclosing them on the periodic
statement, the card issuer must calculate the savings estimate for
repayment in 36 months by subtracting the total cost estimate for
repayment in 36 months calculated under paragraph (e) of this
appendix (rounded to the nearest cent) from the minimum payment
total cost estimate calculated under paragraph (c) of this appendix
(rounded to the nearest cent). The savings estimate for repayment in
36 months shall be considered accurate if it is based on the total
cost estimate for repayment in 36 months that is calculated in
accordance with paragraph (e) of this appendix and the minimum
payment total cost estimate calculated under paragraph (c) of this
appendix.
Appendix M2 to Part 1026--Sample Calculations of Repayment Disclosures
The following is an example of how to calculate the minimum
payment repayment estimate, the minimum payment total cost estimate,
the estimated monthly payment for repayment in 36 months, the total
cost estimate for repayment in 36 months, and the savings estimate
for repayment in 36 months using the guidance in Appendix M1 to this
part where three annual percentage rates apply (where one of the
rates is a promotional APR), the total outstanding balance is $1000,
and the minimum payment formula is 2 percent of the outstanding
balance or $20, whichever is greater. The following calculation is
written in SAS code.
data one;
/*
Note:
pmt01 = estimated monthly payment to repay balance in 36 months
sumpmts36 = sum of payments for repayment in 36 months
month = number of months to repay total balance if making only
minimum payments
pmt = minimum monthly payment
fc = monthly finance charge
sumpmts = sum of payments for minimum payments
*/
* inputs;
* annual percentage rates; apr1 = 0.0; apr2 = 0.17; apr3 = 0.21; *
insert in ascending order;
* outstanding balances; cbal1 = 500; cbal2 = 250; cbal3 = 250;
* dollar minimum payment; dmin = 20;
* percent minimum payment; pmin = 0.02; * (0.02 + perrate);
* promotional rate information;
* last month for promotional rate; expm = 6; * = 0 if no promotional
rate;
* regular rate; rrate = .17; * = 0 if no promotional rate;
array apr(3); array perrate(3);
days = 365/12; * calculate days in month;
* calculate estimated monthly payment to pay off balances in 36
months, and total cost of repaying balance in 36 months;
array xperrate(3);
do I = 1 to 3;
xperrate(I) = (apr(I)/365) * days; * calculate periodic rate;
end;
if expmgt 0 then xperrate1a = (expm/36) * xperrate1 + (1-(expm/36))
* (rrate/365) * days; else xperrate1a = xperrate1;
tbal = cbal1 + cbal2 + cbal3;
perrate36 = (cbal1 * xperrate1a + cbal2 * xperrate2 + cbal3 *
xperrate3)/(cbal1 + cbal2 + cbal3);
* months to repay; dmonths = 36;
* initialize counters for sum of payments for repayment in 36
months; Sumpmts36 = 0;
pvaf = (1-(1 + perrate36) ** -dmonths)/perrate36; * calculate
present value of annuity factor;
pmt01 = round(tbal/pvaf,0.01); * calculate monthly payment for
designated number of months;
sumpmts36 = pmt01 * 36;
* calculate time to repay and total cost of making minimum payments
each month;
* initialize counter for months, and sum of payments;
month = 0;
sumpmts = 0;
do I = 1 to 3;
perrate(I) = (apr(I)/365) * days; * calculate periodic rate;
end;
put perrate1 = perrate2 = perrate3 =;
eins:
month = month + 1; * increment month counter;
pmt = round(pmin * tbal,0.01); * calculate payment as percentage of
balance;
if month geexpm and expm ne 0 then perrate1 = (rrate/365) * days;
if pmtltdmin then pmt = dmin; * set dollar minimum payment;
array xxxbal(3); array cbal(3);
do I = 1 to 3;
xxxbal(I) = round(cbal(I) * (1 + perrate(I)),0.01);
end;
fc = xxxbal1 + xxxbal2 + xxxbal3 - tbal;
if pmtgt (tbal + fc) then do;
do I = 1 to 3;
if cbal(I) gt 0 then pmt = round(cbal(I) * (1 + perrate(I)),0.01); *
set final payment amount;
end;
end;
if pmt le xxxbal1 then do;
cbal1 = xxxbal1 - pmt;
cbal2 = xxxbal2;
cbal3 = xxxbal3;
end;
if pmtgt xxxbal1 and xxxbal2 gt 0 and pmt le (xxxbal1 + xxxbal2)
then do;
cbal2 = xxxbal2 - (pmt - xxxbal1);
cbal1 = 0;
cbal3 = xxxbal3;
end;
if pmtgt xxxbal2 and xxxbal3 gt 0 then do;
cbal3 = xxxbal3 - (pmt - xxxbal1 - xxxbal2);
cbal2 = 0;
end;
sumpmts = sumpmts + pmt; * increment sum of payments;
tbal = cbal1 + cbal2 + cbal3; * calculate new total balance;
* print month, balance, payment amount, and finance charge;
put month = tbal = cbal1 = cbal2 = cbal3 = pmt = fc =;
if tbalgt 0 then go to eins; * go to next month if balance is
greater than zero;
* initialize total cost savings;
savtot = 0;
savtot = round(sumpmts,1)--round (sumpmts36,1);
* print number of months to repay debt if minimum payments made,
final balance (zero), total cost if minimum payments made, estimated
monthly payment for repayment in 36 months, total cost for repayment
in 36 months, and total savings if repaid in 36 months;
put title = ` ';
put title = `number of months to repay debt if minimum payment made,
final balance, total cost if minimum payments made, estimated
monthly payment for
[[Page 79917]]
repayment in 36 months, total cost for repayment in 36 months, and
total savings if repaid in 36 months';
put month = tbal = sumpmts = pmt01 = sumpmts36 = savtot =;
put title = ` ';
run;
Supplement I to Part 1026--Official Interpretations
Introduction
1. Official status. This commentary is the vehicle by which the
Bureau of Consumer Financial Protection issues official
interpretations of Regulation Z. Good faith compliance with this
commentary affords protection from liability under section 130(f) of
the Truth in Lending Act. Section 130(f) (15 U.S.C. 1640) protects
creditors from civil liability for any act done or omitted in good
faith in conformity with any interpretation issued by a duly
authorized official or employee of the Bureau of Consumer Financial
Protection.
2. Procedure for requesting interpretations. Under Appendix C of
the regulation, anyone may request an official interpretation.
Interpretations that are adopted will be incorporated in this
commentary following publication in the Federal Register. No
official interpretations are expected to be issued other than by
means of this commentary.
3. Rules of construction. (a) Lists that appear in the
commentary may be exhaustive or illustrative; the appropriate
construction should be clear from the context. In most cases,
illustrative lists are introduced by phrases such as ``including,
but not limited to,'' ``among other things,'' ``for example,'' or
``such as.''
(b) Throughout the commentary, reference to ``this section'' or
``this paragraph'' means the section or paragraph in the regulation
that is the subject of the comment.
4. Comment designations. Each comment in the commentary is
identified by a number and the regulatory section or paragraph which
it interprets. The comments are designated with as much specificity
as possible according to the particular regulatory provision
addressed. For example, some of the comments to Sec. 1026.18(b) are
further divided by subparagraph, such as comment 18(b)(1)-1 and
comment 18(b)(2)-1. In other cases, comments have more general
application and are designated, for example, as comment 18-1 or
comment 18(b)-1. This introduction may be cited as comments I-1
through I-4. Comments to the appendices may be cited, for example,
as comment app. A-1.
Subpart A--General
Section 1026.1--Authority, Purpose, Coverage, Organization,
Enforcement and Liability
1(c) Coverage
1. Foreign applicability. Regulation Z applies to all persons
(including branches of foreign banks and sellers located in the
United States) that extend consumer credit to residents (including
resident aliens) of any state as defined in Sec. 1026.2. If an
account is located in the United States and credit is extended to a
U.S. resident, the transaction is subject to the regulation. This
will be the case whether or not a particular advance or purchase on
the account takes place in the United States and whether or not the
extender of credit is chartered or based in the United States or a
foreign country. For example, if a U.S. resident has a credit card
account located in the consumer's state issued by a bank (whether
U.S. or foreign-based), the account is covered by the regulation,
including extensions of credit under the account that occur outside
the United States. In contrast, if a U.S. resident residing or
visiting abroad, or a foreign national abroad, opens a credit card
account issued by a foreign branch of a U.S. bank, the account is
not covered by the regulation.
Section 1026.2--Definitions and Rules of Construction
2(a)(2) Advertisement
1. Coverage. Only commercial messages that promote consumer
credit transactions requiring disclosures are advertisements.
Messages inviting, offering, or otherwise announcing generally to
prospective customers the availability of credit transactions,
whether in visual, oral, or print media, are covered by Regulation Z
(12 CFR part 1026).
i. Examples include:
A. Messages in a newspaper, magazine, leaflet, promotional
flyer, or catalog.
B. Announcements on radio, television, or public address system.
C. Electronic advertisements, such as on the Internet.
D. Direct mail literature or other printed material on any
exterior or interior sign.
E. Point of sale displays.
F. Telephone solicitations.
G. Price tags that contain credit information.
H. Letters sent to customers or potential customers as part of
an organized solicitation of business.
I. Messages on checking account statements offering auto loans
at a stated annual percentage rate.
J. Communications promoting a new open-end plan or closed-end
transaction.
ii. The term does not include:
A. Direct personal contacts, such as follow-up letters, cost
estimates for individual consumers, or oral or written communication
relating to the negotiation of a specific transaction.
B. Informational material, for example, interest-rate and loan-
term memos, distributed only to business entities.
C. Notices required by Federal or state law, if the law mandates
that specific information be displayed and only the information so
mandated is included in the notice.
D. News articles the use of which is controlled by the news
medium.
E. Market-research or educational materials that do not solicit
business.
F. Communications about an existing credit account (for example,
a promotion encouraging additional or different uses of an existing
credit card account).
2. Persons covered. All persons must comply with the advertising
provisions in Sec. Sec. 1026.16 and 1026.24, not just those that
meet the definition of creditor in Sec. 1026.2(a)(17). Thus, home
builders, merchants, and others who are not themselves creditors
must comply with the advertising provisions of the regulation if
they advertise consumer credit transactions. However, under section
145 of the Act, the owner and the personnel of the medium in which
an advertisement appears, or through which it is disseminated, are
not subject to civil liability for violations.
2(a)(4) Billing Cycle or Cycle
1. Intervals. In open-end credit plans, the billing cycle
determines the intervals for which periodic disclosure statements
are required; these intervals are also used as measuring points for
other duties of the creditor. Typically, billing cycles are monthly,
but they may be more frequent or less frequent (but not less
frequent than quarterly).
2. Creditors that do not bill. The term cycle is interchangeable
with billing cycle for definitional purposes, since some creditors'
cycles do not involve the sending of bills in the traditional sense
but only statements of account activity. This is commonly the case
with financial institutions when periodic payments are made through
payroll deduction or through automatic debit of the consumer's asset
account.
3. Equal cycles. Although cycles must be equal, there is a
permissible variance to account for weekends, holidays, and
differences in the number of days in months. If the actual date of
each statement does not vary by more than four days from a fixed
``day'' (for example, the third Thursday of each month) or ``date''
(for example, the 15th of each month) that the creditor regularly
uses, the intervals between statements are considered equal. The
requirement that cycles be equal applies even if the creditor
applies a daily periodic rate to determine the finance charge. The
requirement that intervals be equal does not apply to the first
billing cycle on an open-end account (i.e., the time period between
account opening and the generation of the first periodic statement)
or to a transitional billing cycle that can occur if the creditor
occasionally changes its billing cycles so as to establish a new
statement day or date. (See comments 9(c)(1)-3 and 9(c)(2)-3.)
4. Payment reminder. The sending of a regular payment reminder
(rather than a late payment notice) establishes a cycle for which
the creditor must send periodic statements.
2(a)(6) Business Day
1. Business function test. Activities that indicate that the
creditor is open for substantially all of its business functions
include the availability of personnel to make loan disbursements, to
open new accounts, and to handle credit transaction inquiries.
Activities that indicate that the creditor is not open for
substantially all of its business functions include a retailer's
merely accepting credit cards for purchases or a bank's having its
customer-service windows open only for limited purposes such as
deposits and withdrawals, bill paying, and related services.
2. Rule for rescission, disclosures for certain mortgage
transactions, and private
[[Page 79918]]
education loans. A more precise rule for what is a business day (all
calendar days except Sundays and the Federal legal holidays
specified in 5 U.S.C. 6103(a)) applies when the right of rescission,
the receipt of disclosures for certain dwelling-secured mortgage
transactions under Sec. Sec. 1026.19(a)(1)(ii), 1026.19(a)(2),
1026.31(c), or the receipt of disclosures for private education
loans under Sec. 1026.46(d)(4) is involved. Four Federal legal
holidays are identified in 5 U.S.C. 6103(a) by a specific date: New
Year's Day, January 1; Independence Day, July 4; Veterans Day,
November 11; and Christmas Day, December 25. When one of these
holidays (July 4, for example) falls on a Saturday, Federal offices
and other entities might observe the holiday on the preceding Friday
(July 3). In cases where the more precise rule applies, the observed
holiday (in the example, July 3) is a business day.
2(a)(7) Card Issuer
1. Agent. An agent of a card issuer is considered a card issuer.
Because agency relationships are traditionally defined by contract
and by state or other applicable law, the regulation does not define
agent. Merely providing services relating to the production of
credit cards or data processing for others, however, does not make
one the agent of the card issuer. In contrast, a financial
institution may become the agent of the card issuer if an agreement
between the institution and the card issuer provides that the
cardholder may use a line of credit with the financial institution
to pay obligations incurred by use of the credit card.
2(a)(8) Cardholder
1. General rule. A cardholder is a natural person at whose
request a card is issued for consumer credit purposes or who is a
co-obligor or guarantor for such a card issued to another. The
second category does not include an employee who is a co-obligor or
guarantor on a card issued to the employer for business purposes,
nor does it include a person who is merely the authorized user of a
card issued to another.
2. Limited application of regulation. For the limited purposes
of the rules on issuance of credit cards and liability for
unauthorized use, a cardholder includes any person, including an
organization, to whom a card is issued for any purpose--including a
business, agricultural, or commercial purpose.
3. Issuance. See the commentary to Sec. 1026.12(a).
4. Dual-purpose cards and dual-card systems. Some card issuers
offer dual-purpose cards that are for business as well as consumer
purposes. If a card is issued to an individual for consumer
purposes, the fact that an organization has guaranteed to pay the
debt does not make it business credit. On the other hand, if a card
is issued for business purposes, the fact that an individual
sometimes uses it for consumer purchases does not subject the card
issuer to the provisions on periodic statements, billing-error
resolution, and other protections afforded to consumer credit. Some
card issuers offer dual-card systems--that is, they issue two cards
to the same individual, one intended for business use, the other for
consumer or personal use. With such a system, the same person may be
a cardholder for general purposes when using the card issued for
consumer use, and a cardholder only for the limited purposes of the
restrictions on issuance and liability when using the card issued
for business purposes.
2(a)(9) Cash Price
1. Components. This amount is a starting point in computing the
amount financed and the total sale price under Sec. 1026.18 for
credit sales. Any charges imposed equally in cash and credit
transactions may be included in the cash price, or they may be
treated as other amounts financed under Sec. 1026.18(b)(2).
2. Service contracts. Service contracts include contracts for
the repair or the servicing of goods, such as mechanical breakdown
coverage, even if such a contract is characterized as insurance
under state law.
3. Rebates. The creditor has complete flexibility in the way it
treats rebates for purposes of disclosure and calculation. (See the
commentary to Sec. 1026.18(b).)
2(a)(10) Closed-End Credit
1. General. The coverage of this term is defined by exclusion.
That is, it includes any credit arrangement that does not fall
within the definition of open-end credit. Subpart C contains the
disclosure rules for closed-end credit when the obligation is
subject to a finance charge or is payable by written agreement in
more than four installments.
2(a)(11) Consumer
1. Scope. Guarantors, endorsers, and sureties are not generally
consumers for purposes of the regulation, but they may be entitled
to rescind under certain circumstances and they may have certain
rights if they are obligated on credit card plans.
2. Rescission rules. For purposes of rescission under Sec. Sec.
1026.15 and 1026.23, a consumer includes any natural person whose
ownership interest in his or her principal dwelling is subject to
the risk of loss. Thus, if a security interest is taken in A's
ownership interest in a house and that house is A's principal
dwelling, A is a consumer for purposes of rescission, even if A is
not liable, either primarily or secondarily, on the underlying
consumer credit transaction. An ownership interest does not include,
for example, leaseholds or inchoate rights, such as dower.
3. Land trusts. Credit extended to land trusts, as described in
the commentary to Sec. 1026.3(a), is considered to be extended to a
natural person for purposes of the definition of consumer.
2(a)(12) Consumer Credit
1. Primary purpose. There is no precise test for what
constitutes credit offered or extended for personal, family, or
household purposes, nor for what constitutes the primary purpose.
(See, however, the discussion of business purposes in the commentary
to Sec. 1026.3(a).)
2(a)(13) Consummation
1. State law governs. When a contractual obligation on the
consumer's part is created is a matter to be determined under
applicable law; Regulation Z does not make this determination. A
contractual commitment agreement, for example, that under applicable
law binds the consumer to the credit terms would be consummation.
Consummation, however, does not occur merely because the consumer
has made some financial investment in the transaction (for example,
by paying a nonrefundable fee) unless, of course, applicable law
holds otherwise.
2. Credit v. sale. Consummation does not occur when the consumer
becomes contractually committed to a sale transaction, unless the
consumer also becomes legally obligated to accept a particular
credit arrangement. For example, when a consumer pays a
nonrefundable deposit to purchase an automobile, a purchase contract
may be created, but consummation for purposes of the regulation does
not occur unless the consumer also contracts for financing at that
time.
2(a)(14) Credit
1. Exclusions. The following situations are not considered
credit for purposes of the regulation:
i. Layaway plans, unless the consumer is contractually obligated
to continue making payments. Whether the consumer is so obligated is
a matter to be determined under applicable law. The fact that the
consumer is not entitled to a refund of any amounts paid towards the
cash price of the merchandise does not bring layaways within the
definition of credit.
ii. Tax liens, tax assessments, court judgments, and court
approvals of reaffirmation of debts in bankruptcy. However, third-
party financing of such obligations (for example, a bank loan
obtained to pay off a tax lien) is credit for purposes of the
regulation.
iii. Insurance premium plans that involve payment in
installments with each installment representing the payment for
insurance coverage for a certain future period of time, unless the
consumer is contractually obligated to continue making payments.
iv. Home improvement transactions that involve progress
payments, if the consumer pays, as the work progresses, only for
work completed and has no contractual obligation to continue making
payments.
v. Borrowing against the accrued cash value of an insurance
policy or a pension account, if there is no independent obligation
to repay.
vi. Letters of credit.
vii. The execution of option contracts. However, there may be an
extension of credit when the option is exercised, if there is an
agreement at that time to defer payment of a debt.
viii. Investment plans in which the party extending capital to
the consumer risks the loss of the capital advanced. This includes,
for example, an arrangement with a home purchaser in which the
investor pays a portion of the downpayment and of the periodic
mortgage payments in return for an ownership interest in the
property, and shares in any gain or loss of property value.
ix. Mortgage assistance plans administered by a government
agency in which a portion
[[Page 79919]]
of the consumer's monthly payment amount is paid by the agency. No
finance charge is imposed on the subsidy amount, and that amount is
due in a lump-sum payment on a set date or upon the occurrence of
certain events. (If payment is not made when due, a new note
imposing a finance charge may be written, which may then be subject
to the regulation.)
2. Payday loans; deferred presentment. Credit includes a
transaction in which a cash advance is made to a consumer in
exchange for the consumer's personal check, or in exchange for the
consumer's authorization to debit the consumer's deposit account,
and where the parties agree either that the check will not be cashed
or deposited, or that the consumer's deposit account will not be
debited, until a designated future date. This type of transaction is
often referred to as a ``payday loan'' or ``payday advance'' or
``deferred-presentment loan.'' A fee charged in connection with such
a transaction may be a finance charge for purposes of Sec. 1026.4,
regardless of how the fee is characterized under state law. Where
the fee charged constitutes a finance charge under Sec. 1026.4 and
the person advancing funds regularly extends consumer credit, that
person is a creditor and is required to provide disclosures
consistent with the requirements of Regulation Z. (See Sec.
1026.2(a)(17).)
Paragraph 2(a)(15)
1. Usable from time to time. A credit card must be usable from
time to time. Since this involves the possibility of repeated use of
a single device, checks and similar instruments that can be used
only once to obtain a single credit extension are not credit cards.
2. Examples. i. Examples of credit cards include:
A. A card that guarantees checks or similar instruments, if the
asset account is also tied to an overdraft line or if the instrument
directly accesses a line of credit.
B. A card that accesses both a credit and an asset account (that
is, a debit-credit card).
C. An identification card that permits the consumer to defer
payment on a purchase.
D. An identification card indicating loan approval that is
presented to a merchant or to a lender, whether or not the consumer
signs a separate promissory note for each credit extension.
E. A card or device that can be activated upon receipt to access
credit, even if the card has a substantive use other than credit,
such as a purchase-price discount card. Such a card or device is a
credit card notwithstanding the fact that the recipient must first
contact the card issuer to access or activate the credit feature.
ii. In contrast, credit card does not include, for example:
A. A check-guarantee or debit card with no credit feature or
agreement, even if the creditor occasionally honors an inadvertent
overdraft.
B. Any card, key, plate, or other device that is used in order
to obtain petroleum products for business purposes from a wholesale
distribution facility or to gain access to that facility, and that
is required to be used without regard to payment terms.
C. An account number that accesses a credit account, unless the
account number can access an open-end line of credit to purchase
goods or services. For example, if a creditor provides a consumer
with an open-end line of credit that can be accessed by an account
number in order to transfer funds into another account (such as an
asset account with the same creditor), the account number is not a
credit card for purposes of Sec. 1026.2(a)(15)(i). However, if the
account number can also access the line of credit to purchase goods
or services (such as an account number that can be used to purchase
goods or services on the Internet), the account number is a credit
card for purposes of Sec. 1026.2(a)(15)(i), regardless of whether
the creditor treats such transactions as purchases, cash advances,
or some other type of transaction. Furthermore, if the line of
credit can also be accessed by a card (such as a debit card), that
card is a credit card for purposes of Sec. 1026.2(a)(15)(i).
3. Charge card. Generally, charge cards are cards used in
connection with an account on which outstanding balances cannot be
carried from one billing cycle to another and are payable when a
periodic statement is received. Under the regulation, a reference to
credit cards generally includes charge cards. In particular,
references to credit card accounts under an open-end (not home-
secured) consumer credit plan in Subparts B and G generally include
charge cards. The term charge card is, however, distinguished from
credit card or credit card account under an open-end (not home-
secured) consumer credit plan in Sec. Sec. 1026.60,
1026.6(b)(2)(xiv), 1026.7(b)(11), 1026.7(b)(12), 1026.9(e),
1026.9(f), 1026.28(d), 1026.52(b)(1)(ii)(C), and Appendices G-10
through G-13.
4. Credit card account under an open-end (not home-secured)
consumer credit plan. An open-end consumer credit account is a
credit card account under an open-end (not home-secured) consumer
credit plan for purposes of Sec. 1026.2(a)(15)(ii) if:
i. The account is accessed by a credit card, as defined in Sec.
1026.2(a)(15)(i); and
ii. The account is not excluded under Sec. 1026.2(a)(15)(ii)(A)
or (a)(15)(ii)(B).
2(a)(16) Credit Sale
1. Special disclosure. If the seller is a creditor in the
transaction, the transaction is a credit sale and the special credit
sale disclosures (that is, the disclosures under Sec. 1026.18(j))
must be given. This applies even if there is more than one creditor
in the transaction and the creditor making the disclosures is not
the seller. (See the commentary to Sec. 1026.17(d).)
2. Sellers who arrange credit. If the seller of the property or
services involved arranged for financing but is not a creditor as to
that sale, the transaction is not a credit sale. Thus, if a seller
assists the consumer in obtaining a direct loan from a financial
institution and the consumer's note is payable to the financial
institution, the transaction is a loan and only the financial
institution is a creditor.
3. Refinancings. Generally, when a credit sale is refinanced
within the meaning of Sec. 1026.20(a), loan disclosures should be
made. However, if a new sale of goods or services is also involved,
the transaction is a credit sale.
4. Incidental sales. Some lenders sell a product or service--
such as credit, property, or health insurance--as part of a loan
transaction. Section 1026.4 contains the rules on whether the cost
of credit life, disability or property insurance is part of the
finance charge. If the insurance is financed, it may be disclosed as
a separate credit-sale transaction or disclosed as part of the
primary transaction; if the latter approach is taken, either loan or
credit-sale disclosures may be made. (See the commentary to Sec.
1026.17(c)(1) for further discussion of this point.)
5. Credit extensions for educational purposes. A credit
extension for educational purposes in which an educational
institution is the creditor may be treated as either a credit sale
or a loan, regardless of whether the funds are given directly to the
student, credited to the student's account, or disbursed to other
persons on the student's behalf. The disclosure of the total sale
price need not be given if the transaction is treated as a loan.
2(a)(17) Creditor
1. General. The definition contains four independent tests. If
any one of the tests is met, the person is a creditor for purposes
of that particular test.
Paragraph 2(a)(17)(i)
1. Prerequisites. This test is composed of two requirements,
both of which must be met in order for a particular credit extension
to be subject to the regulation and for the credit extension to
count towards satisfaction of the numerical tests mentioned in Sec.
1026.2(a)(17)(v).
i. First, there must be either or both of the following:
A. A written (rather than oral) agreement to pay in more than
four installments. A letter that merely confirms an oral agreement
does not constitute a written agreement for purposes of the
definition.
B. A finance charge imposed for the credit. The obligation to
pay the finance charge need not be in writing.
ii. Second, the obligation must be payable to the person in
order for that person to be considered a creditor. If an obligation
is made payable to bearer, the creditor is the one who initially
accepts the obligation.
2. Assignees. If an obligation is initially payable to one
person, that person is the creditor even if the obligation by its
terms is simultaneously assigned to another person. For example:
i. An auto dealer and a bank have a business relationship in
which the bank supplies the dealer with credit sale contracts that
are initially made payable to the dealer and provide for the
immediate assignment of the obligation to the bank. The dealer and
purchaser execute the contract only after the bank approves the
creditworthiness of the purchaser. Because the obligation is
initially payable on its face to the dealer, the dealer is the only
creditor in the transaction.
3. Numerical tests. The examples below illustrate how the
numerical tests of Sec. 1026.2(a)(17)(v) are applied. The examples
assume that consumer credit with a finance charge or written
agreement for more than 4 installments was extended in the years in
[[Page 79920]]
question and that the person did not extend such credit in 2006.
4. Counting transactions. For purposes of closed-end credit, the
creditor counts each credit transaction. For open-end credit,
transactions means accounts, so that outstanding accounts are
counted instead of individual credit extensions. Normally the number
of transactions is measured by the preceding calendar year; if the
requisite number is met, then the person is a creditor for all
transactions in the current year. However, if the person did not
meet the test in the preceding year, the number of transactions is
measured by the current calendar year. For example, if the person
extends consumer credit 26 times in 2007, it is a creditor for
purposes of the regulation for the last extension of credit in 2007
and for all extensions of consumer credit in 2008. On the other
hand, if a business begins in 2007 and extends consumer credit 20
times, it is not a creditor for purposes of the regulation in 2007.
If it extends consumer credit 75 times in 2008, however, it becomes
a creditor for purposes of the regulation (and must begin making
disclosures) after the 25th extension of credit in that year and is
a creditor for all extensions of consumer credit in 2009.
5. Relationship between consumer credit in general and credit
secured by a dwelling. Extensions of credit secured by a dwelling
are counted towards the 25-extensions test. For example, if in 2007
a person extends unsecured consumer credit 23 times and consumer
credit secured by a dwelling twice, it becomes a creditor for the
succeeding extensions of credit, whether or not they are secured by
a dwelling. On the other hand, extensions of consumer credit not
secured by a dwelling are not counted towards the number of credit
extensions secured by a dwelling. For example, if in 2007 a person
extends credit not secured by a dwelling 8 times and credit secured
by a dwelling 3 times, it is not a creditor.
6. Effect of satisfying one test. Once one of the numerical
tests is satisfied, the person is also a creditor for the other type
of credit. For example, in 2007 a person extends consumer credit
secured by a dwelling 5 times. That person is a creditor for all
succeeding credit extensions, whether they involve credit secured by
a dwelling or not.
7. Trusts. In the case of credit extended by trusts, each
individual trust is considered a separate entity for purposes of
applying the criteria. For example:
i. A bank is the trustee for three trusts. Trust A makes 15
extensions of consumer credit annually; Trust B makes 10 extensions
of consumer credit annually; and Trust C makes 30 extensions of
consumer credit annually. Only Trust C is a creditor for purposes of
the regulation.
Paragraph 2(a)(17)(ii) [Reserved]
Paragraph 2(a)(17)(iii)
1. Card issuers subject to Subpart B. Section 1026.2(a)(17)(iii)
makes certain card issuers creditors for purposes of the open-end
credit provisions of the regulation. This includes, for example, the
issuers of so-called travel and entertainment cards that expect
repayment at the first billing and do not impose a finance charge.
Since all disclosures are to be made only as applicable, such card
issuers would omit finance charge disclosures. Other provisions of
the regulation regarding such areas as scope, definitions,
determination of which charges are finance charges, Spanish language
disclosures, record retention, and use of model forms, also apply to
such card issuers.
Paragraph 2(a)(17)(iv)
1. Card issuers subject to Subparts B and C. Section
1026.2(a)(17)(iv) includes as creditors card issuers extending
closed-end credit in which there is a finance charge or an agreement
to pay in more than four installments. These card issuers are
subject to the appropriate provisions of Subparts B and C, as well
as to the general provisions.
2(a)(18) Downpayment
1. Allocation. If a consumer makes a lump-sum payment, partially
to reduce the cash price and partially to pay prepaid finance
charges, only the portion attributable to reducing the cash price is
part of the downpayment. (See the commentary to Sec.
1026.2(a)(23).)
2. Pick-up payments. i. Creditors may treat the deferred portion
of the downpayment, often referred to as pick-up payments, in a
number of ways. If the pick-up payment is treated as part of the
downpayment:
A. It is subtracted in arriving at the amount financed under
Sec. 1026.18(b).
B. It may, but need not, be reflected in the payment schedule
under Sec. 1026.18(g).
ii. If the pick-up payment does not meet the definition (for
example, if it is payable after the second regularly scheduled
payment) or if the creditor chooses not to treat it as part of the
downpayment:
A. It must be included in the amount financed.
B. It must be shown in the payment schedule.
iii. Whichever way the pick-up payment is treated, the total of
payments under Sec. 1026.18(h) must equal the sum of the payments
disclosed under Sec. 1026.18(g).
3. Effect of existing liens. i. No cash payment. In a credit
sale, the ``downpayment'' may only be used to reduce the cash price.
For example, when a trade-in is used as the downpayment and the
existing lien on an automobile to be traded in exceeds the value of
the automobile, creditors must disclose a zero on the downpayment
line rather than a negative number. To illustrate, assume a consumer
owes $10,000 on an existing automobile loan and that the trade-in
value of the automobile is only $8,000, leaving a $2,000 deficit.
The creditor should disclose a downpayment of $0, not -$2,000.
ii. Cash payment. If the consumer makes a cash payment,
creditors may, at their option, disclose the entire cash payment as
the downpayment, or apply the cash payment first to any excess lien
amount and disclose any remaining cash as the downpayment. In the
above example:
A. If the downpayment disclosed is equal to the cash payment,
the $2,000 deficit must be reflected as an additional amount
financed under Sec. 1026.18(b)(2).
B. If the consumer provides $1,500 in cash (which does not
extinguish the $2,000 deficit), the creditor may disclose a
downpayment of $1,500 or of $0.
C. If the consumer provides $3,000 in cash, the creditor may
disclose a downpayment of $3,000 or of $1,000.
2(a)(19) Dwelling
1. Scope. A dwelling need not be the consumer's principal
residence to fit the definition, and thus a vacation or second home
could be a dwelling. However, for purposes of the definition of
residential mortgage transaction and the right to rescind, a
dwelling must be the principal residence of the consumer. (See the
commentary to Sec. Sec. 1026.2(a)(24), 1026.15, and 1026.23.)
2. Use as a residence. Mobile homes, boats, and trailers are
dwellings if they are in fact used as residences, just as are
condominium and cooperative units. Recreational vehicles, campers,
and the like not used as residences are not dwellings.
3. Relation to exemptions. Any transaction involving a security
interest in a consumer's principal dwelling (as well as in any real
property) remains subject to the regulation despite the general
exemption in Sec. 1026.3(b).
2(a)(20) Open-End Credit
1. General. This definition describes the characteristics of
open-end credit (for which the applicable disclosure and other rules
are contained in Subpart B), as distinct from closed-end credit.
Open-end credit is consumer credit that is extended under a plan and
meets all 3 criteria set forth in the definition.
2. Existence of a plan. The definition requires that there be a
plan, which connotes a contractual arrangement between the creditor
and the consumer. Some creditors offer programs containing a number
of different credit features. The consumer has a single account with
the institution that can be accessed repeatedly via a number of sub-
accounts established for the different program features and rate
structures. Some features of the program might be used repeatedly
(for example, an overdraft line) while others might be used
infrequently (such as the part of the credit line available for
secured credit). If the program as a whole is subject to prescribed
terms and otherwise meets the definition of open-end credit, such a
program would be considered a single, multifeatured plan.
3. Repeated transactions. Under this criterion, the creditor
must reasonably contemplate repeated transactions. This means that
the credit plan must be usable from time to time and the creditor
must legitimately expect that there will be repeat business rather
than a one-time credit extension. The creditor must expect repeated
dealings with consumers under the credit plan as a whole and need
not believe a consumer will reuse a particular feature of the plan.
The determination of whether a creditor can reasonably contemplate
repeated transactions requires an objective analysis. Information
that much of the creditor's customer base with accounts under the
plan make repeated transactions over some period of time is relevant
to the determination, particularly when the plan is opened primarily
for the financing of infrequently purchased products or services. A
standard
[[Page 79921]]
based on reasonable belief by a creditor necessarily includes some
margin for judgmental error. The fact that particular consumers do
not return for further credit extensions does not prevent a plan
from having been properly characterized as open-end. For example, if
much of the customer base of a clothing store makes repeat
purchases, the fact that some consumers use the plan only once would
not affect the characterization of the store's plan as open-end
credit. The criterion regarding repeated transactions is a question
of fact to be decided in the context of the creditor's type of
business and the creditor's relationship with its customers. For
example, it would be more reasonable for a bank or depository
institution to contemplate repeated transactions with a customer
than for a seller of aluminum siding to make the same assumption
about its customers.
4. Finance charge on an outstanding balance. The requirement
that a finance charge may be computed and imposed from time to time
on the outstanding balance means that there is no specific amount
financed for the plan for which the finance charge, total of
payments, and payment schedule can be calculated. A plan may meet
the definition of open-end credit even though a finance charge is
not normally imposed, provided the creditor has the right, under the
plan, to impose a finance charge from time to time on the
outstanding balance. For example, in some plans, a finance charge is
not imposed if the consumer pays all or a specified portion of the
outstanding balance within a given time period. Such a plan could
meet the finance charge criterion, if the creditor has the right to
impose a finance charge, even though the consumer actually pays no
finance charges during the existence of the plan because the
consumer takes advantage of the option to pay the balance (either in
full or in installments) within the time necessary to avoid finance
charges.
5. Reusable line. The total amount of credit that may be
extended during the existence of an open-end plan is unlimited
because available credit is generally replenished as earlier
advances are repaid. A line of credit is self-replenishing even
though the plan itself has a fixed expiration date, as long as
during the plan's existence the consumer may use the line, repay,
and reuse the credit. The creditor may occasionally or routinely
verify credit information such as the consumer's continued income
and employment status or information for security purposes but, to
meet the definition of open-end credit, such verification of credit
information may not be done as a condition of granting a consumer's
request for a particular advance under the plan. In general, a
credit line is self-replenishing if the consumer can take further
advances as outstanding balances are repaid without being required
to separately apply for those additional advances. A credit card
account where the plan as a whole replenishes meets the self-
replenishing criterion, notwithstanding the fact that a credit card
issuer may verify credit information from time to time in connection
with specific transactions. This criterion of unlimited credit
distinguishes open-end credit from a series of advances made
pursuant to a closed-end credit loan commitment. For example:
i. Under a closed-end commitment, the creditor might agree to
lend a total of $10,000 in a series of advances as needed by the
consumer. When a consumer has borrowed the full $10,000, no more is
advanced under that particular agreement, even if there has been
repayment of a portion of the debt. (See Sec. 1026.2(a)(17)(iv) for
disclosure requirements when a credit card is used to obtain the
advances.)
ii. This criterion does not mean that the creditor must
establish a specific credit limit for the line of credit or that the
line of credit must always be replenished to its original amount.
The creditor may reduce a credit limit or refuse to extend new
credit in a particular case due to changes in the creditor's
financial condition or the consumer's creditworthiness. (The rules
in Sec. 1026.40(f), however, limit the ability of a creditor to
suspend credit advances for home equity plans.) While consumers
should have a reasonable expectation of obtaining credit as long as
they remain current and within any preset credit limits, further
extensions of credit need not be an absolute right in order for the
plan to meet the self-replenishing criterion.
6. Verifications of collateral value. Creditors that otherwise
meet the requirements of Sec. 1026.2(a)(20) extend open-end credit
notwithstanding the fact that the creditor must verify collateral
values to comply with Federal, state, or other applicable law or
verifies the value of collateral in connection with a particular
advance under the plan.
7. Open-end real estate mortgages. Some credit plans call for
negotiated advances under so-called open-end real estate mortgages.
Each such plan must be independently measured against the definition
of open-end credit, regardless of the terminology used in the
industry to describe the plan. The fact that a particular plan is
called an open-end real estate mortgage, for example, does not, by
itself, mean that it is open-end credit under the regulation.
2(a)(21) Periodic Rate
1. Basis. The periodic rate may be stated as a percentage (for
example, 1 and \1/2\% per month) or as a decimal equivalent (for
example, .015 monthly). It may be based on any portion of a year the
creditor chooses. Some creditors use 1/360 of an annual rate as
their periodic rate. These creditors:
i. May disclose a 1/360 rate as a daily periodic rate, without
further explanation, if it is in fact only applied 360 days per
year. But if the creditor applies that rate for 365 days, the
creditor must note that fact and, of course, disclose the true
annual percentage rate.
ii. Would have to apply the rate to the balance to disclose the
annual percentage rate with the degree of accuracy required in the
regulation (that is, within \1/8\th of 1 percentage point of the
rate based on the actual 365 days in the year).
2. Transaction charges. Periodic rate does not include initial
one-time transaction charges, even if the charge is computed as a
percentage of the transaction amount.
2(a)(22) Person
1. Joint ventures. A joint venture is an organization and is
therefore a person.
2. Attorneys. An attorney and his or her client are considered
to be the same person for purposes of this part when the attorney is
acting within the scope of the attorney-client relationship with
regard to a particular transaction.
3. Trusts. A trust and its trustee are considered to be the same
person for purposes of this part.
2(a)(23) Prepaid Finance Charge
1. General. Prepaid finance charges must be taken into account
under Sec. 1026.18(b) in computing the disclosed amount financed,
and must be disclosed if the creditor provides an itemization of the
amount financed under Sec. 1026.18(c).
2. Examples. i. Common examples of prepaid finance charges
include:
A. Buyer's points.
B. Service fees.
C. Loan fees.
D. Finder's fees.
E. Loan-guarantee insurance.
F. Credit-investigation fees.
ii. However, in order for these or any other finance charges to
be considered prepaid, they must be either paid separately in cash
or check or withheld from the proceeds. Prepaid finance charges
include any portion of the finance charge paid prior to or at
closing or settlement.
3. Exclusions. Add-on and discount finance charges are not
prepaid finance charges for purposes of this part. Finance charges
are not prepaid merely because they are precomputed, whether or not
a portion of the charge will be rebated to the consumer upon
prepayment. (See the commentary to Sec. 1026.18(b).)
4. Allocation of lump-sum payments. In a credit sale transaction
involving a lump-sum payment by the consumer and a discount or other
item that is a finance charge under Sec. 1026.4, the discount or
other item is a prepaid finance charge to the extent the lump-sum
payment is not applied to the cash price. For example, a seller
sells property to a consumer for $10,000, requires the consumer to
pay $3,000 at the time of the purchase, and finances the remainder
as a closed-end credit transaction. The cash price of the property
is $9,000. The seller is the creditor in the transaction and
therefore the $1,000 difference between the credit and cash prices
(the discount) is a finance charge. (See the commentary to Sec.
1026.4(b)(9) and (c)(5).) If the creditor applies the entire $3,000
to the cash price and adds the $1,000 finance charge to the interest
on the $6,000 to arrive at the total finance charge, all of the
$3,000 lump-sum payment is a downpayment and the discount is not a
prepaid finance charge. However, if the creditor only applies $2,000
of the lump-sum payment to the cash price, then $2,000 of the $3,000
is a downpayment and the $1,000 discount is a prepaid finance
charge.
2(a)(24) Residential Mortgage Transaction
1. Relation to other sections. This term is important in five
provisions in the regulation:
[[Page 79922]]
i. Section 1026.4(c)(7)--exclusions from the finance charge.
ii. Section 1026.15(f)--exemption from the right of rescission.
iii. Section 1026.18(q)--whether or not the obligation is
assumable.
iv. Section 1026.20(b)--disclosure requirements for assumptions.
v. Section 1026.23(f)--exemption from the right of rescission.
2. Lien status. The definition is not limited to first lien
transactions. For example, a consumer might assume a paid-down first
mortgage (or borrow part of the purchase price) and borrow the
balance of the purchase price from a creditor who takes a second
mortgage. The second mortgage transaction is a residential mortgage
transaction if the dwelling purchased is the consumer's principal
residence.
3. Principal dwelling. A consumer can have only one principal
dwelling at a time. Thus, a vacation or other second home would not
be a principal dwelling. However, if a consumer buys or builds a new
dwelling that will become the consumer's principal dwelling within a
year or upon the completion of construction, the new dwelling is
considered the principal dwelling for purposes of applying this
definition to a particular transaction. (See the commentary to
Sec. Sec. 1026.15(a) and 1026.23(a).)
4. Construction financing. If a transaction meets the definition
of a residential mortgage transaction and the creditor chooses to
disclose it as several transactions under Sec. 1026.17(c)(6), each
one is considered to be a residential mortgage transaction, even if
different creditors are involved. For example:
i. The creditor makes a construction loan to finance the initial
construction of the consumer's principal dwelling, and the loan will
be disbursed in five advances. The creditor gives six sets of
disclosures (five for the construction phase and one for the
permanent phase). Each one is a residential mortgage transaction.
ii. One creditor finances the initial construction of the
consumer's principal dwelling and another creditor makes a loan to
satisfy the construction loan and provide permanent financing. Both
transactions are residential mortgage transactions.
5. Acquisition. i. A residential mortgage transaction finances
the acquisition of a consumer's principal dwelling. The term does
not include a transaction involving a consumer's principal dwelling
if the consumer had previously purchased and acquired some interest
to the dwelling, even though the consumer had not acquired full
legal title.
ii. Examples of new transactions involving a previously acquired
dwelling include the financing of a balloon payment due under a land
sale contract and an extension of credit made to a joint owner of
property to buy out the other joint owner's interest. In these
instances, disclosures are not required under Sec. 1026.18(q)
(assumability policies). However, the rescission rules of Sec. Sec.
1026.15 and 1026.23 do apply to these new transactions.
iii. In other cases, the disclosure and rescission rules do not
apply. For example, where a buyer enters into a written agreement
with the creditor holding the seller's mortgage, allowing the buyer
to assume the mortgage, if the buyer had previously purchased the
property and agreed with the seller to make the mortgage payments,
Sec. 1026.20(b) does not apply (assumptions involving residential
mortgages).
6. Multiple purpose transactions. A transaction meets the
definition of this section if any part of the loan proceeds will be
used to finance the acquisition or initial construction of the
consumer's principal dwelling. For example, a transaction to finance
the initial construction of the consumer's principal dwelling is a
residential mortgage transaction even if a portion of the funds will
be disbursed directly to the consumer or used to satisfy a loan for
the purchase of the land on which the dwelling will be built.
7. Construction on previously acquired vacant land. A
residential mortgage transaction includes a loan to finance the
construction of a consumer's principal dwelling on a vacant lot
previously acquired by the consumer.
2(a)(25) Security Interest
1. Threshold test. The threshold test is whether a particular
interest in property is recognized as a security interest under
applicable law. The regulation does not determine whether a
particular interest is a security interest under applicable law. If
the creditor is unsure whether a particular interest is a security
interest under applicable law (for example, if statutes and case law
are either silent or inconclusive on the issue), the creditor may at
its option consider such interests as security interests for Truth
in Lending purposes. However, the regulation and the commentary do
exclude specific interests, such as after-acquired property and
accessories, from the scope of the definition regardless of their
categorization under applicable law, and these named exclusions may
not be disclosed as security interests under the regulation. (But
see the discussion of exclusions elsewhere in the commentary to
Sec. 1026.2(a)(25).)
2. Exclusions. The general definition of security interest
excludes three groups of interests: incidental interests, interests
in after-acquired property, and interests that arise solely by
operation of law. These interests may not be disclosed with the
disclosures required under Sec. 1026.18, but the creditor is not
precluded from preserving these rights elsewhere in the contract
documents, or invoking and enforcing such rights, if it is otherwise
lawful to do so. If the creditor is unsure whether a particular
interest is one of the excluded interests, the creditor may, at its
option, consider such interests as security interests for Truth in
Lending purposes.
3. Incidental interests. i. Incidental interests in property
that are not security interests include, among other things:
A. Assignment of rents.
B. Right to condemnation proceeds.
C. Interests in accessories and replacements.
D. Interests in escrow accounts, such as for taxes and
insurance.
E. Waiver of homestead or personal property rights.
ii. The notion of an incidental interest does not encompass an
explicit security interest in an insurance policy if that policy is
the primary collateral for the transaction--for example, in an
insurance premium financing transaction.
4. Operation of law. Interests that arise solely by operation of
law are excluded from the general definition. Also excluded are
interests arising by operation of law that are merely repeated or
referred to in the contract. However, if the creditor has an
interest that arises by operation of law, such as a vendor's lien,
and takes an independent security interest in the same property,
such as a UCC security interest, the latter interest is a
disclosable security interest unless otherwise provided.
5. Rescission rules. Security interests that arise solely by
operation of law are security interests for purposes of rescission.
Examples of such interests are mechanics' and materialmen's liens.
6. Specificity of disclosure. A creditor need not separately
disclose multiple security interests that it may hold in the same
collateral. The creditor need only disclose that the transaction is
secured by the collateral, even when security interests from prior
transactions remain of record and a new security interest is taken
in connection with the transaction. In disclosing the fact that the
transaction is secured by the collateral, the creditor also need not
disclose how the security interest arose. For example, in a closed-
end credit transaction, a rescission notice need not specifically
state that a new security interest is ``acquired'' or an existing
security interest is ``retained'' in the transaction. The
acquisition or retention of a security interest in the consumer's
principal dwelling instead may be disclosed in a rescission notice
with a general statement such as the following: ``Your home is the
security for the new transaction.''
2(b) Rules of Construction
1. [Reserved]
2. Amount. The numerical amount must be a dollar amount unless
otherwise indicated. For example, in a closed-end transaction
(Subpart C), the amount financed and the amount of any payment must
be expressed as a dollar amount. In some cases, an amount should be
expressed as a percentage. For example, in disclosures provided
before the first transaction under an open-end plan (Subpart B),
creditors are permitted to explain how the amount of any finance
charge will be determined; where a cash-advance fee (which is a
finance charge) is a percentage of each cash advance, the amount of
the finance charge for that fee is expressed as a percentage.
Section 1026.3--Exempt Transactions
1. Relationship to Sec. 1026.12. The provisions in Sec.
1026.12(a) and (b) governing the issuance of credit cards and the
limitations on liability for their unauthorized use apply to all
credit cards, even if the credit cards are issued for use in
connection with extensions of credit that otherwise are exempt under
this section.
[[Page 79923]]
3(a) Business, Commercial, Agricultural, or Organizational Credit
1. Primary purposes. A creditor must determine in each case if
the transaction is primarily for an exempt purpose. If some question
exists as to the primary purpose for a credit extension, the
creditor is, of course, free to make the disclosures, and the fact
that disclosures are made under such circumstances is not
controlling on the question of whether the transaction was exempt.
(See comment 3(a)-2, however, with respect to credit cards.)
2. Business purpose purchases. i. Business-purpose credit
cards--extensions of credit for consumer purposes. If a business-
purpose credit card is issued to a person, the provisions of the
regulation do not apply, other than as provided in Sec. Sec.
1026.12(a) and 1026.12(b), even if extensions of credit for consumer
purposes are occasionally made using that business-purpose credit
card. For example, the billing error provisions set forth in Sec.
1026.13 do not apply to consumer-purpose extensions of credit using
a business-purpose credit card.
ii. Consumer-purpose credit cards--extensions of credit for
business purposes. If a consumer-purpose credit card is issued to a
person, the provisions of the regulation apply, even to occasional
extensions of credit for business purposes made using that consumer-
purpose credit card. For example, a consumer may assert a billing
error with respect to any extension of credit using a consumer-
purpose credit card, even if the specific extension of credit on
such credit card or open-end credit plan that is the subject of the
dispute was made for business purposes.
3. Factors. In determining whether credit to finance an
acquisition--such as securities, antiques, or art--is primarily for
business or commercial purposes (as opposed to a consumer purpose),
the following factors should be considered:
i. General. A. The relationship of the borrower's primary
occupation to the acquisition. The more closely related, the more
likely it is to be business purpose.
B. The degree to which the borrower will personally manage the
acquisition. The more personal involvement there is, the more likely
it is to be business purpose.
C. The ratio of income from the acquisition to the total income
of the borrower. The higher the ratio, the more likely it is to be
business purpose.
D. The size of the transaction. The larger the transaction, the
more likely it is to be business purpose.
E. The borrower's statement of purpose for the loan.
ii. Business-purpose examples. Examples of business-purpose
credit include:
A. A loan to expand a business, even if it is secured by the
borrower's residence or personal property.
B. A loan to improve a principal residence by putting in a
business office.
C. A business account used occasionally for consumer purposes.
iii. Consumer-purpose examples. Examples of consumer-purpose
credit include:
A. Credit extensions by a company to its employees or agents if
the loans are used for personal purposes.
B. A loan secured by a mechanic's tools to pay a child's
tuition.
C. A personal account used occasionally for business purposes.
4. Non-owner-occupied rental property. Credit extended to
acquire, improve, or maintain rental property (regardless of the
number of housing units) that is not owner-occupied is deemed to be
for business purposes. This includes, for example, the acquisition
of a warehouse that will be leased or a single-family house that
will be rented to another person to live in. If the owner expects to
occupy the property for more than 14 days during the coming year,
the property cannot be considered non-owner-occupied and this
special rule will not apply. For example, a beach house that the
owner will occupy for a month in the coming summer and rent out the
rest of the year is owner occupied and is not governed by this
special rule. (See comment 3(a)-5, however, for rules relating to
owner-occupied rental property.)
5. Owner-occupied rental property. If credit is extended to
acquire, improve, or maintain rental property that is or will be
owner-occupied within the coming year, different rules apply:
i. Credit extended to acquire the rental property is deemed to
be for business purposes if it contains more than 2 housing units.
ii. Credit extended to improve or maintain the rental property
is deemed to be for business purposes if it contains more than 4
housing units. Since the amended statute defines dwelling to include
1 to 4 housing units, this rule preserves the right of rescission
for credit extended for purposes other than acquisition. Neither of
these rules means that an extension of credit for property
containing fewer than the requisite number of units is necessarily
consumer credit. In such cases, the determination of whether it is
business or consumer credit should be made by considering the
factors listed in comment 3(a)-3.
6. Business credit later refinanced. Business-purpose credit
that is exempt from the regulation may later be rewritten for
consumer purposes. Such a transaction is consumer credit requiring
disclosures only if the existing obligation is satisfied and
replaced by a new obligation made for consumer purposes undertaken
by the same obligor.
7. Credit card renewal. A consumer-purpose credit card that is
subject to the regulation may be converted into a business-purpose
credit card at the time of its renewal, and the resulting business-
purpose credit card would be exempt from the regulation. Conversely,
a business-purpose credit card that is exempt from the regulation
may be converted into a consumer-purpose credit card at the time of
its renewal, and the resulting consumer-purpose credit card would be
subject to the regulation.
8. Agricultural purpose. An agricultural purpose includes the
planting, propagating, nurturing, harvesting, catching, storing,
exhibiting, marketing, transporting, processing, or manufacturing of
food, beverages (including alcoholic beverages), flowers, trees,
livestock, poultry, bees, wildlife, fish, or shellfish by a natural
person engaged in farming, fishing, or growing crops, flowers,
trees, livestock, poultry, bees, or wildlife. The exemption also
applies to a transaction involving real property that includes a
dwelling (for example, the purchase of a farm with a homestead) if
the transaction is primarily for agricultural purposes.
9. Organizational credit. The exemption for transactions in
which the borrower is not a natural person applies, for example, to
loans to corporations, partnerships, associations, churches, unions,
and fraternal organizations. The exemption applies regardless of the
purpose of the credit extension and regardless of the fact that a
natural person may guarantee or provide security for the credit.
10. Land trusts. Credit extended for consumer purposes to a land
trust is considered to be credit extended to a natural person rather
than credit extended to an organization. In some jurisdictions, a
financial institution financing a residential real estate
transaction for an individual uses a land trust mechanism. Title to
the property is conveyed to the land trust for which the financial
institution itself is trustee. The underlying installment note is
executed by the financial institution in its capacity as trustee and
payment is secured by a trust deed, reflecting title in the
financial institution as trustee. In some instances, the consumer
executes a personal guaranty of the indebtedness. The note provides
that it is payable only out of the property specifically described
in the trust deed and that the trustee has no personal liability on
the note. Assuming the transactions are for personal, family, or
household purposes, these transactions are subject to the regulation
since in substance (if not form) consumer credit is being extended.
3(b) Credit Over Applicable Threshold Amount
1. Threshold amount. For purposes of Sec. 1026.3(b), the
threshold amount in effect during a particular period is the amount
stated below for that period. The threshold amount is adjusted
effective January 1 of each year by any annual percentage increase
in the Consumer Price Index for Urban Wage Earners and Clerical
Workers (CPI-W) that was in effect on the preceding June 1. This
comment will be amended to provide the threshold amount for the
upcoming year after the annual percentage change in the CPI-W that
was in effect on June 1 becomes available. Any increase in the
threshold amount will be rounded to the nearest $100 increment. For
example, if the annual percentage increase in the CPI-W would result
in a $950 increase in the threshold amount, the threshold amount
will be increased by $1,000. However, if the annual percentage
increase in the CPI-W would result in a $949 increase in the
threshold amount, the threshold amount will be increased by $900.
i. Prior to July 21, 2011, the threshold amount is $25,000.
ii. From July 21, 2011 through December 31, 2011, the threshold
amount is $50,000.
iii. From January 1, 2012 through December 31, 2012, the
threshold amount is $51,800.
[[Page 79924]]
2. Open-end credit. i. Qualifying for exemption. An open-end
account is exempt under Sec. 1026.3(b) (unless secured by any real
property, or by personal property used or expected to be used as the
consumer's principal dwelling) if either of the following conditions
is met:
A. The creditor makes an initial extension of credit at or after
account opening that exceeds the threshold amount in effect at the
time the initial extension is made. If a creditor makes an initial
extension of credit after account opening that does not exceed the
threshold amount in effect at the time the extension is made, the
creditor must have satisfied all of the applicable requirements of
this Part from the date the account was opened (or earlier, if
applicable), including but not limited to the requirements of Sec.
1026.6 (account-opening disclosures), Sec. 1026.7 (periodic
statements), Sec. 1026.52 (limitations on fees), and Sec. 1026.55
(limitations on increasing annual percentages rates, fees, and
charges). For example:
1. Assume that the threshold amount in effect on January 1 is
$50,000. On February 1, an account is opened but the creditor does
not make an initial extension of credit at that time. On July 1, the
creditor makes an initial extension of credit of $60,000. In this
circumstance, no requirements of this Part apply to the account.
2. Assume that the threshold amount in effect on January 1 is
$50,000. On February 1, an account is opened but the creditor does
not make an initial extension of credit at that time. On July 1, the
creditor makes an initial extension of credit of $50,000 or less. In
this circumstance, the account is not exempt and the creditor must
have satisfied all of the applicable requirements of this Part from
the date the account was opened (or earlier, if applicable).
B. The creditor makes a firm written commitment at account
opening to extend a total amount of credit in excess of the
threshold amount in effect at the time the account is opened with no
requirement of additional credit information for any advances on the
account (except as permitted from time to time with respect to open-
end accounts pursuant to Sec. 1026.2(a)(20)).
ii. Subsequent changes generally. Subsequent changes to an open-
end account or the threshold amount may result in the account no
longer qualifying for the exemption in Sec. 1026.3(b). In these
circumstances, the creditor must begin to comply with all of the
applicable requirements of this Part within a reasonable period of
time after the account ceases to be exempt. Once an account ceases
to be exempt, the requirements of this Part apply to any balances on
the account. The creditor, however, is not required to comply with
the requirements of this Part with respect to the period of time
during which the account was exempt. For example, if an open-end
credit account ceases to be exempt, the creditor must within a
reasonable period of time provide the disclosures required by Sec.
1026.6 reflecting the current terms of the account and begin to
provide periodic statements consistent with Sec. 1026.7. However,
the creditor is not required to disclose fees or charges imposed
while the account was exempt. Furthermore, if the creditor provided
disclosures consistent with the requirements of this Part while the
account was exempt, it is not required to provide disclosures
required by Sec. 1026.6 reflecting the current terms of the
account. See also comment 3(b)-4.
iii. Subsequent changes when exemption is based on initial
extension of credit. If a creditor makes an initial extension of
credit that exceeds the threshold amount in effect at that time, the
open-end account remains exempt under Sec. 1026.3(b) regardless of
a subsequent increase in the threshold amount, including an increase
pursuant to Sec. 1026.3(b)(1)(ii) as a result of an increase in the
CPI-W. Furthermore, in these circumstances, the account remains
exempt even if there are no further extensions of credit, subsequent
extensions of credit do not exceed the threshold amount, the account
balance is subsequently reduced below the threshold amount (such as
through repayment of the extension), or the credit limit for the
account is subsequently reduced below the threshold amount. However,
if the initial extension of credit on an account does not exceed the
threshold amount in effect at the time of the extension, the account
is not exempt under Sec. 1026.3(b) even if a subsequent extension
exceeds the threshold amount or if the account balance later exceeds
the threshold amount (for example, due to the subsequent accrual of
interest).
iv. Subsequent changes when exemption is based on firm
commitment. A. General. If a creditor makes a firm written
commitment at account opening to extend a total amount of credit
that exceeds the threshold amount in effect at that time, the open-
end account remains exempt under Sec. 1026.3(b) regardless of a
subsequent increase in the threshold amount pursuant to Sec.
1026.3(b)(1)(ii) as a result of an increase in the CPI-W. However,
see comment 3(b)-6 with respect to the increase in the threshold
amount from $25,000 to $50,000. If an open-end account is exempt
under Sec. 1026.3(b) based on a firm commitment to extend credit,
the account remains exempt even if the amount of credit actually
extended does not exceed the threshold amount. In contrast, if the
firm commitment does not exceed the threshold amount at account
opening, the account is not exempt under Sec. 1026.3(b) even if the
account balance later exceeds the threshold amount. In addition, if
a creditor reduces a firm commitment, the account ceases to be
exempt unless the reduced firm commitment exceeds the threshold
amount in effect at the time of the reduction. For example:
1. Assume that, at account opening in year one, the threshold
amount in effect is $50,000 and the account is exempt under Sec.
1026.3(b) based on the creditor's firm commitment to extend $55,000
in credit. If during year one the creditor reduces its firm
commitment to $53,000, the account remains exempt under Sec.
1026.3(b). However, if during year one the creditor reduces its firm
commitment to $40,000, the account is no longer exempt under Sec.
1026.3(b).
2. Assume that, at account opening in year one, the threshold
amount in effect is $50,000 and the account is exempt under Sec.
1026.3(b) based on the creditor's firm commitment to extend $55,000
in credit. If the threshold amount is $56,000 on January 1 of year
six as a result of increases in the CPI-W, the account remains
exempt. However, if the creditor reduces its firm commitment to
$54,000 on July 1 of year six, the account ceases to be exempt under
Sec. 1026.3(b).
B. Initial extension of credit. If an open-end account qualifies
for a Sec. 1026.3(b) exemption at account opening based on a firm
commitment, that account may also subsequently qualify for a Sec.
1026.3(b) exemption based on an initial extension of credit.
However, that initial extension must be a single advance in excess
of the threshold amount in effect at the time the extension is made.
In addition, the account must continue to qualify for an exemption
based on the firm commitment until the initial extension of credit
is made. For example:
1. Assume that, at account opening in year one, the threshold
amount in effect is $50,000 and the account is exempt under Sec.
1026.3(b) based on the creditor's firm commitment to extend $55,000
in credit. The account is not used for an extension of credit during
year one. On January 1 of year two, the threshold amount is
increased to $51,000 pursuant to Sec. 1026.3(b)(1)(ii) as a result
of an increase in the CPI-W. On July 1 of year two, the consumer
uses the account for an initial extension of $52,000. As a result of
this extension of credit, the account remains exempt under Sec.
1026.3(b) even if, after July 1 of year two, the creditor reduces
the firm commitment to $51,000 or less.
2. Same facts as in paragraph iv.B.1 above except that the
consumer uses the account for an initial extension of $30,000 on
July 1 of year two and for an extension of $22,000 on July 15 of
year two. In these circumstances, the account is not exempt under
Sec. 1026.3(b) based on the $30,000 initial extension of credit
because that extension did not exceed the applicable threshold
amount ($51,000), although the account remains exempt based on the
firm commitment to extend $55,000 in credit.
3. Same facts as in paragraph iv.B.1 above except that, on April
1 of year two, the creditor reduces the firm commitment to $50,000,
which is below the $51,000 threshold then in effect. Because the
account ceases to qualify for a Sec. 1026.3(b) exemption on April 1
of year two, the account does not qualify for a Sec. 1026.3(b)
exemption based on a $52,000 initial extension of credit on July 1
of year two.
3. Closed-end credit. i. Qualifying for exemption. A closed-end
loan is exempt under Sec. 1026.3(b) (unless the extension of credit
is secured by any real property, or by personal property used or
expected to be used as the consumer's principal dwelling; or is a
private education loan as defined in Sec. 1026.46(b)(5)), if either
of the following conditions is met:
A. The creditor makes an extension of credit at consummation
that exceeds the threshold amount in effect at the time of
consummation. In these circumstances, the loan remains exempt under
Sec. 1026.3(b) even if the amount owed is subsequently reduced
below the threshold amount (such as through repayment of the loan).
[[Page 79925]]
B. The creditor makes a commitment at consummation to extend a
total amount of credit in excess of the threshold amount in effect
at the time of consummation. In these circumstances, the loan
remains exempt under Sec. 1026.3(b) even if the total amount of
credit extended does not exceed the threshold amount.
ii. Subsequent changes. If a creditor makes a closed-end
extension of credit or commitment to extend closed-end credit that
exceeds the threshold amount in effect at the time of consummation,
the closed-end loan remains exempt under Sec. 1026.3(b) regardless
of a subsequent increase in the threshold amount. However, a closed-
end loan is not exempt under Sec. 1026.3(b) merely because it is
used to satisfy and replace an existing exempt loan, unless the new
extension of credit is itself exempt under the applicable threshold
amount. For example, assume a closed-end loan that qualified for a
Sec. 1026.3(b) exemption at consummation in year one is refinanced
in year ten and that the new loan amount is less than the threshold
amount in effect in year ten. In these circumstances, the creditor
must comply with all of the applicable requirements of this Part
with respect to the year ten transaction if the original loan is
satisfied and replaced by the new loan, which is not exempt under
Sec. 1026.3(b). See also comment 3(b)-4.
4. Addition of a security interest in real property or a
dwelling after account opening or consummation. i. Open-end credit.
For open-end accounts, if, after account opening, a security
interest is taken in any real property, or in personal property used
or expected to be used as the consumer's principal dwelling, a
previously exempt account ceases to be exempt under Sec. 1026.3(b)
and the creditor must begin to comply with all of the applicable
requirements of this Part within a reasonable period of time. See
comment 3(b)-2.ii. If a security interest is taken in the consumer's
principal dwelling, the creditor must also give the consumer the
right to rescind the security interest consistent with Sec.
1026.15.
ii. Closed-end credit. For closed-end loans, if, after
consummation, a security interest is taken in any real property, or
in personal property used or expected to be used as the consumer's
principal dwelling, an exempt loan remains exempt under Sec.
1026.3(b). However, the addition of a security interest in the
consumer's principal dwelling is a transaction for purposes of Sec.
1026.23 and the creditor must give the consumer the right to rescind
the security interest consistent with that section. See Sec.
1026.23(a)(1) and the accompanying commentary. In contrast, if a
closed-end loan that is exempt under Sec. 1026.3(b) is satisfied
and replaced by a loan that is secured by any real property, or by
personal property used or expected to be used as the consumer's
principal dwelling, the new loan is not exempt under Sec. 1026.3(b)
and the creditor must comply with all of the applicable requirements
of this Part. See comment 3(b)-3.
5. Application to extensions secured by mobile homes. Because a
mobile home can be a dwelling under Sec. 1026.2(a)(19), the
exemption in Sec. 1026.3(b) does not apply to a credit extension
secured by a mobile home that is used or expected to be used as the
principal dwelling of the consumer. See comment 3(b)-4.
6. Transition rule for open-end accounts exempt prior to July
21, 2011. Section 1026.3(b)(2) applies only to open-end accounts
opened prior to July 21, 2011. Section 1026.3(b)(2) does not apply
if a security interest is taken by the creditor in any real
property, or in personal property used or expected to be used as the
consumer's principal dwelling. If, on July 20, 2011, an open-end
account is exempt under Sec. 1026.3(b) based on a firm commitment
to extend credit in excess of $25,000, the account remains exempt
under Sec. 1026.3(b)(2) until December 31, 2011 (unless the firm
commitment is reduced to $25,000 or less). If the firm commitment is
increased on or before December 31, 2011 to an amount in excess of
$50,000, the account remains exempt under Sec. 1026.3(b)(1)
regardless of subsequent increases in the threshold amount as a
result of increases in the CPI-W. If the firm commitment is not
increased on or before December 31, 2011 to an amount in excess of
$50,000, the account ceases to be exempt under Sec. 1026.3(b) based
on a firm commitment to extend credit. For example:
i. Assume that, on July 20, 2011, the account is exempt under
Sec. 1026.3(b) based on the creditor's firm commitment to extend
$30,000 in credit. On November 1, 2011, the creditor increases the
firm commitment on the account to $55,000. In these circumstances,
the account remains exempt under Sec. 1026.3(b)(1) regardless of
subsequent increases in the threshold amount as a result of
increases in the CPI-W.
ii. Same facts as paragraph i above except, on November 1, 2011,
the creditor increases the firm commitment on the account to
$40,000. In these circumstances, the account ceases to be exempt
under Sec. 1026.3(b)(2) after December 31, 2011, and the creditor
must begin to comply with the applicable requirements of this Part.
3(c) Public Utility Credit
1. Examples. Examples of public utility services include:
i. General. A. Gas, water, or electrical services.
B. Cable television services.
C. Installation of new sewer lines, water lines, conduits,
telephone poles, or metering equipment in an area not already
serviced by the utility.
ii. Extensions of credit not covered. The exemption does not
apply to extensions of credit, for example:
A. To purchase appliances such as gas or electric ranges,
grills, or telephones.
B. To finance home improvements such as new heating or air
conditioning systems.
3(d) Securities or Commodities Accounts
1. Coverage. This exemption does not apply to a transaction with
a broker registered solely with the state, or to a separate credit
extension in which the proceeds are used to purchase securities.
3(e) Home Fuel Budget Plans
1. Definition. Under a typical home fuel budget plan, the fuel
dealer estimates the total cost of fuel for the season, bills the
customer for an average monthly payment, and makes an adjustment in
the final payment for any difference between the estimated and the
actual cost of the fuel. Fuel is delivered as needed, no finance
charge is assessed, and the customer may withdraw from the plan at
any time. Under these circumstances, the arrangement is exempt from
the regulation, even if a charge to cover the billing costs is
imposed.
3(f) Student Loan Programs
1. Coverage. This exemption applies to loans made, insured, or
guaranteed under Title IV of the Higher Education Act of 1965 (20
U.S.C. 1070 et seq.). This exemption does not apply to private
education loans as defined by Sec. 1026.46(b)(5).
Section 1026.4--Finance Charge
4(a) Definition
1. Charges in comparable cash transactions. Charges imposed
uniformly in cash and credit transactions are not finance charges.
In determining whether an item is a finance charge, the creditor
should compare the credit transaction in question with a similar
cash transaction. A creditor financing the sale of property or
services may compare charges with those payable in a similar cash
transaction by the seller of the property or service.
i. For example, the following items are not finance charges:
A. Taxes, license fees, or registration fees paid by both cash
and credit customers.
B. Discounts that are available to cash and credit customers,
such as quantity discounts.
C. Discounts available to a particular group of consumers
because they meet certain criteria, such as being members of an
organization or having accounts at a particular financial
institution. This is the case even if an individual must pay cash to
obtain the discount, provided that credit customers who are members
of the group and do not qualify for the discount pay no more than
the nonmember cash customers.
D. Charges for a service policy, auto club membership, or policy
of insurance against latent defects offered to or required of both
cash and credit customers for the same price.
ii. In contrast, the following items are finance charges:
A. Inspection and handling fees for the staged disbursement of
construction-loan proceeds.
B. Fees for preparing a Truth in Lending disclosure statement,
if permitted by law (for example, the Real Estate Settlement
Procedures Act prohibits such charges in certain transactions
secured by real property).
C. Charges for a required maintenance or service contract
imposed only in a credit transaction.
iii. If the charge in a credit transaction exceeds the charge
imposed in a comparable cash transaction, only the difference is a
finance charge. For example:
A. If an escrow agent is used in both cash and credit sales of
real estate and the agent's charge is $100 in a cash transaction and
$150 in a credit transaction, only $50 is a finance charge.
[[Page 79926]]
2. Costs of doing business. Charges absorbed by the creditor as
a cost of doing business are not finance charges, even though the
creditor may take such costs into consideration in determining the
interest rate to be charged or the cash price of the property or
service sold. However, if the creditor separately imposes a charge
on the consumer to cover certain costs, the charge is a finance
charge if it otherwise meets the definition. For example:
i. A discount imposed on a credit obligation when it is assigned
by a seller-creditor to another party is not a finance charge as
long as the discount is not separately imposed on the consumer. (See
Sec. 1026.4(b)(6).)
ii. A tax imposed by a state or other governmental body on a
creditor is not a finance charge if the creditor absorbs the tax as
a cost of doing business and does not separately impose the tax on
the consumer. (For additional discussion of the treatment of taxes,
see other commentary to Sec. 1026.4(a).)
3. Forfeitures of interest. If the creditor reduces the interest
rate it pays or stops paying interest on the consumer's deposit
account or any portion of it for the term of a credit transaction
(including, for example, an overdraft on a checking account or a
loan secured by a certificate of deposit), the interest lost is a
finance charge. (See the commentary to Sec. 1026.4(c)(6).) For
example:
i. A consumer borrows $5,000 for 90 days and secures it with a
$10,000 certificate of deposit paying 15% interest. The creditor
charges the consumer an interest rate of 6% on the loan and stops
paying interest on $5,000 of the $10,000 certificate for the term of
the loan. The interest lost is a finance charge and must be
reflected in the annual percentage rate on the loan.
ii. However, the consumer must be entitled to the interest that
is not paid in order for the lost interest to be a finance charge.
For example:
A. A consumer wishes to buy from a financial institution a
$10,000 certificate of deposit paying 15% interest but has only
$4,000. The financial institution offers to lend the consumer $6,000
at an interest rate of 6% but will pay the 15% interest only on the
amount of the consumer's deposit, $4,000. The creditor's failure to
pay interest on the $6,000 does not result in an additional finance
charge on the extension of credit, provided the consumer is entitled
by the deposit agreement with the financial institution to interest
only on the amount of the consumer's deposit.
B. A consumer enters into a combined time deposit/credit
agreement with a financial institution that establishes a time
deposit account and an open-end line of credit. The line of credit
may be used to borrow against the funds in the time deposit. The
agreement provides for an interest rate on any credit extension of,
for example, 1%. In addition, the agreement states that the creditor
will pay 0% interest on the amount of the time deposit that
corresponds to the amount of the credit extension(s). The interest
that is not paid on the time deposit by the financial institution is
not a finance charge (and therefore does not affect the annual
percentage rate computation).
4. Treatment of transaction fees on credit card plans. Any
transaction charge imposed on a cardholder by a card issuer is a
finance charge, regardless of whether the issuer imposes the same,
greater, or lesser charge on withdrawals of funds from an asset
account such as a checking or savings account. For example:
i. Any charge imposed on a credit cardholder by a card issuer
for the use of an automated teller machine (ATM) to obtain a cash
advance (whether in a proprietary, shared, interchange, or other
system) is a finance charge regardless of whether the card issuer
imposes a charge on its debit cardholders for using the ATM to
withdraw cash from a consumer asset account, such as a checking or
savings account.
ii. Any charge imposed on a credit cardholder for making a
purchase or obtaining a cash advance outside the United States, with
a foreign merchant, or in a foreign currency is a finance charge,
regardless of whether a charge is imposed on debit cardholders for
such transactions. The following principles apply in determining
what is a foreign transaction fee and the amount of the fee:
A. Included are (1) fees imposed when transactions are made in a
foreign currency and converted to U.S. dollars; (2) fees imposed
when transactions are made in U.S. dollars outside the U.S.; and (3)
fees imposed when transactions are made (whether in a foreign
currency or in U.S. dollars) with a foreign merchant, such as via a
merchant's Web site. For example, a consumer may use a credit card
to make a purchase in Bermuda, in U.S. dollars, and the card issuer
may impose a fee because the transaction took place outside the
United States.
B. Included are fees imposed by the card issuer and fees imposed
by a third party that performs the conversion, such as a credit card
network or the card issuer's corporate parent. (For example, in a
transaction processed through a credit card network, the network may
impose a 1 percent charge and the card-issuing bank may impose an
additional 2 percent charge, for a total of a 3 percentage point
foreign transaction fee being imposed on the consumer.)
C. Fees imposed by a third party are included only if they are
directly passed on to the consumer. For example, if a credit card
network imposes a 1 percent fee on the card issuer, but the card
issuer absorbs the fee as a cost of doing business (and only passes
it on to consumers in the general sense that the interest and fees
are imposed on all its customers to recover its costs), then the fee
is not a foreign transaction fee and need not be disclosed. In
another example, if the credit card network imposes a 1 percent fee
for a foreign transaction on the card issuer, and the card issuer
imposes this same fee on the consumer who engaged in the foreign
transaction, then the fee is a foreign transaction fee and a finance
charge.
D. A card issuer is not required to disclose a fee imposed by a
merchant. For example, if the merchant itself performs the currency
conversion and adds a fee, this fee need not be disclosed by the
card issuer. Under Sec. 1026.9(d), a card issuer is not obligated
to disclose finance charges imposed by a party honoring a credit
card, such as a merchant, although the merchant is required to
disclose such a finance charge if the merchant is subject to the
Truth in Lending Act and Regulation Z.
E. The foreign transaction fee is determined by first
calculating the dollar amount of the transaction by using a currency
conversion rate outside the card issuer's and third party's control.
Any amount in excess of that dollar amount is a foreign transaction
fee. Conversion rates outside the card issuer's and third party's
control include, for example, a rate selected from the range of
rates available in the wholesale currency exchange markets, an
average of the highest and lowest rates available in such markets,
or a government-mandated or government-managed exchange rate (or a
rate selected from a range of such rates).
F. The rate used for a particular transaction need not be the
same rate that the card issuer (or third party) itself obtains in
its currency conversion operations. In addition, the rate used for a
particular transaction need not be the rate in effect on the date of
the transaction (purchase or cash advance).
5. Taxes. i. Generally, a tax imposed by a state or other
governmental body solely on a creditor is a finance charge if the
creditor separately imposes the charge on the consumer.
ii. In contrast, a tax is not a finance charge (even if it is
collected by the creditor) if applicable law imposes the tax:
A. Solely on the consumer;
B. On the creditor and the consumer jointly;
C. On the credit transaction, without indicating which party is
liable for the tax; or
D. On the creditor, if applicable law directs or authorizes the
creditor to pass the tax on to the consumer. (For purposes of this
section, if applicable law is silent as to passing on the tax, the
law is deemed not to authorize passing it on.)
iii. For example, a stamp tax, property tax, intangible tax, or
any other state or local tax imposed on the consumer, or on the
credit transaction, is not a finance charge even if the tax is
collected by the creditor.
iv. In addition, a tax is not a finance charge if it is excluded
from the finance charge by another provision of the regulation or
commentary (for example, if the tax is imposed uniformly in cash and
credit transactions).
4(a)(1) Charges by Third Parties
1. Choosing the provider of a required service. An example of a
third-party charge included in the finance charge is the cost of
required mortgage insurance, even if the consumer is allowed to
choose the insurer.
2. Annuities associated with reverse mortgages. Some creditors
offer annuities in connection with a reverse-mortgage transaction.
The amount of the premium is a finance charge if the creditor
requires the purchase of the annuity incident to the credit.
Examples include the following:
i. The credit documents reflect the purchase of an annuity from
a specific provider or providers.
[[Page 79927]]
ii. The creditor assesses an additional charge on consumers who
do not purchase an annuity from a specific provider.
iii. The annuity is intended to replace in whole or in part the
creditor's payments to the consumer either immediately or at some
future date.
4(a)(2) Special Rule; Closing Agent Charges
1. General. This rule applies to charges by a third party
serving as the closing agent for the particular loan. An example of
a closing agent charge included in the finance charge is a courier
fee where the creditor requires the use of a courier.
2. Required closing agent. If the creditor requires the use of a
closing agent, fees charged by the closing agent are included in the
finance charge only if the creditor requires the particular service,
requires the imposition of the charge, or retains a portion of the
charge. Fees charged by a third-party closing agent may be otherwise
excluded from the finance charge under Sec. 1026.4. For example, a
fee that would be paid in a comparable cash transaction may be
excluded under Sec. 1026.4(a). A charge for conducting or attending
a closing is a finance charge and may be excluded only if the charge
is included in and is incidental to a lump-sum fee excluded under
Sec. 1026.4(c)(7).
4(a)(3) Special Rule; Mortgage Broker Fees
1. General. A fee charged by a mortgage broker is excluded from
the finance charge if it is the type of fee that is also excluded
when charged by the creditor. For example, to exclude an application
fee from the finance charge under Sec. 1026.4(c)(1), a mortgage
broker must charge the fee to all applicants for credit, whether or
not credit is extended.
2. Coverage. This rule applies to charges paid by consumers to a
mortgage broker in connection with a consumer credit transaction
secured by real property or a dwelling.
3. Compensation by lender. The rule requires all mortgage broker
fees to be included in the finance charge. Creditors sometimes
compensate mortgage brokers under a separate arrangement with those
parties. Creditors may draw on amounts paid by the consumer, such as
points or closing costs, to fund their payment to the broker.
Compensation paid by a creditor to a mortgage broker under an
agreement is not included as a separate component of a consumer's
total finance charge (although this compensation may be reflected in
the finance charge if it comes from amounts paid by the consumer to
the creditor that are finance charges, such as points and interest).
4(b) Examples of Finance Charges
1. Relationship to other provisions. Charges or fees shown as
examples of finance charges in Sec. 1026.4(b) may be excludable
under Sec. 1026.4(c), (d), or (e). For example:
i. Premiums for credit life insurance, shown as an example of a
finance charge under Sec. 1026.4(b)(7), may be excluded if the
requirements of Sec. 1026.4(d)(1) are met.
ii. Appraisal fees mentioned in Sec. 1026.4(b)(4) are excluded
for real property or residential mortgage transactions under Sec.
1026.4(c)(7).
Paragraph 4(b)(2)
1. Checking account charges. A checking or transaction account
charge imposed in connection with a credit feature is a finance
charge under Sec. 1026.4(b)(2) to the extent the charge exceeds the
charge for a similar account without a credit feature. If a charge
for an account with a credit feature does not exceed the charge for
an account without a credit feature, the charge is not a finance
charge under Sec. 1026.4(b)(2). To illustrate:
i. A $5 service charge is imposed on an account with an
overdraft line of credit (where the institution has agreed in
writing to pay an overdraft), while a $3 service charge is imposed
on an account without a credit feature; the $2 difference is a
finance charge. (If the difference is not related to account
activity, however, it may be excludable as a participation fee. See
the commentary to Sec. 1026.4(c)(4).)
ii. A $5 service charge is imposed for each item that results in
an overdraft on an account with an overdraft line of credit, while a
$25 service charge is imposed for paying or returning each item on a
similar account without a credit feature; the $5 charge is not a
finance charge.
Paragraph 4(b)(3)
1. Assumption fees. The assumption fees mentioned in Sec.
1026.4(b)(3) are finance charges only when the assumption occurs and
the fee is imposed on the new buyer. The assumption fee is a finance
charge in the new buyer's transaction.
Paragraph 4(b)(5)
1. Credit loss insurance. Common examples of the insurance
against credit loss mentioned in Sec. 1026.4(b)(5) are mortgage
guaranty insurance, holder in due course insurance, and repossession
insurance. Such premiums must be included in the finance charge only
for the period that the creditor requires the insurance to be
maintained.
2. Residual value insurance. Where a creditor requires a
consumer to maintain residual value insurance or where the creditor
is a beneficiary of a residual value insurance policy written in
connection with an extension of credit (as is the case in some forms
of automobile balloon-payment financing, for example), the premiums
for the insurance must be included in the finance charge for the
period that the insurance is to be maintained. If a creditor pays
for residual-value insurance and absorbs the payment as a cost of
doing business, such costs are not considered finance charges. (See
comment 4(a)-2.)
Paragraphs 4(b)(7) and (b)(8)
1. Pre-existing insurance policy. The insurance discussed in
Sec. 1026.4(b)(7) and (b)(8) does not include an insurance policy
(such as a life or an automobile collision insurance policy) that is
already owned by the consumer, even if the policy is assigned to or
otherwise made payable to the creditor to satisfy an insurance
requirement. Such a policy is not ``written in connection with'' the
transaction, as long as the insurance was not purchased for use in
that credit extension, since it was previously owned by the
consumer.
2. Insurance written in connection with a transaction. Credit
insurance sold before or after an open-end (not home-secured) plan
is opened is considered ``written in connection with a credit
transaction.'' Insurance sold after consummation in closed-end
credit transactions or after the opening of a home-equity plan
subject to the requirements of Sec. 1026.40 is not considered
``written in connection with'' the credit transaction if the
insurance is written because of the consumer's default (for example,
by failing to obtain or maintain required property insurance) or
because the consumer requests insurance after consummation or the
opening of a home-equity plan subject to the requirements of Sec.
1026.40 (although credit-sale disclosures may be required for the
insurance sold after consummation if it is financed).
3. Substitution of life insurance. The premium for a life
insurance policy purchased and assigned to satisfy a credit life
insurance requirement must be included in the finance charge, but
only to the extent of the cost of the credit life insurance if
purchased from the creditor or the actual cost of the policy (if
that is less than the cost of the insurance available from the
creditor). If the creditor does not offer the required insurance,
the premium to be included in the finance charge is the cost of a
policy of insurance of the type, amount, and term required by the
creditor.
4. Other insurance. Fees for required insurance not of the types
described in Sec. 1026.4(b)(7) and (b)(8) are finance charges and
are not excludable. For example, the premium for a hospitalization
insurance policy, if it is required to be purchased only in a credit
transaction, is a finance charge.
Paragraph 4(b)(9)
1. Discounts for payment by other than credit. The discounts to
induce payment by other than credit mentioned in Sec. 1026.4(b)(9)
include, for example, the following situation: The seller of land
offers individual tracts for $10,000 each. If the purchaser pays
cash, the price is $9,000, but if the purchaser finances the tract
with the seller the price is $10,000. The $1,000 difference is a
finance charge for those who buy the tracts on credit.
2. Exception for cash discounts. i. Creditors may exclude from
the finance charge discounts offered to consumers for using cash or
another means of payment instead of using a credit card or an open-
end plan. The discount may be in whatever amount the seller desires,
either as a percentage of the regular price (as defined in section
103(z) of the Act, as amended) or a dollar amount. Pursuant to
section 167(b) of the Act, this provision applies only to
transactions involving an open-end credit plan or a credit card
(whether open-end or closed-end credit is extended on the card). The
merchant must offer the discount to prospective buyers whether or
not they are cardholders or members of the open-end credit plan. The
merchant may, however, make other distinctions. For example:
A. The merchant may limit the discount to payment by cash and
not offer it for payment by check or by use of a debit card.
B. The merchant may establish a discount plan that allows a 15%
discount for payment by cash, a 10% discount for payment by check,
and a 5% discount for payment by a
[[Page 79928]]
particular credit card. None of these discounts is a finance charge.
ii. Pursuant to section 171(c) of the Act, discounts excluded
from the finance charge under this paragraph are also excluded from
treatment as a finance charge or other charge for credit under any
state usury or disclosure laws.
3. Determination of the regular price. i. The regular price is
critical in determining whether the difference between the price
charged to cash customers and credit customers is a discount or a
surcharge, as these terms are defined in amended section 103 of the
Act. The regular price is defined in section 103 of the Act as--* *
* the tag or posted price charged for the property or service if a
single price is tagged or posted, or the price charged for the
property or service when payment is made by use of an open-end
credit account or a credit card if either (1) no price is tagged or
posted, or (2) two prices are tagged or posted * * *.
ii. For example, in the sale of motor vehicle fuel, the tagged
or posted price is the price displayed at the pump. As a result, the
higher price (the open-end credit or credit card price) must be
displayed at the pump, either alone or along with the cash price.
Service station operators may designate separate pumps or separate
islands as being for either cash or credit purchases and display
only the appropriate prices at the various pumps. If a pump is
capable of displaying on its meter either a cash or a credit price
depending upon the consumer's means of payment, both the cash price
and the credit price must be displayed at the pump. A service
station operator may display the cash price of fuel by itself on a
curb sign, as long as the sign clearly indicates that the price is
limited to cash purchases.
Paragraph 4(b)(10)
1. Definition. Debt cancellation coverage provides for payment
or satisfaction of all or part of a debt when a specified event
occurs. The term ``debt cancellation coverage'' includes guaranteed
automobile protection, or ``GAP,'' agreements, which pay or satisfy
the remaining debt after property insurance benefits are exhausted.
Debt suspension coverage provides for suspension of the obligation
to make one or more payments on the date(s) otherwise required by
the credit agreement, when a specified event occurs. The term ``debt
suspension'' does not include loan payment deferral arrangements in
which the triggering event is the bank's unilateral decision to
allow a deferral of payment and the borrower's unilateral election
to do so, such as by skipping or reducing one or more payments
(``skip payments'').
2. Coverage written in connection with a transaction. Coverage
sold after consummation in closed-end credit transactions or after
the opening of a home-equity plan subject to the requirements of
Sec. 1026.40 is not ``written in connection with'' the credit
transaction if the coverage is written because the consumer requests
coverage after consummation or the opening of a home-equity plan
subject to the requirements of Sec. 1026.40 (although credit-sale
disclosures may be required for the coverage sold after consummation
if it is financed). Coverage sold before or after an open-end (not
home-secured) plan is opened is considered ``written in connection
with a credit transaction.''
4(c) Charges Excluded From the Finance Charge
Paragraph 4(c)(1)
1. Application fees. An application fee that is excluded from
the finance charge is a charge to recover the costs associated with
processing applications for credit. The fee may cover the costs of
services such as credit reports, credit investigations, and
appraisals. The creditor is free to impose the fee in only certain
of its loan programs, such as mortgage loans. However, if the fee is
to be excluded from the finance charge under Sec. 1026.4(c)(1), it
must be charged to all applicants, not just to applicants who are
approved or who actually receive credit.
Paragraph 4(c)(2)
1. Late payment charges. i. Late payment charges can be excluded
from the finance charge under Sec. 1026.4(c)(2) whether or not the
person imposing the charge continues to extend credit on the account
or continues to provide property or services to the consumer. In
determining whether a charge is for actual unanticipated late
payment on a 30-day account, for example, factors to be considered
include:
A. The terms of the account. For example, is the consumer
required by the account terms to pay the account balance in full
each month? If not, the charge may be a finance charge.
B. The practices of the creditor in handling the accounts. For
example, regardless of the terms of the account, does the creditor
allow consumers to pay the accounts over a period of time without
demanding payment in full or taking other action to collect? If no
effort is made to collect the full amount due, the charge may be a
finance charge.
ii. section 1026.4(c)(2) applies to late payment charges imposed
for failure to make payments as agreed, as well as failure to pay an
account in full when due.
2. Other excluded charges. Charges for ``delinquency, default,
or a similar occurrence'' include, for example, charges for
reinstatement of credit privileges or for submitting as payment a
check that is later returned unpaid.
Paragraph 4(c)(3)
1. Assessing interest on an overdraft balance. A charge on an
overdraft balance computed by applying a rate of interest to the
amount of the overdraft is not a finance charge, even though the
consumer agrees to the charge in the account agreement, unless the
financial institution agrees in writing that it will pay such items.
Paragraph 4(c)(4)
1. Participation fees--periodic basis. The participation fees
described in Sec. 1026.4(c)(4) do not necessarily have to be formal
membership fees, nor are they limited to credit card plans. The
provision applies to any credit plan in which payment of a fee is a
condition of access to the plan itself, but it does not apply to
fees imposed separately on individual closed-end transactions. The
fee may be charged on a monthly, annual, or other periodic basis; a
one-time, non-recurring fee imposed at the time an account is opened
is not a fee that is charged on a periodic basis, and may not be
treated as a participation fee.
2. Participation fees--exclusions. Minimum monthly charges,
charges for non-use of a credit card, and other charges based on
either account activity or the amount of credit available under the
plan are not excluded from the finance charge by Sec. 1026.4(c)(4).
Thus, for example, a fee that is charged and then refunded to the
consumer based on the extent to which the consumer uses the credit
available would be a finance charge. (See the commentary to Sec.
1026.4(b)(2). Also, see comment 14(c)-2 for treatment of certain
types of fees excluded in determining the annual percentage rate for
the periodic statement.)
Paragraph 4(c)(5)
1. Seller's points. The seller's points mentioned in Sec.
1026.4(c)(5) include any charges imposed by the creditor upon the
noncreditor seller of property for providing credit to the buyer or
for providing credit on certain terms. These charges are excluded
from the finance charge even if they are passed on to the buyer, for
example, in the form of a higher sales price. Seller's points are
frequently involved in real estate transactions guaranteed or
insured by governmental agencies. A commitment fee paid by a
noncreditor seller (such as a real estate developer) to the creditor
should be treated as seller's points. Buyer's points (that is,
points charged to the buyer by the creditor), however, are finance
charges.
2. Other seller-paid amounts. Mortgage insurance premiums and
other finance charges are sometimes paid at or before consummation
or settlement on the borrower's behalf by a noncreditor seller. The
creditor should treat the payment made by the seller as seller's
points and exclude it from the finance charge if, based on the
seller's payment, the consumer is not legally bound to the creditor
for the charge. A creditor who gives disclosures before the payment
has been made should base them on the best information reasonably
available.
Paragraph 4(c)(6)
1. Lost interest. Certain Federal and state laws mandate a
percentage differential between the interest rate paid on a deposit
and the rate charged on a loan secured by that deposit. In some
situations, because of usury limits the creditor must reduce the
interest rate paid on the deposit and, as a result, the consumer
loses some of the interest that would otherwise have been earned.
Under Sec. 1026.4(c)(6), such ``lost interest'' need not be
included in the finance charge. This rule applies only to an
interest reduction imposed because a rate differential is required
by law and a usury limit precludes compliance by any other means. If
the creditor imposes a differential that exceeds that required, only
the lost interest attributable to the excess amount is a finance
charge. (See the commentary to Sec. 1026.4(a).)
4(c)(7) Real-Estate Related Fees
1. Real estate or residential mortgage transaction charges. The
list of charges in
[[Page 79929]]
Sec. 1026.4(c)(7) applies both to residential mortgage transactions
(which may include, for example, the purchase of a mobile home) and
to other transactions secured by real estate. The fees are excluded
from the finance charge even if the services for which the fees are
imposed are performed by the creditor's employees rather than by a
third party. In addition, the cost of verifying or confirming
information connected to the item is also excluded. For example,
credit-report fees cover not only the cost of the report but also
the cost of verifying information in the report. In all cases,
charges excluded under Sec. 1026.4(c)(7) must be bona fide and
reasonable.
2. Lump-sum charges. If a lump sum charged for several services
includes a charge that is not excludable, a portion of the total
should be allocated to that service and included in the finance
charge. However, a lump sum charged for conducting or attending a
closing (for example, by a lawyer or a title company) is excluded
from the finance charge if the charge is primarily for services
related to items listed in Sec. 1026.4(c)(7) (for example,
reviewing or completing documents), even if other incidental
services such as explaining various documents or disbursing funds
for the parties are performed. The entire charge is excluded even if
a fee for the incidental services would be a finance charge if it
were imposed separately.
3. Charges assessed during the loan term. Real estate or
residential mortgage transaction charges excluded under Sec.
1026.4(c)(7) are those charges imposed solely in connection with the
initial decision to grant credit. This would include, for example, a
fee to search for tax liens on the property or to determine if flood
insurance is required. The exclusion does not apply to fees for
services to be performed periodically during the loan term,
regardless of when the fee is collected. For example, a fee for one
or more determinations during the loan term of the current tax-lien
status or flood-insurance requirements is a finance charge,
regardless of whether the fee is imposed at closing, or when the
service is performed. If a creditor is uncertain about what portion
of a fee to be paid at consummation or loan closing is related to
the initial decision to grant credit, the entire fee may be treated
as a finance charge.
4(d) Insurance and Debt Cancellation and Debt Suspension Coverage
1. General. Section 1026.4(d) permits insurance premiums and
charges and debt cancellation and debt suspension charges to be
excluded from the finance charge. The required disclosures must be
made in writing, except as provided in Sec. 1026.4(d)(4). The rules
on location of insurance and debt cancellation and debt suspension
disclosures for closed-end transactions are in Sec. 1026.17(a). For
purposes of Sec. 1026.4(d), all references to insurance also
include debt cancellation and debt suspension coverage unless the
context indicates otherwise.
2. Timing of disclosures. If disclosures are given early, for
example under Sec. 1026.17(f) or Sec. 1026.19(a), the creditor
need not redisclose if the actual premium is different at the time
of consummation. If insurance disclosures are not given at the time
of early disclosure and insurance is in fact written in connection
with the transaction, the disclosures under Sec. 1026.4(d) must be
made in order to exclude the premiums from the finance charge.
3. Premium rate increases. The creditor should disclose the
premium amount based on the rates currently in effect and need not
designate it as an estimate even if the premium rates may increase.
An increase in insurance rates after consummation of a closed-end
credit transaction or during the life of an open-end credit plan
does not require redisclosure in order to exclude the additional
premium from treatment as a finance charge.
4. Unit-cost disclosures. i. Open-end credit. The premium or fee
for insurance or debt cancellation or debt suspension for the
initial term of coverage may be disclosed on a unit-cost basis in
open-end credit transactions. The cost per unit should be based on
the initial term of coverage, unless one of the options under
comment 4(d)-12 is available.
ii. Closed-end credit. One of the transactions for which unit-
cost disclosures (such as 50 cents per year for each $100 of the
amount financed) may be used in place of the total insurance premium
involves a particular kind of insurance plan. For example, a
consumer with a current indebtedness of $8,000 is covered by a plan
of credit life insurance coverage with a maximum of $10,000. The
consumer requests an additional $4,000 loan to be covered by the
same insurance plan. Since the $4,000 loan exceeds, in part, the
maximum amount of indebtedness that can be covered by the plan, the
creditor may properly give the insurance-cost disclosures on the
$4,000 loan on a unit-cost basis.
5. Required credit life insurance; debt cancellation or
suspension coverage. Credit life, accident, health, or loss-of-
income insurance, and debt cancellation and suspension coverage
described in Sec. 1026.4(b)(10), must be voluntary in order for the
premium or charges to be excluded from the finance charge. Whether
the insurance or coverage is in fact required or optional is a
factual question. If the insurance or coverage is required, the
premiums must be included in the finance charge, whether the
insurance or coverage is purchased from the creditor or from a third
party. If the consumer is required to elect one of several options--
such as to purchase credit life insurance, or to assign an existing
life insurance policy, or to pledge security such as a certificate
of deposit--and the consumer purchases the credit life insurance
policy, the premium must be included in the finance charge. (If the
consumer assigns a preexisting policy or pledges security instead,
no premium is included in the finance charge. The security interest
would be disclosed under Sec. 1026.6(a)(4), Sec. 1026.6(b)(5)(ii),
or Sec. 1026.18(m). See the commentary to Sec. 1026.4(b)(7) and
(b)(8).)
6. Other types of voluntary insurance. Insurance is not credit
life, accident, health, or loss-of-income insurance if the creditor
or the credit account of the consumer is not the beneficiary of the
insurance coverage. If the premium for such insurance is not imposed
by the creditor as an incident to or a condition of credit, it is
not covered by Sec. 1026.4.
7. Signatures. If the creditor offers a number of insurance
options under Sec. 1026.4(d), the creditor may provide a means for
the consumer to sign or initial for each option, or it may provide
for a single authorizing signature or initial with the options
selected designated by some other means, such as a check mark. The
insurance authorization may be signed or initialed by any consumer,
as defined in Sec. 1026.2(a)(11), or by an authorized user on a
credit card account.
8. Property insurance. To exclude property insurance premiums or
charges from the finance charge, the creditor must allow the
consumer to choose the insurer and disclose that fact. This
disclosure must be made whether or not the property insurance is
available from or through the creditor. The requirement that an
option be given does not require that the insurance be readily
available from other sources. The premium or charge must be
disclosed only if the consumer elects to purchase the insurance from
the creditor; in such a case, the creditor must also disclose the
term of the property insurance coverage if it is less than the term
of the obligation.
9. Single-interest insurance. Blanket and specific single-
interest coverage are treated the same for purposes of the
regulation. A charge for either type of single-interest insurance
may be excluded from the finance charge if:
i. The insurer waives any right of subrogation.
ii. The other requirements of Sec. 1026.4(d)(2) are met. This
includes, of course, giving the consumer the option of obtaining the
insurance from a person of the consumer's choice. The creditor need
not ascertain whether the consumer is able to purchase the insurance
from someone else.
10. Single-interest insurance defined. The term single-interest
insurance as used in the regulation refers only to the types of
coverage traditionally included in the term vendor's single-interest
insurance (or VSI), that is, protection of tangible property against
normal property damage, concealment, confiscation, conversion,
embezzlement, and skip. Some comprehensive insurance policies may
include a variety of additional coverages, such as repossession
insurance and holder-in-due-course insurance. These types of
coverage do not constitute single-interest insurance for purposes of
the regulation, and premiums for them do not qualify for exclusion
from the finance charge under Sec. 1026.4(d). If a policy that is
primarily VSI also provides coverages that are not VSI or other
property insurance, a portion of the premiums must be allocated to
the nonexcludable coverages and included in the finance charge.
However, such allocation is not required if the total premium in
fact attributable to all of the non-VSI coverages included in the
policy is $1.00 or less (or $5.00 or less in the case of a multiyear
policy).
11. Initial term. i. The initial term of insurance or debt
cancellation or debt suspension coverage determines the period for
which a premium amount must be
[[Page 79930]]
disclosed, unless one of the options discussed under comment 4(d)-12
is available. For purposes of Sec. 1026.4(d), the initial term is
the period for which the insurer or creditor is obligated to provide
coverage, even though the consumer may be allowed to cancel the
coverage or coverage may end due to nonpayment before that term
expires.
ii. For example: A. The initial term of a property insurance
policy on an automobile that is written for one year is one year
even though premiums are paid monthly and the term of the credit
transaction is four years.
B. The initial term of an insurance policy is the full term of
the credit transaction if the consumer pays or finances a single
premium in advance.
12. Initial term; alternative. i. General. A creditor has the
option of providing cost disclosures on the basis of one year of
insurance or debt cancellation or debt suspension coverage instead
of a longer initial term (provided the premium or fee is clearly
labeled as being for one year) if:
A. The initial term is indefinite or not clear, or
B. The consumer has agreed to pay a premium or fee that is
assessed periodically but the consumer is under no obligation to
continue the coverage, whether or not the consumer has made an
initial payment.
ii. Open-end plans. For open-end plans, a creditor also has the
option of providing unit-cost disclosure on the basis of a period
that is less than one year if the consumer has agreed to pay a
premium or fee that is assessed periodically, for example monthly,
but the consumer is under no obligation to continue the coverage.
iii. Examples. To illustrate:
A. A credit life insurance policy providing coverage for a 30-
year mortgage loan has an initial term of 30 years, even though
premiums are paid monthly and the consumer is not required to
continue the coverage. Disclosures may be based on the initial term,
but the creditor also has the option of making disclosures on the
basis of coverage for an assumed initial term of one year.
13. Loss-of-income insurance. The loss-of-income insurance
mentioned in Sec. 1026.4(d) includes involuntary unemployment
insurance, which provides that some or all of the consumer's
payments will be made if the consumer becomes unemployed
involuntarily.
4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees
1. General. Fees charged for the specialized form of debt
cancellation agreement known as guaranteed automobile protection
(``GAP'') agreements must be disclosed according to Sec.
1026.4(d)(3) rather than according to Sec. 1026.4(d)(2) for
property insurance.
2. Disclosures. Creditors can comply with Sec. 1026.4(d)(3) by
providing a disclosure that refers to debt cancellation or debt
suspension coverage whether or not the coverage is considered
insurance. Creditors may use the model credit insurance disclosures
only if the debt cancellation or debt suspension coverage
constitutes insurance under state law. (See Model Clauses and
Samples at G-16 and H-17 in Appendix G and Appendix H to part 1026
for guidance on how to provide the disclosure required by Sec.
1026.4(d)(3)(iii) for debt suspension products.)
3. Multiple events. If debt cancellation or debt suspension
coverage for two or more events is provided at a single charge, the
entire charge may be excluded from the finance charge if at least
one of the events is accident or loss of life, health, or income and
the conditions specified in Sec. 1026.4(d)(3) or, as applicable,
Sec. 1026.4(d)(4), are satisfied.
4. Disclosures in programs combining debt cancellation and debt
suspension features. If the consumer's debt can be cancelled under
certain circumstances, the disclosure may be modified to reflect
that fact. The disclosure could, for example, state (in addition to
the language required by Sec. 1026.4(d)(3)(iii)) that ``In some
circumstances, my debt may be cancelled.'' However, the disclosure
would not be permitted to list the specific events that would result
in debt cancellation.
4(d)(4) Telephone Purchases
1. Affirmative request. A creditor would not satisfy the
requirement to obtain a consumer's affirmative request if the
``request'' was a response to a script that uses leading questions
or negative consent. A question asking whether the consumer wishes
to enroll in the credit insurance or debt cancellation or suspension
plan and seeking a yes-or-no response (such as ``Do you want to
enroll in this optional debt cancellation plan?'') would not be
considered leading.
4(e) Certain Security Interest Charges
1. Examples. i. Excludable charges. Sums must be actually paid
to public officials to be excluded from the finance charge under
Sec. 1026.4(e)(1) and (e)(3). Examples are charges or other fees
required for filing or recording security agreements, mortgages,
continuation statements, termination statements, and similar
documents, as well as intangible property or other taxes even when
the charges or fees are imposed by the state solely on the creditor
and charged to the consumer (if the tax must be paid to record a
security agreement). (See comment 4(a)-5 regarding the treatment of
taxes, generally.)
ii. Charges not excludable. If the obligation is between the
creditor and a third party (an assignee, for example), charges or
other fees for filing or recording security agreements, mortgages,
continuation statements, termination statements, and similar
documents relating to that obligation are not excludable from the
finance charge under this section.
2. Itemization. The various charges described in Sec.
1026.4(e)(1) and (e)(3) may be totaled and disclosed as an aggregate
sum, or they may be itemized by the specific fees and taxes imposed.
If an aggregate sum is disclosed, a general term such as security
interest fees or filing fees may be used.
3. Notary fees. In order for a notary fee to be excluded under
Sec. 1026.4(e)(1), all of the following conditions must be met:
i. The document to be notarized is one used to perfect, release,
or continue a security interest.
ii. The document is required by law to be notarized.
iii. A notary is considered a public official under applicable
law.
iv. The amount of the fee is set or authorized by law.
4. Nonfiling insurance. The exclusion in Sec. 1026.4(e)(2) is
available only if nonfiling insurance is purchased. If the creditor
collects and simply retains a fee as a sort of ``self-insurance''
against nonfiling, it may not be excluded from the finance charge.
If the nonfiling insurance premium exceeds the amount of the fees
excludable from the finance charge under Sec. 1026.4(e)(1), only
the excess is a finance charge. For example:
i. The fee for perfecting a security interest is $5.00 and the
fee for releasing the security interest is $3.00. The creditor
charges $10.00 for nonfiling insurance. Only $8.00 of the $10.00 is
excludable from the finance charge.
4(f) Prohibited Offsets
1. Earnings on deposits or investments. The rule that the
creditor shall not deduct any earnings by the consumer on deposits
or investments applies whether or not the creditor has a security
interest in the property.
Subpart B--Open-End Credit
Section 1026.5--General Disclosure Requirements
5(a) Form of Disclosures
5(a)(1) General
1. Clear and conspicuous standard. The ``clear and conspicuous''
standard generally requires that disclosures be in a reasonably
understandable form. Disclosures for credit card applications and
solicitations under Sec. 1026.60, highlighted account-opening
disclosures under Sec. 1026.6(b)(1), highlighted disclosure on
checks that access a credit card under Sec. 1026.9(b)(3),
highlighted change-in-terms disclosures under Sec.
1026.9(c)(2)(iv)(D), and highlighted disclosures when a rate is
increased due to delinquency, default or for a penalty under Sec.
1026.9(g)(3)(ii) must also be readily noticeable to the consumer.
2. Clear and conspicuous--reasonably understandable form. Except
where otherwise provided, the reasonably understandable form
standard does not require that disclosures be segregated from other
material or located in any particular place on the disclosure
statement, or that numerical amounts or percentages be in any
particular type size. For disclosures that are given orally, the
standard requires that they be given at a speed and volume
sufficient for a consumer to hear and comprehend them. (See comment
5(b)(1)(ii)-1.) Except where otherwise provided, the standard does
not prohibit:
i. Pluralizing required terminology (``finance charge'' and
``annual percentage rate'').
ii. Adding to the required disclosures such items as contractual
provisions, explanations of contract terms, state disclosures, and
translations.
iii. Sending promotional material with the required disclosures.
iv. Using commonly accepted or readily understandable
abbreviations (such as ``mo.'' for ``month'' or ``TX'' for
``Texas'') in making any required disclosures.
[[Page 79931]]
v. Using codes or symbols such as ``APR'' (for annual percentage
rate), ``FC'' (for finance charge), or ``Cr'' (for credit balance),
so long as a legend or description of the code or symbol is provided
on the disclosure statement.
3. Clear and conspicuous--readily noticeable standard. To meet
the readily noticeable standard, disclosures for credit card
applications and solicitations under Sec. 1026.60, highlighted
account-opening disclosures under Sec. 1026.6(b)(1), highlighted
disclosures on checks that access a credit card account under Sec.
1026.9(b)(3), highlighted change-in-terms disclosures under Sec.
1026.9(c)(2)(iv)(D), and highlighted disclosures when a rate is
increased due to delinquency, default or penalty pricing under Sec.
1026.9(g)(3)(ii) must be given in a minimum of 10-point font. (See
special rule for font size requirements for the annual percentage
rate for purchases under Sec. Sec. 1026.60(b)(1) and
1026.6(b)(2)(i).)
4. Integrated document. The creditor may make both the account-
opening disclosures (Sec. 1026.6) and the periodic-statement
disclosures (Sec. 1026.7) on more than one page, and use both the
front and the reverse sides, except where otherwise indicated, so
long as the pages constitute an integrated document. An integrated
document would not include disclosure pages provided to the consumer
at different times or disclosures interspersed on the same page with
promotional material. An integrated document would include, for
example:
i. Multiple pages provided in the same envelope that cover
related material and are folded together, numbered consecutively, or
clearly labeled to show that they relate to one another; or
ii. A brochure that contains disclosures and explanatory
material about a range of services the creditor offers, such as
credit, checking account, and electronic fund transfer features.
5. Disclosures covered. Disclosures that must meet the ``clear
and conspicuous'' standard include all required communications under
this subpart. Therefore, disclosures made by a person other than the
card issuer, such as disclosures of finance charges imposed at the
time of honoring a consumer's credit card under Sec. 1026.9(d), and
notices, such as the correction notice required to be sent to the
consumer under Sec. 1026.13(e), must also be clear and conspicuous.
Paragraph 5(a)(1)(ii)(A)
1. Electronic disclosures. Disclosures that need not be provided
in writing under Sec. 1026.5(a)(1)(ii)(A) may be provided in
writing, orally, or in electronic form. If the consumer requests the
service in electronic form, such as on the creditor's Web site, the
specified disclosures may be provided in electronic form without
regard to the consumer consent or other provisions of the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15
U.S.C. 7001 et seq.).
Paragraph 5(a)(1)(iii)
1. Disclosures not subject to E-Sign Act. See the commentary to
Sec. 1026.5(a)(1)(ii)(A) regarding disclosures (in addition to
those specified under Sec. 1026.5(a)(1)(iii)) that may be provided
in electronic form without regard to the consumer consent or other
provisions of the E-Sign Act.
5(a)(2) Terminology
1. When disclosures must be more conspicuous. For home-equity
plans subject to Sec. 1026.40, the terms finance charge and annual
percentage rate, when required to be used with a number, must be
disclosed more conspicuously than other required disclosures, except
in the cases provided in Sec. 1026.5(a)(2)(ii). At the creditor's
option, finance charge and annual percentage rate may also be
disclosed more conspicuously than the other required disclosures
even when the regulation does not so require. The following examples
illustrate these rules:
i. In disclosing the annual percentage rate as required by Sec.
1026.6(a)(1)(ii), the term annual percentage rate is subject to the
more conspicuous rule.
ii. In disclosing the amount of the finance charge, required by
Sec. 1026.7(a)(6)(i), the term finance charge is subject to the
more conspicuous rule.
iii. Although neither finance charge nor annual percentage rate
need be emphasized when used as part of general informational
material or in textual descriptions of other terms, emphasis is
permissible in such cases. For example, when the terms appear as
part of the explanations required under Sec. 1026.6(a)(1)(iii) and
(a)(1)(iv), they may be equally conspicuous as the disclosures
required under Sec. Sec. 1026.6(a)(1)(ii) and 1026.7(a)(7).
2. Making disclosures more conspicuous. In disclosing the terms
finance charge and annual percentage rate more conspicuously for
home-equity plans subject to Sec. 1026.40, only the words finance
charge and annual percentage rate should be accentuated. For
example, if the term total finance charge is used, only finance
charge should be emphasized. The disclosures may be made more
conspicuous by, for example:
i. Capitalizing the words when other disclosures are printed in
lower case.
ii. Putting them in bold print or a contrasting color.
iii. Underlining them.
iv. Setting them off with asterisks.
v. Printing them in larger type.
3. Disclosure of figures--exception to more conspicuous rule.
For home-equity plans subject to Sec. 1026.40, the terms annual
percentage rate and finance charge need not be more conspicuous than
figures (including, for example, numbers, percentages, and dollar
signs).
4. Consistent terminology. Language used in disclosures required
in this subpart must be close enough in meaning to enable the
consumer to relate the different disclosures; however, the language
need not be identical.
5(b) Time of Disclosures
5(b)(1) Account-Opening Disclosures
5(b)(1)(i) General Rule
1. Disclosure before the first transaction. When disclosures
must be furnished ``before the first transaction,'' account-opening
disclosures must be delivered before the consumer becomes obligated
on the plan. Examples include:
i. Purchases. The consumer makes the first purchase, such as
when a consumer opens a credit plan and makes purchases
contemporaneously at a retail store, except when the consumer places
a telephone call to make the purchase and opens the plan
contemporaneously. (See commentary to Sec. 1026.5(b)(1)(iii)
below.)
ii. Advances. The consumer receives the first advance. If the
consumer receives a cash advance check at the same time the account-
opening disclosures are provided, disclosures are still timely if
the consumer can, after receiving the disclosures, return the cash
advance check to the creditor without obligation (for example,
without paying finance charges).
2. Reactivation of suspended account. If an account is
temporarily suspended (for example, because the consumer has
exceeded a credit limit, or because a credit card is reported lost
or stolen) and then is reactivated, no new account-opening
disclosures are required.
3. Reopening closed account. If an account has been closed (for
example, due to inactivity, cancellation, or expiration) and then is
reopened, new account-opening disclosures are required. No new
account-opening disclosures are required, however, when the account
is closed merely to assign it a new number (for example, when a
credit card is reported lost or stolen) and the ``new'' account then
continues on the same terms.
4. Converting closed-end to open-end credit. If a closed-end
credit transaction is converted to an open-end credit account under
a written agreement with the consumer, account-opening disclosures
under Sec. 1026.6 must be given before the consumer becomes
obligated on the open-end credit plan. (See the commentary to Sec.
1026.17 on converting open-end credit to closed-end credit.)
5. Balance transfers. A creditor that solicits the transfer by a
consumer of outstanding balances from an existing account to a new
open-end plan must furnish the disclosures required by Sec. 1026.6
so that the consumer has an opportunity, after receiving the
disclosures, to contact the creditor before the balance is
transferred and decline the transfer. For example, assume a consumer
responds to a card issuer's solicitation for a credit card account
subject to Sec. 1026.60 that offers a range of balance transfer
annual percentage rates, based on the consumer's creditworthiness.
If the creditor opens an account for the consumer, the creditor
would comply with the timing rules of this section by providing the
consumer with the annual percentage rate (along with the fees and
other required disclosures) that would apply to the balance transfer
in time for the consumer to contact the creditor and withdraw the
request. A creditor that permits consumers to withdraw the request
by telephone has met this timing standard if the creditor does not
effect the balance transfer until 10 days after the creditor has
sent account-opening disclosures to the consumer, assuming the
consumer has not contacted the creditor to withdraw the request.
Card issuers that are subject to the requirements of Sec. 1026.60
may
[[Page 79932]]
establish procedures that comply with both Sec. Sec. 1026.60 and
1026.6 in a single disclosure statement.
6. Substitution or replacement of credit card accounts. i.
Generally. When a card issuer substitutes or replaces an existing
credit card account with another credit card account, the card
issuer must either provide notice of the terms of the new account
consistent with Sec. 1026.6(b) or provide notice of the changes in
the terms of the existing account consistent with Sec.
1026.9(c)(2). Whether a substitution or replacement results in the
opening of a new account or a change in the terms of an existing
account for purposes of the disclosure requirements in Sec. Sec.
1026.6(b) and 1026.9(c)(2) is determined in light of all the
relevant facts and circumstances. For additional requirements and
limitations related to the substitution or replacement of credit
card accounts, see Sec. Sec. 1026.12(a) and 1026.55(d) and comments
12(a)(1)-1 through -8, 12(a)(2)-1 through -9, 55(b)(3)-3, and 55(d)-
1 through -3.
ii. Relevant facts and circumstances. Listed below are facts and
circumstances that are relevant to whether a substitution or
replacement results in the opening of a new account or a change in
the terms of an existing account for purposes of the disclosure
requirements in Sec. Sec. 1026.6(b) and 1026.9(c)(2). When most of
the facts and circumstances listed below are present, the
substitution or replacement likely constitutes the opening of a new
account for which Sec. 1026.6(b) disclosures are appropriate. When
few of the facts and circumstances listed below are present, the
substitution or replacement likely constitutes a change in the terms
of an existing account for which Sec. 1026.9(c)(2) disclosures are
appropriate.
A. Whether the card issuer provides the consumer with a new
credit card;
B. Whether the card issuer provides the consumer with a new
account number;
C. Whether the account provides new features or benefits after
the substitution or replacement (such as rewards on purchases);
D. Whether the account can be used to conduct transactions at a
greater or lesser number of merchants after the substitution or
replacement (such as when a retail card is replaced with a cobranded
general purpose credit card that can be used at a wider number of
merchants);
E. Whether the card issuer implemented the substitution or
replacement on an individualized basis (such as in response to a
consumer's request); and
F. Whether the account becomes a different type of open-end plan
after the substitution or replacement (such as when a charge card is
replaced by a credit card).
iii. Replacement as a result of theft or unauthorized use.
Notwithstanding paragraphs i and ii above, a card issuer that
replaces a credit card or provides a new account number because the
consumer has reported the card stolen or because the account appears
to have been used for unauthorized transactions is not required to
provide a notice under Sec. Sec. 1026.6(b) or 1026.9(c)(2) unless
the card issuer has changed a term of the account that is subject to
Sec. Sec. 1026.6(b) or 1026.9(c)(2).
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured)
Plan
1. Disclosing charges before the fee is imposed. Creditors may
disclose charges imposed as part of an open-end (not home-secured)
plan orally or in writing at any time before a consumer agrees to
pay the fee or becomes obligated for the charge, unless the charge
is specified under Sec. 1026.6(b)(2). (Charges imposed as part of
an open-end (not home-secured plan) that are not specified under
Sec. 1026.6(b)(2) may alternatively be disclosed in electronic
form; see the commentary to Sec. 1026.5(a)(1)(ii)(A).) Creditors
must provide such disclosures at a time and in a manner that a
consumer would be likely to notice them. For example, if a consumer
telephones a card issuer to discuss a particular service, a creditor
would meet the standard if the creditor clearly and conspicuously
discloses the fee associated with the service that is the topic of
the telephone call orally to the consumer. Similarly, a creditor
providing marketing materials in writing to a consumer about a
particular service would meet the standard if the creditor provided
a clear and conspicuous written disclosure of the fee for that
service in those same materials. A creditor that provides written
materials to a consumer about a particular service but provides a
fee disclosure for another service not promoted in such materials
would not meet the standard. For example, if a creditor provided
marketing materials promoting payment by Internet, but included the
fee for a replacement card on such materials with no explanation,
the creditor would not be disclosing the fee at a time and in a
manner that the consumer would be likely to notice the fee.
5(b)(1)(iii) Telephone Purchases
1. Return policies. In order for creditors to provide
disclosures in accordance with the timing requirements of this
paragraph, consumers must be permitted to return merchandise
purchased at the time the plan was established without paying
mailing or return-shipment costs. Creditors may impose costs to
return subsequent purchases of merchandise under the plan, or to
return merchandise purchased by other means such as a credit card
issued by another creditor. A reasonable return policy would be of
sufficient duration that the consumer is likely to have received the
disclosures and had sufficient time to make a decision about the
financing plan before his or her right to return the goods expires.
Return policies need not provide a right to return goods if the
consumer consumes or damages the goods, or for installed appliances
or fixtures, provided there is a reasonable repair or replacement
policy to cover defective goods or installations. If the consumer
chooses to reject the financing plan, creditors comply with the
requirements of this paragraph by permitting the consumer to pay for
the goods with another reasonable form of payment acceptable to the
merchant and keep the goods although the creditor cannot require the
consumer to do so.
5(b)(1)(iv) Membership Fees
1. Membership fees. See Sec. 1026.60(b)(2) and related
commentary for guidance on fees for issuance or availability of a
credit or charge card.
2. Rejecting the plan. If a consumer has paid or promised to pay
a membership fee including an application fee excludable from the
finance charge under Sec. 1026.4(c)(1) before receiving account-
opening disclosures, the consumer may, after receiving the
disclosures, reject the plan and not be obligated for the membership
fee, application fee, or any other fee or charge. A consumer who has
received the disclosures and uses the account, or makes a payment on
the account after receiving a billing statement, is deemed not to
have rejected the plan.
3. Using the account. A consumer uses an account by obtaining an
extension of credit after receiving the account-opening disclosures,
such as by making a purchase or obtaining an advance. A consumer
does not ``use'' the account by activating the account. A consumer
also does not ``use'' the account when the creditor assesses fees on
the account (such as start-up fees or fees associated with credit
insurance or debt cancellation or suspension programs agreed to as a
part of the application and before the consumer receives account-
opening disclosures). For example, the consumer does not ``use'' the
account when a creditor sends a billing statement with start-up
fees, there is no other activity on the account, the consumer does
not pay the fees, and the creditor subsequently assesses a late fee
or interest on the unpaid fee balances. A consumer also does not
``use'' the account by paying an application fee excludable from the
finance charge under Sec. 1026.4(c)(1) prior to receiving the
account-opening disclosures.
4. Home-equity plans. Creditors offering home-equity plans
subject to the requirements of Sec. 1026.40 are subject to the
requirements of Sec. 1026.40(h) regarding the collection of fees.
5(b)(2) Periodic Statements
5(b)(2)(i) Statement Required
1. Periodic statements not required. Periodic statements need
not be sent in the following cases:
i. If the creditor adjusts an account balance so that at the end
of the cycle the balance is less than $1--so long as no finance
charge has been imposed on the account for that cycle.
ii. If a statement was returned as undeliverable. If a new
address is provided, however, within a reasonable time before the
creditor must send a statement, the creditor must resume sending
statements. Receiving the address at least 20 days before the end of
a cycle would be a reasonable amount of time to prepare the
statement for that cycle. For example, if an address is received 22
days before the end of the June cycle, the creditor must send the
periodic statement for the June cycle. (See Sec. 1026.13(a)(7).)
2. Termination of draw privileges. When a consumer's ability to
draw on an open-end account is terminated without being converted to
closed-end credit under a written agreement, the creditor must
continue to provide periodic statements to those consumers entitled
to receive them under Sec. 1026.5(b)(2)(i), for example, when the
draw period of an open-end credit plan
[[Page 79933]]
ends and consumers are paying off outstanding balances according to
the account agreement or under the terms of a workout agreement that
is not converted to a closed-end transaction. In addition, creditors
must continue to follow all of the other open-end credit
requirements and procedures in subpart B.
3. Uncollectible accounts. An account is deemed uncollectible
for purposes of Sec. 1026.5(b)(2)(i) when a creditor has ceased
collection efforts, either directly or through a third party.
4. Instituting collection proceedings. Creditors institute a
delinquency collection proceeding by filing a court action or
initiating an adjudicatory process with a third party. Assigning a
debt to a debt collector or other third party would not constitute
instituting a collection proceeding.
5(b)(2)(ii) Timing Requirements
1. Mailing or delivery of periodic statements. A creditor is not
required to determine the specific date on which a periodic
statement is mailed or delivered to an individual consumer for
purposes of Sec. 1026.5(b)(2)(ii). A creditor complies with Sec.
1026.5(b)(2)(ii) if it has adopted reasonable procedures designed to
ensure that periodic statements are mailed or delivered to consumers
no later than a certain number of days after the closing date of the
billing cycle and adds that number of days to the 21-day or 14-day
period required by Sec. 1026.5(b)(2)(ii) when determining, as
applicable, the payment due date for purposes of Sec.
1026.5(b)(2)(ii)(A), the date on which any grace period expires for
purposes of Sec. 1026.5(b)(2)(ii)(B)(1), or the date after which
the payment will be treated as late for purposes of Sec.
1026.5(b)(2)(ii)(B)(2). For example:
A. If a creditor has adopted reasonable procedures designed to
ensure that periodic statements for a credit card account under an
open-end (not home-secured) consumer credit plan or an account under
an open-end consumer credit plan that provides a grace period are
mailed or delivered to consumers no later than three days after the
closing date of the billing cycle, the payment due date for purposes
of Sec. 1026.5(b)(2)(ii)(A) and the date on which any grace period
expires for purposes of Sec. 1026.5(b)(2)(ii)(B)(1) must be no less
than 24 days after the closing date of the billing cycle. Similarly,
in these circumstances, the limitations in Sec. 1026.5(b)(2)(ii)(A)
and (b)(2)(ii)(B)(1) on treating a payment as late and imposing
finance charges apply for 24 days after the closing date of the
billing cycle.
B. If a creditor has adopted reasonable procedures designed to
ensure that periodic statements for an account under an open-end
consumer credit plan that does not provide a grace period are mailed
or delivered to consumers no later than five days after the closing
date of the billing cycle, the date on which a payment must be
received in order to avoid being treated as late for purposes of
Sec. 1026.5(b)(2)(ii)(B)(2) must be no less than 19 days after the
closing date of the billing cycle. Similarly, in these
circumstances, the limitation in Sec. 1026.5(b)(2)(ii)(B)(2) on
treating a payment as late for any purpose applies for 19 days after
the closing date of the billing cycle.
2. Treating a payment as late for any purpose. Treating a
payment as late for any purpose includes increasing the annual
percentage rate as a penalty, reporting the consumer as delinquent
to a credit reporting agency, assessing a late fee or any other fee,
initiating collection activities, or terminating benefits (such as
rewards on purchases) based on the consumer's failure to make a
payment within a specified amount of time or by a specified date.
The prohibitions in Sec. 1026.5(b)(2)(ii)(A)(2) and
(b)(2)(B)(2)(ii) on treating a payment as late for any purpose apply
only during the 21-day or 14-day period (as applicable) following
mailing or delivery of the periodic statement stating the due date
for that payment and only if the required minimum periodic payment
is received within that period. For example:
i. Assume that, for a credit card account under an open-end (not
home-secured) consumer credit plan, a periodic statement mailed on
April 4 states that a required minimum periodic payment of $50 is
due on April 25. If the card issuer does not receive any payment on
or before April 25, Sec. 1026.5(b)(2)(ii)(A)(2) does not prohibit
the card issuer from treating the required minimum periodic payment
as late.
ii. Same facts as in paragraph i above. On April 20, the card
issuer receives a payment of $30 and no additional payment is
received on or before April 25. Section 1026.5(b)(2)(ii)(A)(2) does
not prohibit the card issuer from treating the required minimum
periodic payment as late.
iii. Same facts as in paragraph i above. On May 4, the card
issuer has not received the $50 required minimum periodic payment
that was due on April 25. The periodic statement mailed on May 4
states that a required minimum periodic payment of $150 is due on
May 25. Section 1026.5(b)(2)(ii)(A)(2) does not permit the card
issuer to treat the $150 required minimum periodic payment as late
until April 26. However, the card issuer may continue to treat the
$50 required minimum periodic payment as late during this period.
iv. Assume that, for an account under an open-end consumer
credit plan that does not provide a grace period, a periodic
statement mailed on September 10 states that a required minimum
periodic payment of $100 is due on September 24. If the creditor
does not receive any payment on or before September 24, Sec.
1026.5(b)(2)(ii)(B)(2)(ii) does not prohibit the creditor from
treating the required minimum periodic payment as late.
3. Grace periods. i. Definition of grace period. For purposes of
Sec. 1026.5(b)(2)(ii)(B), ``grace period'' means a period within
which any credit extended may be repaid without incurring a finance
charge due to a periodic interest rate. A deferred interest or
similar promotional program under which the consumer is not
obligated to pay interest that accrues on a balance if that balance
is paid in full prior to the expiration of a specified period of
time is not a grace period for purposes of Sec.
1026.5(b)(2)(ii)(B). Similarly, a period following the payment due
date during which a late payment fee will not be imposed is not a
grace period for purposes of Sec. 1026.5(b)(2)(ii)(B). See comments
7(b)(11)-1, 7(b)(11)-2, and 54(a)(1)-2.
ii. Applicability of Sec. 1026.5(b)(2)(ii)(B)(1). Section
1026.5(b)(2)(ii)(B)(1) applies if an account is eligible for a grace
period when the periodic statement is mailed or delivered. Section
1026.5(b)(2)(ii)(B)(1) does not require the creditor to provide a
grace period or prohibit the creditor from placing limitations and
conditions on a grace period to the extent consistent with Sec.
1026.5(b)(2)(ii)(B) and Sec. 1026.54. See comment 54(a)(1)-1.
Furthermore, the prohibition in Sec. 1026.5(b)(2)(ii)(B)(1)(ii)
applies only during the 21-day period following mailing or delivery
of the periodic statement and applies only when the creditor
receives a payment within that 21-day period that satisfies the
terms of the grace period.
iii. Example. Assume that the billing cycles for an account
begin on the first day of the month and end on the last day of the
month and that the payment due date for the account is the twenty-
fifth of the month. Assume also that, under the terms of the
account, the balance at the end of a billing cycle must be paid in
full by the following payment due date in order for the account to
remain eligible for the grace period. At the end of the April
billing cycle, the balance on the account is $500. The grace period
applies to the $500 balance because the balance for the March
billing cycle was paid in full on April 25. Accordingly, Sec.
1026.5(b)(2)(ii)(B)(1)(i) requires the creditor to have reasonable
procedures designed to ensure that the periodic statement reflecting
the $500 balance is mailed or delivered on or before May 4.
Furthermore, Sec. 1026.5(b)(2)(ii)(B)(1)(ii) requires the creditor
to have reasonable procedures designed to ensure that the creditor
does not impose finance charges as a result of the loss of the grace
period if a $500 payment is received on or before May 25. However,
if the creditor receives a payment of $300 on April 25, Sec.
1026.5(b)(2)(ii)(B)(1)(ii) would not prohibit the creditor from
imposing finance charges as a result of the loss of the grace period
(to the extent permitted by Sec. 1026.54).
4. Application of Sec. 1026.5(b)(2)(ii) to charge card and
charged-off accounts. i. Charge card accounts. For purposes of Sec.
1026.5(b)(2)(ii)(A)(1), the payment due date for a credit card
account under an open-end (not home-secured) consumer credit plan is
the date the card issuer is required to disclose on the periodic
statement pursuant to Sec. 1026.7(b)(11)(i)(A). Because Sec.
1026.7(b)(11)(ii) provides that Sec. 1026.7(b)(11)(i) does not
apply to periodic statements provided solely for charge card
accounts, Sec. 1026.5(b)(2)(ii)(A)(1) also does not apply to the
mailing or delivery of periodic statements provided solely for such
accounts. However, in these circumstances, Sec.
1026.5(b)(2)(ii)(A)(2) requires the card issuer to have reasonable
procedures designed to ensure that a payment is not treated as late
for any purpose during the 21-day period following mailing or
delivery of the statement. A card issuer that complies with Sec.
1026.5(b)(2)(ii)(A) as discussed above with respect to a charge card
account has also complied with Sec. 1026.5(b)(2)(ii)(B)(2). Section
1026.5(b)(2)(ii)(B)(1) does not apply
[[Page 79934]]
to charge card accounts because, for purposes of Sec.
1026.5(b)(2)(ii)(B), a grace period is a period within which any
credit extended may be repaid without incurring a finance charge due
to a periodic interest rate and, consistent with Sec.
1026.2(a)(15)(iii), charge card accounts do not impose a finance
charge based on a periodic rate.
ii. Charged-off accounts. For purposes of Sec.
1026.5(b)(2)(ii)(A)(1), the payment due date for a credit card
account under an open-end (not home-secured) consumer credit plan is
the date the card issuer is required to disclose on the periodic
statement pursuant to Sec. 1026.7(b)(11)(i)(A). Because Sec.
1026.7(b)(11)(ii) provides that Sec. 1026.7(b)(11)(i) does not
apply to periodic statements provided for charged-off accounts where
full payment of the entire account balance is due immediately, Sec.
1026.5(b)(2)(ii)(A)(1) also does not apply to the mailing or
delivery of periodic statements provided solely for such accounts.
Furthermore, although Sec. 1026.5(b)(2)(ii)(A)(2) requires the card
issuer to have reasonable procedures designed to ensure that a
payment is not treated as late for any purpose during the 21-day
period following mailing or delivery of the statement, Sec.
1026.5(b)(2)(ii)(A)(2) does not prohibit a card issuer from
continuing to treat prior payments as late during that period. See
comment 5(b)(2)(ii)-2. Similarly, although Sec.
1026.5(b)(2)(ii)(B)(2) applies to open-end consumer credit accounts
in these circumstances, Sec. 1026.5(b)(2)(ii)(B)(2)(ii) does not
prohibit a creditor from continuing treating prior payments as late
during the 14-day period following mailing or delivery of a periodic
statement. Section 1026.5(b)(2)(ii)(B)(1) does not apply to charged-
off accounts where full payment of the entire account balance is due
immediately because such accounts do not provide a grace period.
5. Consumer request to pick up periodic statements. When a
consumer initiates a request, the creditor may permit, but may not
require, the consumer to pick up periodic statements. If the
consumer wishes to pick up a statement, the statement must be made
available in accordance with Sec. 1026.5(b)(2)(ii).
6. Deferred interest and similar promotional programs. See
comment 7(b)-1.iv.
5(c) Basis of Disclosures and Use of Estimates
1. Legal obligation. The disclosures should reflect the credit
terms to which the parties are legally bound at the time of giving
the disclosures.
i. The legal obligation is determined by applicable state or
other law.
ii. The fact that a term or contract may later be deemed
unenforceable by a court on the basis of equity or other grounds
does not, by itself, mean that disclosures based on that term or
contract did not reflect the legal obligation.
iii. The legal obligation normally is presumed to be contained
in the contract that evidences the agreement. But this may be
rebutted if another agreement between the parties legally modifies
that contract.
2. Estimates--obtaining information. Disclosures may be
estimated when the exact information is unknown at the time
disclosures are made. Information is unknown if it is not reasonably
available to the creditor at the time disclosures are made. The
reasonably available standard requires that the creditor, acting in
good faith, exercise due diligence in obtaining information. In
using estimates, the creditor is not required to disclose the basis
for the estimated figures, but may include such explanations as
additional information. The creditor normally may rely on the
representations of other parties in obtaining information. For
example, the creditor might look to insurance companies for the cost
of insurance.
3. Estimates--redisclosure. If the creditor makes estimated
disclosures, redisclosure is not required for that consumer, even
though more accurate information becomes available before the first
transaction. For example, in an open-end plan to be secured by real
estate, the creditor may estimate the appraisal fees to be charged;
such an estimate might reasonably be based on the prevailing market
rates for similar appraisals. If the exact appraisal fee is
determinable after the estimate is furnished but before the consumer
receives the first advance under the plan, no new disclosure is
necessary.
5(d) Multiple Creditors; Multiple Consumers
1. Multiple creditors. Under Sec. 1026.5(d):
i. Creditors must choose which of them will make the
disclosures.
ii. A single, complete set of disclosures must be provided,
rather than partial disclosures from several creditors.
iii. All disclosures for the open-end credit plan must be given,
even if the disclosing creditor would not otherwise have been
obligated to make a particular disclosure.
2. Multiple consumers. Disclosures may be made to either obligor
on a joint account. Disclosure responsibilities are not satisfied by
giving disclosures to only a surety or guarantor for a principal
obligor or to an authorized user. In rescindable transactions,
however, separate disclosures must be given to each consumer who has
the right to rescind under Sec. 1026.15.
3. Card issuer and person extending credit not the same person.
Section 127(c)(4)(D) of the Truth in Lending Act (15 U.S.C.
1637(c)(4)(D)) contains rules pertaining to charge card issuers with
plans that allow access to an open-end credit plan that is
maintained by a person other than the charge card issuer. These
rules are not implemented in Regulation Z (although they were
formerly implemented in Sec. 1026.60(f)). However, the statutory
provisions remain in effect and may be used by charge card issuers
with plans meeting the specified criteria.
5(e) Effect of Subsequent Events
1. Events causing inaccuracies. Inaccuracies in disclosures are
not violations if attributable to events occurring after disclosures
are made. For example, when the consumer fails to fulfill a prior
commitment to keep the collateral insured and the creditor then
provides the coverage and charges the consumer for it, such a change
does not make the original disclosures inaccurate. The creditor may,
however, be required to provide a new disclosure(s) under Sec.
1026.9(c).
2. Use of inserts. When changes in a creditor's plan affect
required disclosures, the creditor may use inserts with outdated
disclosure forms. Any insert:
i. Should clearly refer to the disclosure provision it replaces.
ii. Need not be physically attached or affixed to the basic
disclosure statement.
iii. May be used only until the supply of outdated forms is
exhausted.
Section 1026.6--Account-Opening Disclosures
6(a) Rules Affecting Home-Equity Plans
6(a)(1) Finance Charge
Paragraph 6(a)(1)(i)
1. When finance charges accrue. Creditors are not required to
disclose a specific date when finance charges will begin to accrue.
Creditors may provide a general explanation such as that the
consumer has 30 days from the closing date to pay the new balance
before finance charges will accrue on the account.
2. Grace periods. In disclosing whether or not a grace period
exists, the creditor need not use ``free period,'' ``free-ride
period,'' ``grace period'' or any other particular descriptive
phrase or term. For example, a statement that ``the finance charge
begins on the date the transaction is posted to your account''
adequately discloses that no grace period exists. In the same
fashion, a statement that ``finance charges will be imposed on any
new purchases only if they are not paid in full within 25 days after
the close of the billing cycle'' indicates that a grace period
exists in the interim.
Paragraph 6(a)(1)(ii)
1. Range of balances. The range of balances disclosure is
inapplicable:
i. If only one periodic rate may be applied to the entire
account balance.
ii. If only one periodic rate may be applied to the entire
balance for a feature (for example, cash advances), even though the
balance for another feature (purchases) may be subject to two rates
(a 1.5% monthly periodic rate on purchase balances of $0-$500, and a
1% monthly periodic rate for balances above $500). In this example,
the creditor must give a range of balances disclosure for the
purchase feature.
2. Variable-rate disclosures--coverage. i. Examples. This
section covers open-end credit plans under which rate changes are
specifically set forth in the account agreement and are tied to an
index or formula. A creditor would use variable-rate disclosures for
plans involving rate changes such as the following:
A. Rate changes that are tied to the rate the creditor pays on
its six-month certificates of deposit.
B. Rate changes that are tied to Treasury bill rates.
C. Rate changes that are tied to changes in the creditor's
commercial lending rate.
ii. An open-end credit plan in which the employee receives a
lower rate contingent upon employment (that is, with the rate to be
increased upon termination of employment) is not a variable-rate
plan.
3. Variable-rate plan--rate(s) in effect. In disclosing the
rate(s) in effect at the time of
[[Page 79935]]
the account-opening disclosures (as is required by Sec.
1026.6(a)(1)(ii)), the creditor may use an insert showing the
current rate; may give the rate as of a specified date and then
update the disclosure from time to time, for example, each calendar
month; or may disclose an estimated rate under Sec. 1026.5(c).
4. Variable-rate plan--additional disclosures required. In
addition to disclosing the rates in effect at the time of the
account-opening disclosures, the disclosures under Sec.
1026.6(a)(1)(ii) also must be made.
5. Variable-rate plan--index. The index to be used must be
clearly identified; the creditor need not give, however, an
explanation of how the index is determined or provide instructions
for obtaining it.
6. Variable-rate plan--circumstances for increase. i.
Circumstances under which the rate(s) may increase include, for
example:
A. An increase in the Treasury bill rate.
B. An increase in the Federal Reserve discount rate.
ii. The creditor must disclose when the increase will take
effect; for example:
A. ``An increase will take effect on the day that the Treasury
bill rate increases,'' or
B. ``An increase in the Federal Reserve discount rate will take
effect on the first day of the creditor's billing cycle.''
7. Variable-rate plan--limitations on increase. In disclosing
any limitations on rate increases, limitations such as the maximum
increase per year or the maximum increase over the duration of the
plan must be disclosed. When there are no limitations, the creditor
may, but need not, disclose that fact. (A maximum interest rate must
be included in dwelling-secured open-end credit plans under which
the interest rate may be changed. See Sec. 1026.30 and the
commentary to that section.) Legal limits such as usury or rate
ceilings under state or Federal statutes or regulations need not be
disclosed. Examples of limitations that must be disclosed include:
i. ``The rate on the plan will not exceed 25% annual percentage
rate.''
ii. ``Not more than \1/2\ percent increase in the annual
percentage rate per year will occur.''
8. Variable-rate plan--effects of increase. Examples of effects
of rate increases that must be disclosed include:
i. Any requirement for additional collateral if the annual
percentage rate increases beyond a specified rate.
ii. Any increase in the scheduled minimum periodic payment
amount.
9. Variable-rate plan--change-in-terms notice not required. No
notice of a change in terms is required for a rate increase under a
variable-rate plan as defined in comment 6(a)(1)(ii)-2.
10. Discounted variable-rate plans. In some variable-rate plans,
creditors may set an initial interest rate that is not determined by
the index or formula used to make later interest rate adjustments.
Typically, this initial rate is lower than the rate would be if it
were calculated using the index or formula.
i. For example, a creditor may calculate interest rates
according to a formula using the six-month Treasury bill rate plus a
2 percent margin. If the current Treasury bill rate is 10 percent,
the creditor may forgo the 2 percent spread and charge only 10
percent for a limited time, instead of setting an initial rate of 12
percent, or the creditor may disregard the index or formula and set
the initial rate at 9 percent.
ii. When creditors use an initial rate that is not calculated
using the index or formula for later rate adjustments, the account-
opening disclosure statement should reflect:
A. The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate), together with a statement of
how long the initial rate will remain in effect;
B. The current rate that would have been applied using the index
or formula (also expressed as a periodic rate and a corresponding
annual percentage rate); and
C. The other variable-rate information required in Sec.
1026.6(a)(1)(ii).
iii. In disclosing the current periodic and annual percentage
rates that would be applied using the index or formula, the creditor
may use any of the disclosure options described in comment
6(a)(1)(ii)-3.
11. Increased penalty rates. If the initial rate may increase
upon the occurrence of one or more specific events, such as a late
payment or an extension of credit that exceeds the credit limit, the
creditor must disclose the initial rate and the increased penalty
rate that may apply. If the penalty rate is based on an index and an
increased margin, the issuer must disclose the index and the margin.
The creditor must also disclose the specific event or events that
may result in the increased rate, such as ``22% APR, if 60 days
late.'' If the penalty rate cannot be determined at the time
disclosures are given, the creditor must provide an explanation of
the specific event or events that may result in the increased rate.
At the creditor's option, the creditor may disclose the period for
which the increased rate will remain in effect, such as ``until you
make three timely payments.'' The creditor need not disclose an
increased rate that is imposed when credit privileges are
permanently terminated.
Paragraph 6(a)(1)(iii)
1. Explanation of balance computation method. A shorthand phrase
such as ``previous balance method'' does not suffice in explaining
the balance computation method. (See Model Clauses G-1 and G-1(A) to
part 1026.)
2. Allocation of payments. Creditors may, but need not, explain
how payments and other credits are allocated to outstanding
balances. For example, the creditor need not disclose that payments
are applied to late charges, overdue balances, and finance charges
before being applied to the principal balance; or in a multifeatured
plan, that payments are applied first to finance charges, then to
purchases, and then to cash advances. (See comment 7-1 for
definition of multifeatured plan.)
Paragraph 6(a)(1)(iv)
1. Finance charges. In addition to disclosing the periodic
rate(s) under Sec. 1026.6(a)(1)(ii), creditors must disclose any
other type of finance charge that may be imposed, such as minimum,
fixed, transaction, and activity charges; required insurance; or
appraisal or credit report fees (unless excluded from the finance
charge under Sec. 1026.4(c)(7)). Creditors are not required to
disclose the fact that no finance charge is imposed when the
outstanding balance is less than a certain amount or the balance
below which no finance charge will be imposed.
6(a)(2) Other Charges
1. General; examples of other charges. Under Sec. 1026.6(a)(2),
significant charges related to the plan (that are not finance
charges) must also be disclosed. For example:
i. Late-payment and over-the-credit-limit charges.
ii. Fees for providing documentary evidence of transactions
requested under Sec. 1026.13 (billing error resolution).
iii. Charges imposed in connection with residential mortgage
transactions or real estate transactions such as title, appraisal,
and credit-report fees (see Sec. 1026.4(c)(7)).
iv. A tax imposed on the credit transaction by a state or other
governmental body, such as a documentary stamp tax on cash advances.
(See the commentary to Sec. 1026.4(a)).
v. A membership or participation fee for a package of services
that includes an open-end credit feature, unless the fee is required
whether or not the open-end credit feature is included. For example,
a membership fee to join a credit union is not an ``other charge,''
even if membership is required to apply for credit. For example, if
the primary benefit of membership in an organization is the
opportunity to apply for a credit card, and the other benefits
offered (such as a newsletter or a member information hotline) are
merely incidental to the credit feature, the membership fee would be
disclosed as an ``other charge.''
vi. Charges imposed for the termination of an open-end credit
plan.
2. Exclusions. The following are examples of charges that are
not ``other charges'':
i. Fees charged for documentary evidence of transactions for
income tax purposes.
ii. Amounts payable by a consumer for collection activity after
default; attorney's fees, whether or not automatically imposed;
foreclosure costs; post-judgment interest rates imposed by law; and
reinstatement or reissuance fees.
iii. Premiums for voluntary credit life or disability insurance,
or for property insurance, that are not part of the finance charge.
iv. Application fees under Sec. 1026.4(c)(1).
v. A monthly service charge for a checking account with
overdraft protection that is applied to all checking accounts,
whether or not a credit feature is attached.
vi. Charges for submitting as payment a check that is later
returned unpaid (See commentary to Sec. 1026.4(c)(2)).
vii. Charges imposed on a cardholder by an institution other
than the card issuer for the use of the other institution's ATM in a
shared or interchange system. (See also comment 7(a)(2)-2.)
viii. Taxes and filing or notary fees excluded from the finance
charge under Sec. 1026.4(e).
ix. A fee to expedite delivery of a credit card, either at
account opening or during the life of the account, provided delivery
of the
[[Page 79936]]
card is also available by standard mail service (or other means at
least as fast) without paying a fee for delivery.
x. A fee charged for arranging a single payment on the credit
account, upon the consumer's request (regardless of how frequently
the consumer requests the service), if the credit plan provides that
the consumer may make payments on the account by another reasonable
means, such as by standard mail service, without paying a fee to the
creditor.
6(a)(3) Home-Equity Plan Information
1. Additional disclosures required. For home-equity plans,
creditors must provide several of the disclosures set forth in Sec.
1026.40(d) along with the disclosures required under Sec. 1026.6.
Creditors also must disclose a list of the conditions that permit
the creditor to terminate the plan, freeze or reduce the credit
limit, and implement specified modifications to the original terms.
(See comment 40(d)(4)(iii)-1.)
2. Form of disclosures. The home-equity disclosures provided
under this section must be in a form the consumer can keep, and are
governed by Sec. 1026.5(a)(1). The segregation standard set forth
in Sec. 1026.40(a) does not apply to home-equity disclosures
provided under Sec. 1026.6.
3. Disclosure of payment and variable-rate examples. i. The
payment-example disclosure in Sec. 1026.40(d)(5)(iii) and the
variable-rate information in Sec. 1026.40(d)(12)(viii), (d)(12)(x),
(d)(12)(xi), and (d)(12)(xii) need not be provided with the
disclosures under Sec. 1026.6 if the disclosures under Sec.
1026.40(d) were provided in a form the consumer could keep; and the
disclosures of the payment example under Sec. 1026.40(d)(5)(iii),
the maximum-payment example under Sec. 1026.40(d)(12)(x) and the
historical table under Sec. 1026.40(d)(12)(xi) included a
representative payment example for the category of payment options
the consumer has chosen.
ii. For example, if a creditor offers three payment options (one
for each of the categories described in the commentary to Sec.
1026.40(d)(5)), describes all three options in its early
disclosures, and provides all of the disclosures in a retainable
form, that creditor need not provide the Sec. 1026.40(d)(5)(iii) or
(d)(12) disclosures again when the account is opened. If the
creditor showed only one of the three options in the early
disclosures (which would be the case with a separate disclosure form
rather than a combined form, as discussed under Sec. 1026.40(a)),
the disclosures under Sec. 1026.40(d)(5)(iii), (d)(12)(viii),
(d)(12)(x), (d)(12)(xi) and (d)(12)(xii) must be given to any
consumer who chooses one of the other two options. If the Sec.
1026.40(d)(5)(iii) and (d)(12) disclosures are provided with the
second set of disclosures, they need not be transaction-specific,
but may be based on a representative example of the category of
payment option chosen.
4. Disclosures for the repayment period. The creditor must
provide disclosures about both the draw and repayment phases when
giving the disclosures under Sec. 1026.6. Specifically, the
creditor must make the disclosures in Sec. 1026.6(a)(3), state the
corresponding annual percentage rate, and provide the variable-rate
information required in Sec. 1026.6(a)(1)(ii) for the repayment
phase. To the extent the corresponding annual percentage rate, the
information in Sec. 1026.6(a)(1)(ii), and any other required
disclosures are the same for the draw and repayment phase, the
creditor need not repeat such information, as long as it is clear
that the information applies to both phases.
6(a)(4) Security Interests
1. General. Creditors are not required to use specific terms to
describe a security interest, or to explain the type of security or
the creditor's rights with respect to the collateral.
2. Identification of property. Creditors sufficiently identify
collateral by type by stating, for example, motor vehicle or
household appliances. (Creditors should be aware, however, that the
Federal credit practices rules, as well as some state laws, prohibit
certain security interests in household goods.) The creditor may, at
its option, provide a more specific identification (for example, a
model and serial number).
3. Spreader clause. If collateral for preexisting credit with
the creditor will secure the plan being opened, the creditor must
disclose that fact. (Such security interests may be known as
``spreader'' or ``dragnet'' clauses, or as ``cross-
collateralization'' clauses.) The creditor need not specifically
identify the collateral; a reminder such as ``collateral securing
other loans with us may also secure this loan'' is sufficient. At
the creditor's option, a more specific description of the property
involved may be given.
4. Additional collateral. If collateral is required when
advances reach a certain amount, the creditor should disclose the
information available at the time of the account-opening
disclosures. For example, if the creditor knows that a security
interest will be taken in household goods if the consumer's balance
exceeds $1,000, the creditor should disclose accordingly. If the
creditor knows that security will be required if the consumer's
balance exceeds $1,000, but the creditor does not know what security
will be required, the creditor must disclose on the initial
disclosure statement that security will be required if the balance
exceeds $1,000, and the creditor must provide a change-in-terms
notice under Sec. 1026.9(c) at the time the security is taken. (See
comment 6(a)(4)-2.)
5. Collateral from third party. Security interests taken in
connection with the plan must be disclosed, whether the collateral
is owned by the consumer or a third party.
6(a)(5) Statement of Billing Rights
1. See the commentary to Model Forms G-3, G-3(A), G-4, and G-
4(A).
6(b) Rules Affecting Open-End (Not Home-Secured) Plans
6(b)(1) Form of Disclosures; Tabular Format for Open-End (Not Home-
Secured) Plans
1. Relation to tabular summary for applications and
solicitations. See commentary to Sec. 1026.60(a), (b), and (c)
regarding format and content requirements, except for the following:
i. Creditors must use the accuracy standard for annual
percentage rates in Sec. 1026.6(b)(4)(ii)(G).
ii. Generally, creditors must disclose the specific rate for
each feature that applies to the account. If the rates on an open-
end (not home-secured) plan vary by state and the creditor is
providing the account-opening table in person at the time the plan
is established in connection with financing the purchase of goods or
services the creditor may, at its option, disclose in the account-
opening table (A) the rate applicable to the consumer's account, or
(B) the range of rates, if the disclosure includes a statement that
the rate varies by state and refers the consumer to the account
agreement or other disclosure provided with the account-opening
table where the rate applicable to the consumer's account is
disclosed.
iii. Creditors must explain whether or not a grace period exists
for all features on the account. The row heading ``Paying Interest''
must be used if any one feature on the account does not have a grace
period.
iv. Creditors must name the balance computation method used for
each feature of the account and state that an explanation of the
balance computation method(s) is provided in the account-opening
disclosures.
v. Creditors must state that consumers' billing rights are
provided in the account-opening disclosures.
vi. If fees on an open-end (not home-secured) plan vary by state
and the creditor is providing the account-opening table in person at
the time the plan is established in connection with financing the
purchase of goods or services the creditor may, at its option,
disclose in the account-opening table (A) the specific fee
applicable to the consumer's account, or (B) the range of fees, if
the disclosure includes a statement that the amount of the fee
varies by state and refers the consumer to the account agreement or
other disclosure provided with the account-opening table where the
fee applicable to the consumer's account is disclosed.
vii. Creditors that must disclose the amount of available credit
must state the initial credit limit provided on the account.
viii. Creditors must disclose directly beneath the table the
circumstances under which an introductory rate may be revoked and
the rate that will apply after the introductory rate is revoked.
Issuers of credit card accounts under an open-end (not home-secured)
consumer credit plan are subject to limitations on the circumstances
under which an introductory rate may be revoked. (See comment
60(b)(1)-5 for guidance on how a card issuer may disclose the
circumstances under which an introductory rate may be revoked.)
ix. The applicable forms providing safe harbors for account-
opening tables are under Appendix G-17 to part 1026.
2. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 1026.6
disclosures.
3. Terminology. Section 1026.6(b)(1) generally requires that the
headings, content, and format of the tabular disclosures be
substantially similar, but need not be identical, to the tables in
Appendix G to part
[[Page 79937]]
1026; but see Sec. 1026.5(a)(2) for terminology requirements
applicable to Sec. 1026.6(b).
6(b)(2) Required Disclosures for Account-Opening Table for Open-End
(Not Home-Secured) Plans
6(b)(2)(iii) Fixed Finance Charge; Minimum Interest Charge
1. Example of brief statement. See Samples G-17(B), G-17(C), and
G-17(D) for guidance on how to provide a brief description of a
minimum interest charge.
6(b)(2)(v) Grace Period
1. Grace period. Creditors must state any conditions on the
applicability of the grace period. A creditor, however, may not
disclose under Sec. 1026.6(b)(2)(v) the limitations on the
imposition of finance charges as a result of a loss of a grace
period in Sec. 1026.54, or the impact of payment allocation on
whether interest is charged on transactions as a result of a loss of
a grace period. Some creditors may offer a grace period on all types
of transactions under which interest will not be charged on
transactions if the consumer pays the outstanding balance shown on a
periodic statement in full by the due date shown on that statement
for one or more billing cycles. In these circumstances, Sec.
1026.6(b)(2)(v) requires that the creditor disclose the grace period
and the conditions for its applicability using the following
language, or substantially similar language, as applicable: ``Your
due date is [at least] ------ days after the close of each billing
cycle. We will not charge you any interest on your account if you
pay your entire balance by the due date each month.'' However, other
creditors may offer a grace period on all types of transactions
under which interest may be charged on transactions even if the
consumer pays the outstanding balance shown on a periodic statement
in full by the due date shown on that statement each billing cycle.
In these circumstances, Sec. 1026.6(b)(2)(v) requires the creditor
to amend the above disclosure language to describe accurately the
conditions on the applicability of the grace period.
2. No grace period. Creditors may use the following language to
describe that no grace period is offered, as applicable: ``We will
begin charging interest on [applicable transactions] on the
transaction date.''
3. Grace period on some features. Some creditors do not offer a
grace period on cash advances and balance transfers, but offer a
grace period for all purchases under which interest will not be
charged on purchases if the consumer pays the outstanding balance
shown on a periodic statement in full by the due date shown on that
statement for one or more billing cycles. In these circumstances,
Sec. 1026.6(b)(2)(v) requires that the creditor disclose the grace
period for purchases and the conditions for its applicability, and
the lack of a grace period for cash advances and balance transfers
using the following language, or substantially similar language, as
applicable: ``Your due date is [at least] ------ days after the
close of each billing cycle. We will not charge you any interest on
purchases if you pay your entire balance by the due date each month.
We will begin charging interest on cash advances and balance
transfers on the transaction date.'' However, other creditors may
offer a grace period on all purchases under which interest may be
charged on purchases even if the consumer pays the outstanding
balance shown on a periodic statement in full by the due date shown
on that statement each billing cycle. In these circumstances, Sec.
1026.6(a)(2)(v) requires the creditor to amend the above disclosure
language to describe accurately the conditions on the applicability
of the grace period. Also, some creditors may not offer a grace
period on cash advances and balance transfers, and will begin
charging interest on these transactions from a date other than the
transaction date, such as the posting date. In these circumstances,
Sec. 1026.6(a)(2)(v) requires the creditor to amend the above
disclosure language to be accurate.
6(b)(2)(vi) Balance Computation Method
1. Use of same balance computation method for all features. In
cases where the balance for each feature is computed using the same
balance computation method, a single identification of the name of
the balance computation method is sufficient. In this case, a
creditor may use an appropriate name listed in Sec. 1026.60(g)
(e.g., ``average daily balance (including new purchases)'') to
satisfy the requirement to disclose the name of the method for all
features on the account, even though the name only refers to
purchases. For example, if a creditor uses the average daily balance
method including new transactions for all features, a creditor may
use the name ``average daily balance (including new purchases)''
listed in Sec. 1026.60(g)(i) to satisfy the requirement to disclose
the name of the balance computation method for all features. As an
alternative, in this situation, a creditor may revise the balance
computation names listed in Sec. 1026.60(g) to refer more broadly
to all new credit transactions, such as using the language ``new
transactions'' or ``current transactions'' (e.g., ``average daily
balance (including new transactions)''), rather than simply
referring to new purchases when the same method is used to calculate
the balances for all features of the account. See Samples G-17(B)
and G-17(C) for guidance on how to disclose the balance computation
method where the same method is used for all features on the
account.
2. Use of balance computation names in Sec. 1026.60(g) for
balances other than purchases. The names of the balance computation
methods listed in Sec. 1026.60(g) describe balance computation
methods for purchases. When a creditor is disclosing the name of the
balance computation methods separately for each feature, in using
the names listed in Sec. 1026.60(g) to satisfy the requirements of
Sec. 1026.6(b)(2)(vi) for features other than purchases, a creditor
must revise the names listed in Sec. 1026.60(g) to refer to the
other features. For example, when disclosing the name of the balance
computation method applicable to cash advances, a creditor must
revise the name listed in Sec. 1026.60(g)(i) to disclose it as
``average daily balance (including new cash advances)'' when the
balance for cash advances is figured by adding the outstanding
balance (including new cash advances and deducting payments and
credits) for each day in the billing cycle, and then dividing by the
number of days in the billing cycle. Similarly, a creditor must
revise the name listed in Sec. 1026.60(g)(ii) to disclose it as
``average daily balance (excluding new cash advances)'' when the
balance for cash advances is figured by adding the outstanding
balance (excluding new cash advances and deducting payments and
credits) for each day in the billing cycle, and then dividing by the
number of days in the billing cycle. See comment 6(b)(2)(vi)-1 for
guidance on the use of one balance computation name when the same
balance computation method is used for all features on the account.
6(b)(2)(xiii) Available Credit
1. Right to reject the plan. Creditors may use the following
language to describe consumers' right to reject a plan after
receiving account-opening disclosures: ``You may still reject this
plan, provided that you have not yet used the account or paid a fee
after receiving a billing statement. If you do reject the plan, you
are not responsible for any fees or charges.''
6(b)(3) Disclosure of Charges Imposed as Part of Open-End (Not Home-
Secured) Plans
1. When finance charges accrue. Creditors are not required to
disclose a specific date when a cost that is a finance charge under
Sec. 1026.4 will begin to accrue.
2. Grace periods. In disclosing in the account agreement or
disclosure statement whether or not a grace period exists, the
creditor need not use any particular descriptive phrase or term.
However, the descriptive phrase or term must be sufficiently similar
to the disclosures provided pursuant to Sec. Sec. 1026.60(b)(5) and
1026.6(b)(2)(v) to satisfy a creditor's duty to provide consistent
terminology under Sec. 1026.5(a)(2).
3. No finance charge imposed below certain balance. Creditors
are not required to disclose the fact that no finance charge is
imposed when the outstanding balance is less than a certain amount
or the balance below which no finance charge will be imposed.
Paragraph 6(b)(3)(ii)
1. Failure to use the plan as agreed. Late payment fees, over-
the-limit fees, and fees for payments returned unpaid are examples
of charges resulting from consumers' failure to use the plan as
agreed.
2. Examples of fees that affect the plan. Examples of charges
the payment, or nonpayment, of which affects the consumer's account
are:
i. Access to the plan. Fees for using the card at the creditor's
ATM to obtain a cash advance, fees to obtain additional cards
including replacements for lost or stolen cards, fees to expedite
delivery of cards or other credit devices, application and
membership fees, and annual or other participation fees identified
in Sec. 1026.4(c)(4).
ii. Amount of credit extended. Fees for increasing the credit
limit on the account, whether at the consumer's request or
unilaterally by the creditor.
iii. Timing or method of billing or payment. Fees to pay by
telephone or via the Internet.
[[Page 79938]]
3. Threshold test. If the creditor is unsure whether a
particular charge is a cost imposed as part of the plan, the
creditor may at its option consider such charges as a cost imposed
as part of the plan for purposes of the Truth in Lending Act.
Paragraph 6(b)(3)(iii)(B)
1. Fees for package of services. A fee to join a credit union is
an example of a fee for a package of services that is not imposed as
part of the plan, even if the consumer must join the credit union to
apply for credit. In contrast, a membership fee is an example of a
fee for a package of services that is considered to be imposed as
part of a plan where the primary benefit of membership in the
organization is the opportunity to apply for a credit card, and the
other benefits offered (such as a newsletter or a member information
hotline) are merely incidental to the credit feature.
6(b)(4) Disclosure of Rates for Open-End (Not Home-Secured) Plans
6(b)(4)(i)(B) Range of Balances
1. Range of balances. Creditors are not required to disclose the
range of balances:
i. If only one periodic interest rate may be applied to the
entire account balance.
ii. If only one periodic interest rate may be applied to the
entire balance for a feature (for example, cash advances), even
though the balance for another feature (purchases) may be subject to
two rates (a 1.5% monthly periodic interest rate on purchase
balances of $0-$500, and a 1% periodic interest rate for balances
above $500). In this example, the creditor must give a range of
balances disclosure for the purchase feature.
6(b)(4)(i)(D) Balance Computation Method
1. Explanation of balance computation method. Creditors do not
provide a sufficient explanation of a balance computation method by
using a shorthand phrase such as ``previous balance method'' or the
name of a balance computation method listed in Sec. 1026.60(g).
(See Model Clauses G-1(A) in Appendix G to part 1026. See Sec.
1026.6(b)(2)(vi) regarding balance computation descriptions in the
account-opening summary.)
2. Allocation of payments. Creditors may, but need not, explain
how payments and other credits are allocated to outstanding
balances.
6(b)(4)(ii) Variable-Rate Accounts
1. Variable-rate disclosures--coverage. i. Examples. Examples of
open-end plans that permit the rate to change and are considered
variable-rate plans include:
A. Rate changes that are tied to the rate the creditor pays on
its six-month certificates of deposit.
B. Rate changes that are tied to Treasury bill rates.
C. Rate changes that are tied to changes in the creditor's
commercial lending rate.
ii. Examples of open-end plans that permit the rate to change
and are not considered variable-rate include:
A. Rate changes that are invoked under a creditor's contract
reservation to increase the rate without reference to such an index
or formula (for example, a plan that simply provides that the
creditor reserves the right to raise its rates).
B. Rate changes that are triggered by a specific event such as
an open-end credit plan in which the employee receives a lower rate
contingent upon employment, and the rate increases upon termination
of employment.
2. Variable-rate plan--circumstances for increase. i. The
following are examples that comply with the requirement to disclose
circumstances under which the rate(s) may increase:
A. ``The Treasury bill rate increases.''
B. ``The Federal Reserve discount rate increases.''
ii. Disclosing the frequency with which the rate may increase
includes disclosing when the increase will take effect; for example:
A. ``An increase will take effect on the day that the Treasury
bill rate increases.''
B. ``An increase in the Federal Reserve discount rate will take
effect on the first day of the creditor's billing cycle.''
3. Variable-rate plan--limitations on increase. In disclosing
any limitations on rate increases, limitations such as the maximum
increase per year or the maximum increase over the duration of the
plan must be disclosed. When there are no limitations, the creditor
may, but need not, disclose that fact. Legal limits such as usury or
rate ceilings under state or Federal statutes or regulations need
not be disclosed. Examples of limitations that must be disclosed
include:
i. ``The rate on the plan will not exceed 25% annual percentage
rate.''
ii. ``Not more than \1/2\; of 1% increase in the annual
percentage rate per year will occur.''
4. Variable-rate plan--effects of increase. Examples of effects
of rate increases that must be disclosed include:
i. Any requirement for additional collateral if the annual
percentage rate increases beyond a specified rate.
ii. Any increase in the scheduled minimum periodic payment
amount.
5. Discounted variable-rate plans. In some variable-rate plans,
creditors may set an initial interest rate that is not determined by
the index or formula used to make later interest rate adjustments.
Typically, this initial rate is lower than the rate would be if it
were calculated using the index or formula.
i. For example, a creditor may calculate interest rates
according to a formula using the six-month Treasury bill rate plus a
2 percent margin. If the current Treasury bill rate is 10 percent,
the creditor may forgo the 2 percent spread and charge only 10
percent for a limited time, instead of setting an initial rate of 12
percent, or the creditor may disregard the index or formula and set
the initial rate at 9 percent.
ii. When creditors disclose in the account-opening disclosures
an initial rate that is not calculated using the index or formula
for later rate adjustments, the disclosure should reflect:
A. The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate), together with a statement of
how long the initial rate will remain in effect;
B. The current rate that would have been applied using the index
or formula (also expressed as a periodic rate and a corresponding
annual percentage rate); and
C. The other variable-rate information required by Sec.
1026.6(b)(4)(ii).
6(b)(4)(iii) Rate Changes Not Due to Index or Formula
1. Events that cause the initial rate to change. i. Changes
based on expiration of time period. If the initial rate will change
at the expiration of a time period, creditors that disclose the
initial rate in the account-opening disclosure must identify the
expiration date and the fact that the initial rate will end at that
time.
ii. Changes based on specified contract terms. If the account
agreement provides that the creditor may change the initial rate
upon the occurrence of a specified event or events, the creditor
must identify the events or events. Examples include the consumer
not making the required minimum payment when due, or the termination
of an employee preferred rate when the employment relationship is
terminated.
2. Rate that will apply after initial rate changes. i. Increased
margins. If the initial rate is based on an index and the rate may
increase due to a change in the margin applied to the index, the
creditor must disclose the increased margin. If more than one margin
could apply, the creditor may disclose the highest margin.
ii. Risk-based pricing. In some plans, the amount of the rate
change depends on how the creditor weighs the occurrence of events
specified in the account agreement that authorize the creditor to
change rates, as well as other factors. Creditors must state the
increased rate that may apply. At the creditor's option, the
creditor may state the possible rates as a range, or by stating only
the highest rate that could be assessed. The creditor must disclose
the period for which the increased rate will remain in effect, such
as ``until you make three timely payments,'' or if there is no
limitation, the fact that the increased rate may remain
indefinitely.
3. Effect of rate change on balances. Creditors must disclose
information to consumers about the balance to which the new rate
will apply and the balance to which the current rate at the time of
the change will apply. Card issuers subject to Sec. 1026.55 may be
subject to certain restrictions on the application of increased
rates to certain balances.
6(b)(5) Additional Disclosures for Open-End (Not Home-Secured) Plans
6(b)(5)(i) Voluntary Credit Insurance, Debt Cancellation or Debt
Suspension
1. Timing. Under Sec. 1026.4(d), disclosures required to
exclude the cost of voluntary credit insurance or debt cancellation
or debt suspension coverage from the finance charge must be provided
before the consumer agrees to the purchase of the insurance or
coverage. Creditors comply with Sec. 1026.6(b)(5)(i) if they
provide those disclosures in accordance with Sec. 1026.4(d). For
example, if the disclosures required by Sec. 1026.4(d) are provided
at application, creditors need not repeat those disclosures at
account opening.
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6(b)(5)(ii) Security Interests
1. General. Creditors are not required to use specific terms to
describe a security interest, or to explain the type of security or
the creditor's rights with respect to the collateral.
2. Identification of property. Creditors sufficiently identify
collateral by type by stating, for example, motor vehicle or
household appliances. (Creditors should be aware, however, that the
Federal credit practices rules, as well as some state laws, prohibit
certain security interests in household goods.) The creditor may, at
its option, provide a more specific identification (for example, a
model and serial number.)
3. Spreader clause. If collateral for preexisting credit with
the creditor will secure the plan being opened, the creditor must
disclose that fact. (Such security interests may be known as
``spreader'' or ``dragnet'' clauses, or as ``cross-
collateralization'' clauses.) The creditor need not specifically
identify the collateral; a reminder such as ``collateral securing
other loans with us may also secure this loan'' is sufficient. At
the creditor's option, a more specific description of the property
involved may be given.
4. Additional collateral. If collateral is required when
advances reach a certain amount, the creditor should disclose the
information available at the time of the account-opening
disclosures. For example, if the creditor knows that a security
interest will be taken in household goods if the consumer's balance
exceeds $1,000, the creditor should disclose accordingly. If the
creditor knows that security will be required if the consumer's
balance exceeds $1,000, but the creditor does not know what security
will be required, the creditor must disclose on the initial
disclosure statement that security will be required if the balance
exceeds $1,000, and the creditor must provide a change-in-terms
notice under Sec. 1026.9(c) at the time the security is taken. (See
comment 6(b)(5)(ii)-2.)
5. Collateral from third party. Security interests taken in
connection with the plan must be disclosed, whether the collateral
is owned by the consumer or a third party.
6(b)(5)(iii) Statement of Billing Rights
1. See the commentary to Model Forms G-3(A) and G-4(A).
Section 1026.7--Periodic Statement
1. Multifeatured plans. Some plans involve a number of different
features, such as purchases, cash advances, or overdraft checking.
Groups of transactions subject to different finance charge terms
because of the dates on which the transactions took place are
treated like different features for purposes of disclosures on the
periodic statements. The commentary includes additional guidance for
multifeatured plans.
7(a) Rules Affecting Home-Equity Plans
7(a)(1) Previous Balance
1. Credit balances. If the previous balance is a credit balance,
it must be disclosed in such a way so as to inform the consumer that
it is a credit balance, rather than a debit balance.
2. Multifeatured plans. In a multifeatured plan, the previous
balance may be disclosed either as an aggregate balance for the
account or as separate balances for each feature (for example, a
previous balance for purchases and a previous balance for cash
advances). If separate balances are disclosed, a total previous
balance is optional.
3. Accrued finance charges allocated from payments. Some open-
end credit plans provide that the amount of the finance charge that
has accrued since the consumer's last payment is directly deducted
from each new payment, rather than being separately added to each
statement and reflected as an increase in the obligation. In such a
plan, the previous balance need not reflect finance charges accrued
since the last payment.
7(a)(2) Identification of Transactions
1. Multifeatured plans. In identifying transactions under Sec.
1026.7(a)(2) for multifeatured plans, creditors may, for example,
choose to arrange transactions by feature (such as disclosing sale
transactions separately from cash advance transactions) or in some
other clear manner, such as by arranging the transactions in general
chronological order.
2. Automated teller machine (ATM) charges imposed by other
institutions in shared or interchange systems. A charge imposed on
the cardholder by an institution other than the card issuer for the
use of the other institution's ATM in a shared or interchange system
and included by the terminal-operating institution in the amount of
the transaction need not be separately disclosed on the periodic
statement.
7(a)(3) Credits
1. Identification--sufficiency. The creditor need not describe
each credit by type (returned merchandise, rebate of finance charge,
etc.)--``credit'' would suffice--except if the creditor is using the
periodic statement to satisfy the billing-error correction notice
requirement. (See the commentary to Sec. 1026.13(e) and (f).)
2. Format. A creditor may list credits relating to credit
extensions (payments, rebates, etc.) together with other types of
credits (such as deposits to a checking account), as long as the
entries are identified so as to inform the consumer which type of
credit each entry represents.
3. Date. If only one date is disclosed (that is, the crediting
date as required by the regulation), no further identification of
that date is necessary. More than one date may be disclosed for a
single entry, as long as it is clear which date represents the date
on which credit was given.
4. Totals. A total of amounts credited during the billing cycle
is not required.
7(a)(4) Periodic Rates
1. Disclosure of periodic rates--whether or not actually
applied. Except as provided in Sec. 1026.7(a)(4)(ii), any periodic
rate that may be used to compute finance charges (and its
corresponding annual percentage rate) must be disclosed whether or
not it is applied during the billing cycle. For example:
i. If the consumer's account has both a purchase feature and a
cash advance feature, the creditor must disclose the rate for each,
even if the consumer only makes purchases on the account during the
billing cycle.
ii. If the rate varies (such as when it is tied to a particular
index), the creditor must disclose each rate in effect during the
cycle for which the statement was issued.
2. Disclosure of periodic rates required only if imposition
possible. With regard to the periodic rate disclosure (and its
corresponding annual percentage rate), only rates that could have
been imposed during the billing cycle reflected on the periodic
statement need to be disclosed. For example:
i. If the creditor is changing rates effective during the next
billing cycle (because of a variable-rate plan), the rates required
to be disclosed under Sec. 1026.7(a)(4) are only those in effect
during the billing cycle reflected on the periodic statement. For
example, if the monthly rate applied during May was 1.5%, but the
creditor will increase the rate to 1.8% effective June 1, 1.5% (and
its corresponding annual percentage rate) is the only required
disclosure under Sec. 1026.7(a)(4) for the periodic statement
reflecting the May account activity.
ii. If rates applicable to a particular type of transaction
changed after a certain date and the old rate is only being applied
to transactions that took place prior to that date, the creditor
need not continue to disclose the old rate for those consumers that
have no outstanding balances to which that rate could be applied.
3. Multiple rates--same transaction. If two or more periodic
rates are applied to the same balance for the same type of
transaction (for example, if the finance charge consists of a
monthly periodic rate of 1.5% applied to the outstanding balance and
a required credit life insurance component calculated at 0.1% per
month on the same outstanding balance), the creditor may do either
of the following:
i. Disclose each periodic rate, the range of balances to which
it is applicable, and the corresponding annual percentage rate for
each. (For example, 1.5% monthly, 18% annual percentage rate; 0.1%
monthly, 1.2% annual percentage rate.)
ii. Disclose one composite periodic rate (that is, 1.6% per
month) along with the applicable range of balances and the
corresponding annual percentage rate.
4. Corresponding annual percentage rate. In disclosing the
annual percentage rate that corresponds to each periodic rate, the
creditor may use ``corresponding annual percentage rate,'' ``nominal
annual percentage rate,'' ``corresponding nominal annual percentage
rate,'' or similar phrases.
5. Rate same as actual annual percentage rate. When the
corresponding rate is the same as the annual percentage rate
disclosed under Sec. 1026.7(a)(7), the creditor need disclose only
one annual percentage rate, but must use the phrase ``annual
percentage rate.''
6. Range of balances. See comment 6(a)(1)(ii)-1. A creditor is
not required to adjust the range of balances disclosure to reflect
the balance below which only a minimum charge applies.
7(a)(5) Balance on Which Finance Charge Computed
1. Limitation to periodic rates. Section 1026.7(a)(5) only
requires disclosure of the balance(s) to which a periodic rate was
applied and does not apply to balances on
[[Page 79940]]
which other kinds of finance charges (such as transaction charges)
were imposed. For example, if a consumer obtains a $1,500 cash
advance subject to both a 1% transaction fee and a 1% monthly
periodic rate, the creditor need only disclose the balance subject
to the monthly rate (which might include portions of earlier cash
advances not paid off in previous cycles).
2. Split rates applied to balance ranges. If split rates were
applied to a balance because different portions of the balance fall
within two or more balance ranges, the creditor need not separately
disclose the portions of the balance subject to such different rates
since the range of balances to which the rates apply has been
separately disclosed. For example, a creditor could disclose a
balance of $700 for purchases even though a monthly periodic rate of
1.5% applied to the first $500, and a monthly periodic rate of 1% to
the remainder. This option to disclose a combined balance does not
apply when the finance charge is computed by applying the split
rates to each day's balance (in contrast, for example, to applying
the rates to the average daily balance). In that case, the balances
must be disclosed using any of the options that are available if two
or more daily rates are imposed. (See comment 7(a)(5)-5.)
3. Monthly rate on average daily balance. Creditors may apply a
monthly periodic rate to an average daily balance.
4. Multifeatured plans. In a multifeatured plan, the creditor
must disclose a separate balance (or balances, as applicable) to
which a periodic rate was applied for each feature or group of
features subject to different periodic rates or different balance
computation methods. Separate balances are not required, however,
merely because a grace period is available for some features but not
others. A total balance for the entire plan is optional. This does
not affect how many balances the creditor must disclose--or may
disclose--within each feature. (See, for example, comment 7(a)(5)-
5.)
5. Daily rate on daily balances. If the finance charge is
computed on the balance each day by application of one or more daily
periodic rates, the balance on which the finance charge was computed
may be disclosed in any of the following ways for each feature:
i. If a single daily periodic rate is imposed, the balance to
which it is applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the
balance in the account changes.
C. The sum of the daily balances during the billing cycle.
D. The average daily balance during the billing cycle, in which
case the creditor shall explain that the average daily balance is or
can be multiplied by the number of days in the billing cycle and the
periodic rate applied to the product to determine the amount of the
finance charge.
ii. If two or more daily periodic rates may be imposed, the
balances to which the rates are applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the
balance in the account changes.
C. Two or more average daily balances, each applicable to the
daily periodic rates imposed for the time that those rates were in
effect, as long as the creditor explains that the finance charge is
or may be determined by (1) multiplying each of the average balances
by the number of days in the billing cycle (or if the daily rate
varied during the cycle, by multiplying by the number of days the
applicable rate was in effect), (2) multiplying each of the results
by the applicable daily periodic rate, and (3) adding these products
together.
6. Explanation of balance computation method. See the commentary
to 6(a)(1)(iii).
7. Information to compute balance. In connection with disclosing
the finance charge balance, the creditor need not give the consumer
all of the information necessary to compute the balance if that
information is not otherwise required to be disclosed. For example,
if current purchases are included from the date they are posted to
the account, the posting date need not be disclosed.
8. Non-deduction of credits. The creditor need not specifically
identify the total dollar amount of credits not deducted in
computing the finance charge balance. Disclosure of the amount of
credits not deducted is accomplished by listing the credits (Sec.
1026.7(a)(3)) and indicating which credits will not be deducted in
determining the balance (for example, ``credits after the 15th of
the month are not deducted in computing the finance charge.'').
9. Use of one balance computation method explanation when
multiple balances disclosed. Sometimes the creditor will disclose
more than one balance to which a periodic rate was applied, even
though each balance was computed using the same balance computation
method. For example, if a plan involves purchases and cash advances
that are subject to different rates, more than one balance must be
disclosed, even though the same computation method is used for
determining the balance for each feature. In these cases, one
explanation of the balance computation method is sufficient.
Sometimes the creditor separately discloses the portions of the
balance that are subject to different rates because different
portions of the balance fall within two or more balance ranges, even
when a combined balance disclosure would be permitted under comment
7(a)(5)-2. In these cases, one explanation of the balance
computation method is also sufficient (assuming, of course, that all
portions of the balance were computed using the same method).
7(a)(6) Amount of Finance Charge and Other Charges
7(a)(6)(i) Finance Charges
1. Total. A total finance charge amount for the plan is not
required.
2. Itemization--types of finance charges. Each type of finance
charge (such as periodic rates, transaction charges, and minimum
charges) imposed during the cycle must be separately itemized; for
example, disclosure of only a combined finance charge attributable
to both a minimum charge and transaction charges would not be
permissible. Finance charges of the same type may be disclosed,
however, individually or as a total. For example, five transaction
charges of $1 may be listed separately or as $5.
3. Itemization--different periodic rates. Whether different
periodic rates are applicable to different types of transactions or
to different balance ranges, the creditor may give the finance
charge attributable to each rate or may give a total finance charge
amount. For example, if a creditor charges 1.5% per month on the
first $500 of a balance and 1% per month on amounts over $500, the
creditor may itemize the two components ($7.50 and $1.00) of the
$8.50 charge, or may disclose $8.50.
4. Multifeatured plans. In a multifeatured plan, in disclosing
the amount of the finance charge attributable to the application of
periodic rates no total periodic rate disclosure for the entire plan
need be given.
5. Finance charges not added to account. A finance charge that
is not included in the new balance because it is payable to a third
party (such as required life insurance) must still be shown on the
periodic statement as a finance charge.
6. Finance charges other than periodic rates. See comment
6(a)(1)(iv)-1 for examples.
7. Accrued finance charges allocated from payments. Some plans
provide that the amount of the finance charge that has accrued since
the consumer's last payment is directly deducted from each new
payment, rather than being separately added to each statement and
therefore reflected as an increase in the obligation. In such a
plan, no disclosure is required of finance charges that have accrued
since the last payment.
8. Start-up fees. Points, loan fees, and similar finance charges
relating to the opening of the account that are paid prior to the
issuance of the first periodic statement need not be disclosed on
the periodic statement. If, however, these charges are financed as
part of the plan, including charges that are paid out of the first
advance, the charges must be disclosed as part of the finance charge
on the first periodic statement. However, they need not be factored
into the annual percentage rate. (See Sec. 1026.14(c)(3).)
7(a)(6)(ii) Other Charges
1. Identification. In identifying any other charges actually
imposed during the billing cycle, the type is adequately described
as late charge or membership fee, for example. Similarly, closing
costs or settlement costs, for example, may be used to describe
charges imposed in connection with real estate transactions that are
excluded from the finance charge under Sec. 1026.4(c)(7), if the
same term (such as closing costs) was used in the initial
disclosures and if the creditor chose to itemize and individually
disclose the costs included in that term. Even though the taxes and
filing or notary fees excluded from the finance charge under Sec.
1026.4(e) are not required to be disclosed as other charges under
Sec. 1026.6(a)(2), these charges may be included in the amount
shown as closing costs or settlement costs on the periodic
statement, if the charges were itemized and
[[Page 79941]]
disclosed as part of the closing costs or settlement costs on the
initial disclosure statement. (See comment 6(a)(2)-1 for examples of
other charges.)
2. Date. The date of imposing or debiting other charges need not
be disclosed.
3. Total. Disclosure of the total amount of other charges is
optional.
4. Itemization--types of other charges. Each type of other
charge (such as late-payment charges, over-the-credit-limit charges,
and membership fees) imposed during the cycle must be separately
itemized; for example, disclosure of only a total of other charges
attributable to both an over-the-credit-limit charge and a late-
payment charge would not be permissible. Other charges of the same
type may be disclosed, however, individually or as a total. For
example, three fees of $3 for providing copies related to the
resolution of a billing error could be listed separately or as $9.
7(a)(7) Annual Percentage Rate
1. Plans subject to the requirements of Sec. 1026.40. For home-
equity plans subject to the requirements of Sec. 1026.40, creditors
are not required to disclose an effective annual percentage rate.
Creditors that state an annualized rate in addition to the
corresponding annual percentage rate required by Sec. 1026.7(a)(4)
must calculate that rate in accordance with Sec. 1026.14(c).
2. Labels. Creditors that choose to disclose an annual
percentage rate calculated under Sec. 1026.14(c) and label the
figure as ``annual percentage rate'' must label the periodic rate
expressed as an annualized rate as the ``corresponding APR,''
``nominal APR,'' or a similar phrase as provided in comment 7(a)(4)-
4. Creditors also comply with the label requirement if the rate
calculated under Sec. 1026.14(c) is described as the ``effective
APR'' or something similar. For those creditors, the periodic rate
expressed as an annualized rate could be labeled ``annual percentage
rate,'' consistent with the requirement under Sec. 1026.7(b)(4). If
the two rates represent different values, creditors must label the
rates differently to meet the clear and conspicuous standard under
Sec. 1026.5(a)(1).
7(a)(8) Grace Period
1. Terminology. Although the creditor is required to indicate
any time period the consumer may have to pay the balance outstanding
without incurring additional finance charges, no specific wording is
required, so long as the language used is consistent with that used
on the account-opening disclosure statement. For example, ``To avoid
additional finance charges, pay the new balance before ----'' would
suffice.
7(a)(9) Address for Notice of Billing Errors
1. Terminology. The periodic statement should indicate the
general purpose for the address for billing-error inquiries,
although a detailed explanation or particular wording is not
required.
2. Telephone number. A telephone number, email address, or Web
site location may be included, but the mailing address for billing-
error inquiries, which is the required disclosure, must be clear and
conspicuous. The address is deemed to be clear and conspicuous if a
precautionary instruction is included that telephoning or notifying
the creditor by email or Web site will not preserve the consumer's
billing rights, unless the creditor has agreed to treat billing
error notices provided by electronic means as written notices, in
which case the precautionary instruction is required only for
telephoning.
7(a)(10) Closing Date of Billing Cycle; New Balance
1. Credit balances. See comment 7(a)(1)-1.
2. Multifeatured plans. In a multifeatured plan, the new balance
may be disclosed for each feature or for the plan as a whole. If
separate new balances are disclosed, a total new balance is
optional.
3. Accrued finance charges allocated from payments. Some plans
provide that the amount of the finance charge that has accrued since
the consumer's last payment is directly deducted from each new
payment, rather than being separately added to each statement and
therefore reflected as an increase in the obligation. In such a
plan, the new balance need not reflect finance charges accrued since
the last payment.
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
1. Deferred interest or similar transactions. Creditors offer a
variety of payment plans for purchases that permit consumers to
avoid interest charges if the purchase balance is paid in full by a
certain date. ``Deferred interest'' has the same meaning as in Sec.
1026.16(h)(2) and associated commentary. The following provides
guidance for a deferred interest or similar plan where, for example,
no interest charge is imposed on a $500 purchase made in January if
the $500 balance is paid by July 31.
i. Annual percentage rates. Under Sec. 1026.7(b)(4), creditors
must disclose each annual percentage rate that may be used to
compute the interest charge. Under some plans with a deferred
interest or similar feature, if the deferred interest balance is not
paid by a certain date, July 31 in this example, interest charges
applicable to the billing cycles between the date of purchase in
January and July 31 may be imposed. Annual percentage rates that may
apply to the deferred interest balance ($500 in this example) if the
balance is not paid in full by July 31 must appear on periodic
statements for the billing cycles between the date of purchase and
July 31. However, if the consumer does not pay the deferred interest
balance by July 31, the creditor is not required to identify, on the
periodic statement disclosing the interest charge for the deferred
interest balance, annual percentage rates that have been disclosed
in previous billing cycles between the date of purchase and July 31.
ii. Balances subject to periodic rates. Under Sec.
1026.7(b)(5), creditors must disclose the balances subject to
interest during a billing cycle. The deferred interest balance ($500
in this example) is not subject to interest for billing cycles
between the date of purchase and July 31 in this example. Periodic
statements sent for those billing cycles should not include the
deferred interest balance in the balance disclosed under Sec.
1026.7(b)(5). This amount must be separately disclosed on periodic
statements and identified by a term other than the term used to
identify the balance disclosed under Sec. 1026.7(b)(5) (such as
``deferred interest balance''). During any billing cycle in which an
interest charge on the deferred interest balance is debited to the
account, the balance disclosed under Sec. 1026.7(b)(5) should
include the deferred interest balance for that billing cycle.
iii. Amount of interest charge. Under Sec. 1026.7(b)(6)(ii),
creditors must disclose interest charges imposed during a billing
cycle. For some deferred interest purchases, the creditor may impose
interest from the date of purchase if the deferred interest balance
($500 in this example) is not paid in full by July 31 in this
example, but otherwise will not impose interest for billing cycles
between the date of purchase and July 31. Periodic statements for
billing cycles preceding July 31 in this example should not include
in the interest charge disclosed under Sec. 1026.7(b)(6)(ii) the
amounts a consumer may owe if the deferred interest balance is not
paid in full by July 31. In this example, the February periodic
statement should not identify as interest charges interest
attributable to the $500 January purchase. This amount must be
separately disclosed on periodic statements and identified by a term
other than ``interest charge'' (such as ``contingent interest
charge'' or ``deferred interest charge''). The interest charge on a
deferred interest balance should be reflected on the periodic
statement under Sec. 1026.7(b)(6)(ii) for the billing cycle in
which the interest charge is debited to the account.
iv. Due date to avoid obligation for finance charges under a
deferred interest or similar program. Section 1026.7(b)(14) requires
disclosure on periodic statements of the date by which any
outstanding balance subject to a deferred interest or similar
program must be paid in full in order to avoid the obligation for
finance charges on such balance. This disclosure must appear on the
front of any page of each periodic statement issued during the
deferred interest period beginning with the first periodic statement
issued during the deferred interest period that reflects the
deferred interest or similar transaction.
7(b)(1) Previous Balance
1. Credit balances. If the previous balance is a credit balance,
it must be disclosed in such a way so as to inform the consumer that
it is a credit balance, rather than a debit balance.
2. Multifeatured plans. In a multifeatured plan, the previous
balance may be disclosed either as an aggregate balance for the
account or as separate balances for each feature (for example, a
previous balance for purchases and a previous balance for cash
advances). If separate balances are disclosed, a total previous
balance is optional.
3. Accrued finance charges allocated from payments. Some open-
end credit plans provide that the amount of the finance charge that
has accrued since the consumer's last payment is directly deducted
from each new payment, rather than being separately added to each
statement and reflected as an increase
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in the obligation. In such a plan, the previous balance need not
reflect finance charges accrued since the last payment.
7(b)(2) Identification of Transactions
1. Multifeatured plans. Creditors may, but are not required to,
arrange transactions by feature (such as disclosing purchase
transactions separately from cash advance transactions). Pursuant to
Sec. 1026.7(b)(6), however, creditors must group all fees and all
interest separately from transactions and may not disclose any fees
or interest charges with transactions.
2. Automated teller machine (ATM) charges imposed by other
institutions in shared or interchange systems. A charge imposed on
the cardholder by an institution other than the card issuer for the
use of the other institution's ATM in a shared or interchange system
and included by the terminal-operating institution in the amount of
the transaction need not be separately disclosed on the periodic
statement.
7(b)(3) Credits
1. Identification--sufficiency. The creditor need not describe
each credit by type (returned merchandise, rebate of finance charge,
etc.)--``credit'' would suffice--except if the creditor is using the
periodic statement to satisfy the billing-error correction notice
requirement. (See the commentary to Sec. 1026.13(e) and (f).)
Credits may be distinguished from transactions in any way that is
clear and conspicuous, for example, by use of debit and credit
columns or by use of plus signs and/or minus signs.
2. Date. If only one date is disclosed (that is, the crediting
date as required by the regulation), no further identification of
that date is necessary. More than one date may be disclosed for a
single entry, as long as it is clear which date represents the date
on which credit was given.
3. Totals. A total of amounts credited during the billing cycle
is not required.
7(b)(4) Periodic Rates
1. Disclosure of periodic interest rates--whether or not
actually applied. Except as provided in Sec. 1026.7(b)(4)(ii), any
periodic interest rate that may be used to compute finance charges,
expressed as and labeled ``Annual Percentage Rate,'' must be
disclosed whether or not it is applied during the billing cycle. For
example:
i. If the consumer's account has both a purchase feature and a
cash advance feature, the creditor must disclose the annual
percentage rate for each, even if the consumer only makes purchases
on the account during the billing cycle.
ii. If the annual percentage rate varies (such as when it is
tied to a particular index), the creditor must disclose each annual
percentage rate in effect during the cycle for which the statement
was issued.
2. Disclosure of periodic interest rates required only if
imposition possible. With regard to the periodic interest rate
disclosure (and its corresponding annual percentage rate), only
rates that could have been imposed during the billing cycle
reflected on the periodic statement need to be disclosed. For
example:
i. If the creditor is changing annual percentage rates effective
during the next billing cycle (either because it is changing terms
or because of a variable-rate plan), the annual percentage rates
required to be disclosed under Sec. 1026.7(b)(4) are only those in
effect during the billing cycle reflected on the periodic statement.
For example, if the annual percentage rate applied during May was
18%, but the creditor will increase the rate to 21% effective June
1, 18% is the only required disclosure under Sec. 1026.7(b)(4) for
the periodic statement reflecting the May account activity.
ii. If the consumer has an overdraft line that might later be
expanded upon the consumer's request to include secured advances,
the rates for the secured advance feature need not be given until
such time as the consumer has requested and received access to the
additional feature.
iii. If annual percentage rates applicable to a particular type
of transaction changed after a certain date and the old rate is only
being applied to transactions that took place prior to that date,
the creditor need not continue to disclose the old rate for those
consumers that have no outstanding balances to which that rate could
be applied.
3. Multiple rates--same transaction. If two or more periodic
rates are applied to the same balance for the same type of
transaction (for example, if the interest charge consists of a
monthly periodic interest rate of 1.5% applied to the outstanding
balance and a required credit life insurance component calculated at
0.1% per month on the same outstanding balance), creditors must
disclose the periodic interest rate, expressed as an 18% annual
percentage rate and the range of balances to which it is applicable.
Costs attributable to the credit life insurance component must be
disclosed as a fee under Sec. 1026.7(b)(6)(iii).
4. Fees. Creditors that identify fees in accordance with Sec.
1026.7(b)(6)(iii) need not identify the periodic rate at which a fee
would accrue if the fee remains unpaid. For example, assume a fee is
imposed for a late payment in the previous cycle and that the fee,
unpaid, would be included in the purchases balance and accrue
interest at the rate for purchases. The creditor need not separately
disclose that the purchase rate applies to the portion of the
purchases balance attributable to the unpaid fee.
5. Ranges of balances. See comment 6(b)(4)(i)(B)-1. A creditor
is not required to adjust the range of balances disclosure to
reflect the balance below which only a minimum charge applies.
6. Deferred interest transactions. See comment 7(b)-1.i.
7(b)(5) Balance on Which Finance Charge Computed
1. Split rates applied to balance ranges. If split rates were
applied to a balance because different portions of the balance fall
within two or more balance ranges, the creditor need not separately
disclose the portions of the balance subject to such different rates
since the range of balances to which the rates apply has been
separately disclosed. For example, a creditor could disclose a
balance of $700 for purchases even though a monthly periodic rate of
1.5% applied to the first $500, and a monthly periodic rate of 1% to
the remainder. This option to disclose a combined balance does not
apply when the interest charge is computed by applying the split
rates to each day's balance (in contrast, for example, to applying
the rates to the average daily balance). In that case, the balances
must be disclosed using any of the options that are available if two
or more daily rates are imposed. (See comment 7(b)(5)-4.)
2. Monthly rate on average daily balance. Creditors may apply a
monthly periodic rate to an average daily balance.
3. Multifeatured plans. In a multifeatured plan, the creditor
must disclose a separate balance (or balances, as applicable) to
which a periodic rate was applied for each feature. Separate
balances are not required, however, merely because a grace period is
available for some features but not others. A total balance for the
entire plan is optional. This does not affect how many balances the
creditor must disclose--or may disclose--within each feature. (See,
for example, comments 7(b)(5)-4 and 7(b)(4)-5.)
4. Daily rate on daily balance. If a finance charge is computed
on the balance each day by application of one or more daily periodic
interest rates, the balance on which the interest charge was
computed may be disclosed in any of the following ways for each
feature:
i. If a single daily periodic interest rate is imposed, the
balance to which it is applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the
balance in the account changes.
C. The sum of the daily balances during the billing cycle.
D. The average daily balance during the billing cycle, in which
case the creditor may, at its option, explain that the average daily
balance is or can be multiplied by the number of days in the billing
cycle and the periodic rate applied to the product to determine the
amount of interest.
ii. If two or more daily periodic interest rates may be imposed,
the balances to which the rates are applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the
balance in the account changes.
C. Two or more average daily balances, each applicable to the
daily periodic interest rates imposed for the time that those rates
were in effect. The creditor may, at its option, explain that
interest is or may be determined by (1) multiplying each of the
average balances by the number of days in the billing cycle (or if
the daily rate varied during the cycle, by multiplying by the number
of days the applicable rate was in effect), (2) multiplying each of
the results by the applicable daily periodic rate, and (3) adding
these products together.
5. Information to compute balance. In connection with disclosing
the interest charge balance, the creditor need not give the consumer
all of the information necessary to compute the balance if that
information is not otherwise required to be disclosed. For example,
if current purchases are included from the date they are posted to
the account, the posting date need not be disclosed.
[[Page 79943]]
6. Non-deduction of credits. The creditor need not specifically
identify the total dollar amount of credits not deducted in
computing the finance charge balance. Disclosure of the amount of
credits not deducted is accomplished by listing the credits (Sec.
1026.7(b)(3)) and indicating which credits will not be deducted in
determining the balance (for example, ``credits after the 15th of
the month are not deducted in computing the interest charge.'').
7. Use of one balance computation method explanation when
multiple balances disclosed. Sometimes the creditor will disclose
more than one balance to which a periodic rate was applied, even
though each balance was computed using the same balance computation
method. For example, if a plan involves purchases and cash advances
that are subject to different rates, more than one balance must be
disclosed, even though the same computation method is used for
determining the balance for each feature. In these cases, one
explanation or a single identification of the name of the balance
computation method is sufficient. Sometimes the creditor separately
discloses the portions of the balance that are subject to different
rates because different portions of the balance fall within two or
more balance ranges, even when a combined balance disclosure would
be permitted under comment 7(b)(5)-1. In these cases, one
explanation or a single identification of the name of the balance
computation method is also sufficient (assuming, of course, that all
portions of the balance were computed using the same method). In
these cases, a creditor may use an appropriate name listed in Sec.
1026.60(g) (e.g., ``average daily balance (including new purchases)
'') as the single identification of the name of the balance
computation method applicable to all features, even though the name
only refers to purchases. For example, if a creditor uses the
average daily balance method including new transactions for all
features, a creditor may use the name ``average daily balance
(including new purchases) '' listed in Sec. 1026.60(g)(i) to
satisfy the requirement to disclose the name of the balance
computation method for all features. As an alternative, in this
situation, a creditor may revise the balance computation names
listed in Sec. 1026.60(g) to refer more broadly to all new credit
transactions, such as using the language ``new transactions'' or
``current transactions'' (e.g., ``average daily balance (including
new transactions) ''), rather than simply referring to new
purchases, when the same method is used to calculate the balances
for all features of the account.
8. Use of balance computation names in Sec. 1026.60(g) for
balances other than purchases. The names of the balance computation
methods listed in Sec. 1026.60(g) describe balance computation
methods for purchases. When a creditor is disclosing the name of the
balance computation methods separately for each feature, in using
the names listed in Sec. 1026.60(g) to satisfy the requirements of
Sec. 1026.7(b)(5) for features other than purchases, a creditor
must revise the names listed in Sec. 1026.60(g) to refer to the
other features. For example, when disclosing the name of the balance
computation method applicable to cash advances, a creditor must
revise the name listed in Sec. 1026.60(g)(i) to disclose it as
``average daily balance (including new cash advances)'' when the
balance for cash advances is figured by adding the outstanding
balance (including new cash advances and deducting payments and
credits) for each day in the billing cycle, and then dividing by the
number of days in the billing cycle. Similarly, a creditor must
revise the name listed in Sec. 1026.60(g)(ii) to disclose it as
``average daily balance (excluding new cash advances) '' when the
balance for cash advances is figured by adding the outstanding
balance (excluding new cash advances and deducting payments and
credits) for each day in the billing cycle, and then dividing by the
number of days in the billing cycle. See comment 7(b)(5)-7 for
guidance on the use of one balance computation method explanation or
name when multiple balances are disclosed.
7(b)(6) Charges Imposed
1. Examples of charges. See commentary to Sec. 1026.6(b)(3).
2. Fees. Costs attributable to periodic rates other than
interest charges shall be disclosed as a fee. For example, if a
consumer obtains credit life insurance that is calculated at 0.1%
per month on an outstanding balance and a monthly interest rate of
1.5% applies to the same balance, the creditor must disclose the
dollar cost attributable to interest as an ``interest charge'' and
the credit insurance cost as a ``fee.''
3. Total fees and interest charged for calendar year to date. i.
Monthly statements. Some creditors send monthly statements but the
statement periods do not coincide with the calendar month. For
creditors sending monthly statements, the following comply with the
requirement to provide calendar year-to-date totals.
A. A creditor may disclose calendar-year-to-date totals at the
end of the calendar year by separately aggregating finance charges
attributable to periodic interest rates and fees for 12 monthly
cycles, starting with the period that begins during January and
finishing with the period that begins during December. For example,
if statement periods begin on the 10th day of each month, the
statement covering December 10, 2011 through January 9, 2012, may
disclose the separate year-to-date totals for interest charged and
fees imposed from January 10, 2011, through January 9, 2012.
Alternatively, the creditor could provide a statement for the cycle
ending January 9, 2012, showing the separate year-to-date totals for
interest charged and fees imposed January 1, 2011, through December
31, 2011.
B. A creditor may disclose calendar-year-to-date totals at the
end of the calendar year by separately aggregating finance charges
attributable to periodic interest rates and fees for 12 monthly
cycles, starting with the period that begins during December and
finishing with the period that begins during November. For example,
if statement periods begin on the 10th day of each month, the
statement covering November 10, 2011 through December 9, 2011, may
disclose the separate year-to-date totals for interest charged and
fees imposed from December 10, 2010, through December 9, 2011.
ii. Quarterly statements. Creditors issuing quarterly statements
may apply the guidance set forth for monthly statements to comply
with the requirement to provide calendar year-to-date totals on
quarterly statements.
4. Minimum charge in lieu of interest. A minimum charge imposed
if a charge would otherwise have been determined by applying a
periodic rate to a balance except for the fact that such charge is
smaller than the minimum must be disclosed as a fee. For example,
assume a creditor imposes a minimum charge of $1.50 in lieu of
interest if the calculated interest for a billing period is less
than that minimum charge. If the interest calculated on a consumer's
account for a particular billing period is 50 cents, the minimum
charge of $1.50 would apply. In this case, the entire $1.50 would be
disclosed as a fee; the periodic statement would reflect the $1.50
as a fee, and $0 in interest.
5. Adjustments to year-to-date totals. In some cases, a creditor
may provide a statement for the current period reflecting that fees
or interest charges imposed during a previous period were waived or
reversed and credited to the account. Creditors may, but are not
required to, reflect the adjustment in the year-to-date totals, nor,
if an adjustment is made, to provide an explanation about the reason
for the adjustment. Such adjustments should not affect the total
fees or interest charges imposed for the current statement period.
6. Acquired accounts. An institution that acquires an account or
plan must include, as applicable, fees and charges imposed on the
account or plan prior to the acquisition in the aggregate
disclosures provided under Sec. 1026.7(b)(6) for the acquired
account or plan. Alternatively, the institution may provide separate
totals reflecting activity prior and subsequent to the account or
plan acquisition. For example, a creditor that acquires an account
or plan on August 12 of a given calendar year may provide one total
for the period from January 1 to August 11 and a separate total for
the period beginning on August 12.
7. Account upgrades. A creditor that upgrades, or otherwise
changes, a consumer's plan to a different open-end credit plan must
include, as applicable, fees and charges imposed for that portion of
the calendar year prior to the upgrade or change in the consumer's
plan in the aggregate disclosures provided pursuant to Sec.
1026.7(b)(6) for the new plan. For example, assume a consumer has
incurred $125 in fees for the calendar year to date for a retail
credit card account, which is then replaced by a cobranded credit
card account also issued by the creditor. In this case, the creditor
must reflect the $125 in fees incurred prior to the replacement of
the retail credit card account in the calendar year-to-date totals
provided for the cobranded credit card account. Alternatively, the
institution may provide two separate totals reflecting activity
prior and subsequent to the plan upgrade or change.
7(b)(7) Change-in-Terms and Increased Penalty Rate Summary for Open-End
(Not Home-Secured) Plan
1. Location of summary tables. If a change-in-terms notice
required by Sec. 1026.9(c)(2) is provided on or with a periodic
statement, a
[[Page 79944]]
tabular summary of key changes must appear on the front of the
statement. Similarly, if a notice of a rate increase due to
delinquency or default or as a penalty required by Sec.
1026.9(g)(1) is provided on or with a periodic statement,
information required to be provided about the increase, presented in
a table, must appear on the front of the statement.
7(b)(8) Grace Period
1. Terminology. In describing the grace period, the language
used must be consistent with that used on the account-opening
disclosure statement. (See Sec. 1026.5(a)(2)(i).)
2. Deferred interest transactions. See comment 7(b)-1.iv.
3. Limitation on the imposition of finance charges in Sec.
1026.54. Section 1026.7(b)(8) does not require a card issuer to
disclose the limitations on the imposition of finance charges as a
result of a loss of a grace period in Sec. 1026.54, or the impact
of payment allocation on whether interest is charged on transactions
as a result of a loss of a grace period.
7(b)(9) Address for Notice of Billing Errors
1. Terminology. The periodic statement should indicate the
general purpose for the address for billing-error inquiries,
although a detailed explanation or particular wording is not
required.
2. Telephone number. A telephone number, email address, or Web
site location may be included, but the mailing address for billing-
error inquiries, which is the required disclosure, must be clear and
conspicuous. The address is deemed to be clear and conspicuous if a
precautionary instruction is included that telephoning or notifying
the creditor by email or Web site will not preserve the consumer's
billing rights, unless the creditor has agreed to treat billing
error notices provided by electronic means as written notices, in
which case the precautionary instruction is required only for
telephoning.
7(b)(10) Closing Date of Billing Cycle; New Balance
1. Credit balances. See comment 7(b)(1)-1.
2. Multifeatured plans. In a multifeatured plan, the new balance
may be disclosed for each feature or for the plan as a whole. If
separate new balances are disclosed, a total new balance is
optional.
3. Accrued finance charges allocated from payments. Some plans
provide that the amount of the finance charge that has accrued since
the consumer's last payment is directly deducted from each new
payment, rather than being separately added to each statement and
therefore reflected as an increase in the obligation. In such a
plan, the new balance need not reflect finance charges accrued since
the last payment.
7(b)(11) Due Date; Late Payment Costs
1. Informal periods affecting late payments. Although the terms
of the account agreement may provide that a card issuer may assess a
late payment fee if a payment is not received by a certain date, the
card issuer may have an informal policy or practice that delays the
assessment of the late payment fee for payments received a brief
period of time after the date upon which a card issuer has the
contractual right to impose the fee. A card issuer must disclose the
due date according to the legal obligation between the parties, and
need not consider the end of an informal ``courtesy period'' as the
due date under Sec. 1026.7(b)(11).
2. Assessment of late payment fees. Some state or other laws
require that a certain number of days must elapse following a due
date before a late payment fee may be imposed. In addition, a card
issuer may be restricted by the terms of the account agreement from
imposing a late payment fee until a payment is late for a certain
number of days following a due date. For example, assume a payment
is due on March 10 and the account agreement or state law provides
that a late payment fee cannot be assessed before March 21. A card
issuer must disclose the due date under the terms of the legal
obligation (March 10 in this example), and not a date different than
the due date, such as when the card issuer is restricted by the
account agreement or state or other law from imposing a late payment
fee unless a payment is late for a certain number of days following
the due date (March 21 in this example). Consumers' rights under
state law to avoid the imposition of late payment fees during a
specified period following a due date are unaffected by the
disclosure requirement. In this example, the card issuer would
disclose March 10 as the due date for purposes of Sec.
1026.7(b)(11), but could not, under state law, assess a late payment
fee before March 21.
3. Fee or rate triggered by multiple events. If a late payment
fee or penalty rate is triggered after multiple events, such as two
late payments in six months, the card issuer may, but is not
required to, disclose the late payment and penalty rate disclosure
each month. The disclosures must be included on any periodic
statement for which a late payment could trigger the late payment
fee or penalty rate, such as after the consumer made one late
payment in this example. For example, if a cardholder has already
made one late payment, the disclosure must be on each statement for
the following five billing cycles.
4. Range of late fees or penalty rates. A card issuer that
imposes a range of late payment fees or rates on a credit card
account under an open-end (not home-secured) consumer credit plan
may state the highest fee or rate along with an indication lower
fees or rates could be imposed. For example, a phrase indicating the
late payment fee could be ``up to $29'' complies with this
requirement.
5. Penalty rate in effect. If the highest penalty rate has
previously been triggered on an account, the card issuer may, but is
not required to, delete the amount of the penalty rate and the
warning that the rate may be imposed for an untimely payment, as not
applicable. Alternatively, the card issuer may, but is not required
to, modify the language to indicate that the penalty rate has been
increased due to previous late payments (if applicable).
6. Same day each month. The requirement that the due date be the
same day each month means that the due date must generally be the
same numerical date. For example, a consumer's due date could be the
25th of every month. In contrast, a due date that is the same
relative date but not numerical date each month, such as the third
Tuesday of the month, generally would not comply with this
requirement. However, a consumer's due date may be the last day of
each month, even though that date will not be the same numerical
date. For example, if a consumer's due date is the last day of each
month, it will fall on February 28th (or February 29th in a leap
year) and on August 31st.
7. Change in due date. A creditor may adjust a consumer's due
date from time to time provided that the new due date will be the
same numerical date each month on an ongoing basis. For example, a
creditor may choose to honor a consumer's request to change from a
due date that is the 20th of each month to the 5th of each month, or
may choose to change a consumer's due date from time to time for
operational reasons. See comment 2(a)(4)-3 for guidance on
transitional billing cycles.
8. Billing cycles longer than one month. The requirement that
the due date be the same day each month does not prohibit billing
cycles that are two or three months, provided that the due date for
each billing cycle is on the same numerical date of the month. For
example, a creditor that establishes two-month billing cycles could
send a consumer periodic statements disclosing due dates of January
25, March 25, and May 25.
9. Payment due date when the creditor does not accept or receive
payments by mail. If the due date in a given month falls on a day on
which the creditor does not receive or accept payments by mail and
the creditor is required to treat a payment received the next
business day as timely pursuant to Sec. 1026.10(d), the creditor
must disclose the due date according to the legal obligation between
the parties, not the date as of which the creditor is permitted to
treat the payment as late. For example, assume that the consumer's
due date is the 4th of every month and the creditor does not accept
or receive payments by mail on Thursday, July 4. Pursuant to Sec.
1026.10(d), the creditor may not treat a mailed payment received on
the following business day, Friday, July 5, as late for any purpose.
The creditor must nonetheless disclose July 4 as the due date on the
periodic statement and may not disclose a July 5 due date.
7(b)(12) Repayment Disclosures
1. Rounding. In disclosing on the periodic statement the minimum
payment total cost estimate, the estimated monthly payment for
repayment in 36 months, the total cost estimate for repayment in 36
months, and the savings estimate for repayment in 36 months under
Sec. 1026.7(b)(12)(i) or (b)(12)(ii) as applicable, a card issuer,
at its option, must either round these disclosures to the nearest
whole dollar or to the nearest cent. Nonetheless, an issuer's
rounding for all of these disclosures must be consistent. An issuer
may round all of these disclosures to the nearest whole dollar when
disclosing them on the periodic statement, or may round all of these
disclosures to the nearest cent. An issuer may not, however, round
some of the disclosures to the nearest whole
[[Page 79945]]
dollar, while rounding other disclosures to the nearest cent.
Paragraph 7(b)(12)(i)(F)
1. Minimum payment repayment estimate disclosed on the periodic
statement is three years or less. Section 1026.7(b)(12)(i)(F)(2)(i)
provides that a credit card issuer is not required to provide the
disclosures related to repayment in 36 months if the minimum payment
repayment estimate disclosed under Sec. 1026.7(b)(12)(i)(B) after
rounding is 3 years or less. For example, if the minimum payment
repayment estimate is 2 years 6 months to 3 years 5 months, issuers
would be required under Sec. 1026.7(b)(12)(i)(B) to disclose that
it would take 3 years to pay off the balance in full if making only
the minimum payment. In these cases, an issuer would not be required
to disclose the 36-month disclosures on the periodic statement
because the minimum payment repayment estimate disclosed to the
consumer on the periodic statement (after rounding) is 3 years or
less.
7(b)(12)(iv) Provision of Information About Credit Counseling Services
1. Approved organizations. Section 1026.7(b)(12)(iv)(A) requires
card issuers to provide information regarding at least three
organizations that have been approved by the United States Trustee
or a bankruptcy administrator pursuant to 11 U.S.C. 111(a)(1) to
provide credit counseling services in, at the card issuer's option,
either the state in which the billing address for the account is
located or the state specified by the consumer. A card issuer does
not satisfy the requirements in Sec. 1026.7(b)(12)(iv)(A) by
providing information regarding providers that have been approved
pursuant to 11 U.S.C. 111(a)(2) to offer personal financial
management courses.
2. Information regarding approved organizations. i. Provision of
information obtained from United States Trustee or bankruptcy
administrator. A card issuer complies with the requirements of Sec.
1026.7(b)(12)(iv)(A) if, through the toll-free number disclosed
pursuant to Sec. 1026.7(b)(12)(i) or (b)(12)(ii), it provides the
consumer with information obtained from the United States Trustee or
a bankruptcy administrator, such as information obtained from the
Web site operated by the United States Trustee. Section
1026.7(b)(12)(iv)(A) does not require a card issuer to provide
information that is not available from the United States Trustee or
a bankruptcy administrator. If, for example, the Web site address
for an organization approved by the United States Trustee is not
available from the Web site operated by the United States Trustee, a
card issuer is not required to provide a Web site address for that
organization. However, Sec. 1026.7(b)(12)(iv)(B) requires the card
issuer to, at least annually, update the information it provides for
consistency with the information provided by the United States
Trustee or a bankruptcy administrator.
ii. Provision of information consistent with request of approved
organization. If requested by an approved organization, a card
issuer may at its option provide, in addition to the name of the
organization obtained from the United States Trustee or a bankruptcy
administrator, another name used by that organization through the
toll-free number disclosed pursuant to Sec. 1026.7(b)(12)(i) or
(b)(12)(ii). In addition, if requested by an approved organization,
a card issuer may at its option provide through the toll-free number
disclosed pursuant to Sec. 1026.7(b)(12)(i) or (b)(12)(ii) a street
address, telephone number, or Web site address for the organization
that is different than the street address, telephone number, or Web
site address obtained from the United States Trustee or a bankruptcy
administrator. However, if requested by an approved organization, a
card issuer must not provide information regarding that organization
through the toll-free number disclosed pursuant to Sec.
1026.7(b)(12)(i) or (b)(12)(ii).
iii. Information regarding approved organizations that provide
credit counseling services in a language other than English. A card
issuer may at its option provide through the toll-free number
disclosed pursuant to Sec. 1026.7(b)(12)(i) or (b)(12)(ii)
information regarding approved organizations that provide credit
counseling services in languages other than English. In the
alternative, a card issuer may at its option state that such
information is available from the Web site operated by the United
States Trustee. Disclosing this Web site address does not by itself
constitute a statement that organizations have been approved by the
United States Trustee for purposes of comment 7(b)(12)(iv)-2.iv.
iv. Statements regarding approval by the United States Trustee
or a bankruptcy administrator. Section 1026.7(b)(12)(iv) does not
require a card issuer to disclose through the toll-free number
disclosed pursuant to Sec. 1026.7(b)(12)(i) or (b)(12)(ii) that
organizations have been approved by the United States Trustee or a
bankruptcy administrator. However, if a card issuer chooses to make
such a disclosure, Sec. 1026.7(b)(12)(iv) requires that the card
issuer also disclose that:
A. The United States Trustee or a bankruptcy administrator has
determined that the organizations meet the minimum requirements for
nonprofit pre-bankruptcy budget and credit counseling;
B. The organizations may provide other credit counseling
services that have not been reviewed by the United States Trustee or
a bankruptcy administrator; and
C. The United States Trustee or the bankruptcy administrator
does not endorse or recommend any particular organization.
3. Automated response systems or devices. At their option, card
issuers may use toll-free telephone numbers that connect consumers
to automated systems, such as an interactive voice response system,
through which consumers may obtain the information required by Sec.
1026.7(b)(12)(iv) by inputting information using a touch-tone
telephone or similar device.
4. Toll-free telephone number. A card issuer may provide a toll-
free telephone number that is designed to handle customer service
calls generally, so long as the option to receive the information
required by Sec. 1026.7(b)(12)(iv) is prominently disclosed to the
consumer. For automated systems, the option to receive the
information required by Sec. 1026.7(b)(12)(iv) is prominently
disclosed to the consumer if it is listed as one of the options in
the first menu of options given to the consumer, such as ``Press or
say `3' if you would like information about credit counseling
services.'' If the automated system permits callers to select the
language in which the call is conducted and in which information is
provided, the menu to select the language may precede the menu with
the option to receive information about accessing credit counseling
services.
5. Third parties. At their option, card issuers may use a third
party to establish and maintain a toll-free telephone number for use
by the issuer to provide the information required by Sec.
1026.7(b)(12)(iv).
6. Web site address. When making the repayment disclosures on
the periodic statement pursuant to Sec. 1026.7(b)(12), a card
issuer at its option may also include a reference to a Web site
address (in addition to the toll-free telephone number) where its
customers may obtain the information required by Sec.
1026.7(b)(12)(iv), so long as the information provided on the Web
site complies with Sec. 1026.7(b)(12)(iv). The Web site address
disclosed must take consumers directly to the Web page where
information about accessing credit counseling may be obtained. In
the alternative, the card issuer may disclose the Web site address
for the Web page operated by the United States Trustee where
consumers may obtain information about approved credit counseling
organizations. Disclosing this Web site address does not by itself
constitute a statement that organizations have been approved by the
United States Trustee for purposes of comment 7(b)(12)(iv)-2.iv.
7. Advertising or marketing information. If a consumer requests
information about credit counseling services, the card issuer may
not provide advertisements or marketing materials to the consumer
(except for providing the name of the issuer) prior to providing the
information required by Sec. 1026.7(b)(12)(iv). Educational
materials that do not solicit business are not considered
advertisements or marketing materials for this purpose. Examples:
i. Toll-free telephone number. As described in comment
7(b)(12)(iv)-4, an issuer may provide a toll-free telephone number
that is designed to handle customer service calls generally, so long
as the option to receive the information required by Sec.
1026.7(b)(12)(iv) through that toll-free telephone number is
prominently disclosed to the consumer. Once the consumer selects the
option to receive the information required by Sec.
1026.7(b)(12)(iv), the issuer may not provide advertisements or
marketing materials to the consumer (except for providing the name
of the issuer) prior to providing the required information.
ii. Web page. If the issuer discloses a link to a Web site
address as part of the disclosures pursuant to comment 7(b)(12)(iv)-
6, the issuer may not provide advertisements or marketing materials
(except for providing the name of the issuer) on the Web page
accessed by the address prior to providing the information required
by Sec. 1026.7(b)(12)(iv).
[[Page 79946]]
7(b)(12)(v) Exemptions
1. Billing cycle where paying the minimum payment due for that
billing cycle will pay the outstanding balance on the account for
that billing cycle. Under Sec. 1026.7(b)(12)(v)(C), a card issuer
is exempt from the repayment disclosure requirements set forth in
Sec. 1026.7(b)(12) for a particular billing cycle where paying the
minimum payment due for that billing cycle will pay the outstanding
balance on the account for that billing cycle. For example, if the
entire outstanding balance on an account for a particular billing
cycle is $20 and the minimum payment is $20, an issuer would not
need to comply with the repayment disclosure requirements for that
particular billing cycle. In addition, this exemption would apply to
a charged-off account where payment of the entire account balance is
due immediately.
7(b)(13) Format Requirements
1. Combined deposit account and credit account statements. Some
financial institutions provide information about deposit account and
open-end credit account activity on one periodic statement. For
purposes of providing disclosures on the front of the first page of
the periodic statement pursuant to Sec. 1026.7(b)(13), the first
page of such a combined statement shall be the page on which credit
transactions first appear.
Section 1026.8--Identifying Transactions on Periodic Statements
8(a) Sale Credit
1. Sale credit. The term ``sale credit'' refers to a purchase in
which the consumer uses a credit card or otherwise directly accesses
an open-end line of credit (see comment 8(b)-1 if access is by means
of a check) to obtain goods or services from a merchant, whether or
not the merchant is the card issuer or creditor. ``Sale credit''
includes:
i. The purchase of funds-transfer services (such as a wire
transfer) from an intermediary.
ii. The purchase of services from the card issuer or creditor.
For the purchase of services that are costs imposed as part of the
plan under Sec. 1026.6(b)(3), card issuers and creditors comply
with the requirements for identifying transactions under this
section by disclosing the fees in accordance with the requirements
of Sec. 1026.7(b)(6). For the purchases of services that are not
costs imposed as part of the plan, card issuers and creditors may,
at their option, identify transactions under this section or in
accordance with the requirements of Sec. 1026.7(b)(6).
2. Amount--transactions not billed in full. If sale transactions
are not billed in full on any single statement, but are billed
periodically in precomputed installments, the first periodic
statement reflecting the transaction must show either the full
amount of the transaction together with the date the transaction
actually took place; or the amount of the first installment that was
debited to the account together with the date of the transaction or
the date on which the first installment was debited to the account.
In any event, subsequent periodic statements should reflect each
installment due, together with either any other identifying
information required by Sec. 1026.8(a) (such as the seller's name
and address in a three-party situation) or other appropriate
identifying information relating the transaction to the first
billing. The debiting date for the particular installment, or the
date the transaction took place, may be used as the date of the
transaction on these subsequent statements.
3. Date--when a transaction takes place. i. If the consumer
conducts the transaction in person, the date of the transaction is
the calendar date on which the consumer made the purchase or order,
or secured the advance.
ii. For transactions billed to the account on an ongoing basis
(other than installments to pay a precomputed amount), the date of
the transaction is the date on which the amount is debited to the
account. This might include, for example, monthly insurance
premiums.
iii. For mail, Internet, or telephone orders, a creditor may
disclose as the transaction date either the invoice date, the
debiting date, or the date the order was placed by telephone or via
the Internet.
iv. In a foreign transaction, the debiting date may be
considered the transaction date.
4. Date--sufficiency of description. i. If the creditor
discloses only the date of the transaction, the creditor need not
identify it as the ``transaction date.'' If the creditor discloses
more than one date (for example, the transaction date and the
posting date), the creditor must identify each.
ii. The month and day sufficiently identify the transaction
date, unless the posting of the transaction is delayed so long that
the year is needed for a clear disclosure to the consumer.
5. Same or related persons. i. For purposes of identifying
transactions, the term same or related persons refers to, for
example:
A. Franchised or licensed sellers of a creditor's product or
service.
B. Sellers who assign or sell open-end sales accounts to a
creditor or arrange for such credit under a plan that allows the
consumer to use the credit only in transactions with that seller.
ii. A seller is not related to the creditor merely because the
seller and the creditor have an agreement authorizing the seller to
honor the creditor's credit card.
6. Brief identification--sufficiency of description. The ``brief
identification'' provision in Sec. 1026.8(a)(1)(i) requires a
designation that will enable the consumer to reconcile the periodic
statement with the consumer's own records. In determining the
sufficiency of the description, the following rules apply:
i. While item-by-item descriptions are not necessary, reasonable
precision is required. For example, ``merchandise,''
``miscellaneous,'' ``second-hand goods,'' or ``promotional items''
would not suffice.
ii. A reference to a department in a sales establishment that
accurately conveys the identification of the types of property or
services available in the department is sufficient--for example,
``jewelry,'' or ``sporting goods.''
iii. A number or symbol that is related to an identification
list printed elsewhere on the statement that reasonably identifies
the transaction with the creditor is sufficient.
7. Seller's name--sufficiency of description. The requirement
contemplates that the seller's name will appear on the periodic
statement in essentially the same form as it appears on transaction
documents provided to the consumer at the time of the sale. The
seller's name may also be disclosed as, for example:
i. A more complete spelling of the name that was alphabetically
abbreviated on the receipt or other credit document.
ii. An alphabetical abbreviation of the name on the periodic
statement even if the name appears in a more complete spelling on
the receipt or other credit document. Terms that merely indicate the
form of a business entity, such as ``Inc.,'' ``Co.,'' or ``Ltd.,''
may always be omitted.
8. Location of transaction. i. If the seller has multiple stores
or branches within a city, the creditor need not identify the
specific branch at which the sale occurred.
ii. When no meaningful address is available because the consumer
did not make the purchase at any fixed location of the seller, the
creditor may omit the address, or may provide some other identifying
designation, such as ``aboard plane,'' ``ABC Airways Flight,''
``customer's home,'' ``telephone order,'' ``internet order'' or
``mail order.''
8(b) Nonsale credit.
1. Nonsale credit. The term ``nonsale credit'' refers to any
form of loan credit including, for example:
i. A cash advance.
ii. An advance on a credit plan that is accessed by overdrafts
on a checking account.
iii. The use of a ``supplemental credit device'' in the form of
a check or draft or the use of the overdraft credit plan accessed by
a debit card, even if such use is in connection with a purchase of
goods or services.
iv. Miscellaneous debits to remedy mispostings, returned checks,
and similar entries.
2. Amount--overdraft credit plans. If credit is extended under
an overdraft credit plan tied to a checking account or by means of a
debit card tied to an overdraft credit plan:
i. The amount to be disclosed is that of the credit extension,
not the face amount of the check or the total amount of the debit/
credit transaction.
ii. The creditor may disclose the amount of the credit
extensions on a cumulative daily basis, rather than the amount
attributable to each check or each use of the debit card that
accesses the credit plan.
3. Date of transaction. See comment 8(a)-4.
4. Nonsale transaction--sufficiency of identification. The
creditor sufficiently identifies a nonsale transaction by describing
the type of advance it represents, such as cash advance, loan,
overdraft loan, or any readily understandable trade name for the
credit program.
Section 1026.9--Subsequent Disclosure Requirements
9(a) Furnishing Statement of Billing Rights
9(a)(1) Annual Statement
1. General. The creditor may provide the annual billing rights
statement:
[[Page 79947]]
i. By sending it in one billing period per year to each consumer
that gets a periodic statement for that period; or
ii. By sending a copy to all of its accountholders sometime
during the calendar year but not necessarily all in one billing
period (for example, sending the annual notice in connection with
renewal cards or when imposing annual membership fees).
2. Substantially similar. See the commentary to Model Forms G-3
and G-3(A) in Appendix G to part 1026.
9(a)(2) Alternative Summary Statement
1. Changing from long-form to short form statement and vice
versa. If the creditor has been sending the long-form annual
statement, and subsequently decides to use the alternative summary
statement, the first summary statement must be sent no later than 12
months after the last long-form statement was sent. Conversely, if
the creditor wants to switch to the long-form, the first long-form
statement must be sent no later than 12 months after the last
summary statement.
2. Substantially similar. See the commentary to Model Forms G-4
and G-4(A) in Appendix G to part 1026.
9(b) Disclosures for Supplemental Credit Access Devices and Additional
Features
1. Credit access device--examples. Credit access device
includes, for example, a blank check, payee-designated check, blank
draft or order, or authorization form for issuance of a check; it
does not include a check issued payable to a consumer representing
loan proceeds or the disbursement of a cash advance.
2. Credit account feature--examples. A new credit account
feature would include, for example:
i. The addition of overdraft checking to an existing account
(although the regular checks that could trigger the overdraft
feature are not themselves ``devices'').
ii. The option to use an existing credit card to secure cash
advances, when previously the card could only be used for purchases.
Paragraph 9(b)(2)
1. Different finance charge terms. Except as provided in Sec.
1026.9(b)(3) for checks that access a credit card account, if the
finance charge terms are different from those previously disclosed,
the creditor may satisfy the requirement to give the finance charge
terms either by giving a complete set of new account-opening
disclosures reflecting the terms of the added device or feature or
by giving only the finance charge disclosures for the added device
or feature.
9(b)(3) Checks That Access a Credit Card Account
9(b)(3)(i) Disclosures
1. Front of the page containing the checks. The following would
comply with the requirement that the tabular disclosures provided
pursuant to Sec. 1026.9(b)(3) appear on the front of the page
containing the checks:
i. Providing the tabular disclosure on the front of the first
page on which checks appear, for an offer where checks are provided
on multiple pages;
ii. Providing the tabular disclosure on the front of a mini-book
or accordion booklet containing the checks; or
iii. Providing the tabular disclosure on the front of the
solicitation letter, when the checks are printed on the front of the
same page as the solicitation letter even if the checks can be
separated by the consumer from the solicitation letter using
perforations.
2. Combined disclosures for checks and other transactions
subject to the same terms. A card issuer may include in the tabular
disclosure provided pursuant to Sec. 1026.9(b)(3) disclosures
regarding the terms offered on non-check transactions, provided that
such transactions are subject to the same terms that are required to
be disclosed pursuant to Sec. 1026.9(b)(3)(i) for the checks that
access a credit card account. However, a card issuer may not include
in the table information regarding additional terms that are not
required disclosures for checks that access a credit card account
pursuant to Sec. 1026.9(b)(3).
Paragraph 9(b)(3)(i)(D)
1. Grace period. A creditor may not disclose under Sec.
1026.9(b)(3)(i)(D) the limitations on the imposition of finance
charges as a result of a loss of a grace period in Sec. 1026.54, or
the impact of payment allocation on whether interest is charged on
transactions as a result of a loss of a grace period. Some creditors
may offer a grace period on credit extended by the use of an access
check under which interest will not be charged on the check
transactions if the consumer pays the outstanding balance shown on a
periodic statement in full by the due date shown on that statement
for one or more billing cycles. In these circumstances, Sec.
1026.9(b)(3)(i)(D) requires that the creditor disclose the grace
period using the following language, or substantially similar
language, as applicable: ``Your due date is [at least] ---- days
after the close of each billing cycle. We will not charge you any
interest on check transactions if you pay your entire balance by the
due date each month.'' However, other creditors may offer a grace
period on check transactions under which interest may be charged on
check transactions even if the consumer pays the outstanding balance
shown on a periodic statement in full by the due date shown on that
statement each billing cycle. In these circumstances, Sec.
1026.9(b)(3)(i)(D) requires the creditor to amend the above
disclosure language to describe accurately the conditions on the
applicability of the grace period. Creditors may use the following
language to describe that no grace period on check transactions is
offered, as applicable: ``We will begin charging interest on these
checks on the transaction date.''
9(c) Change in Terms
9(c)(1) Rules Affecting Home-Equity Plans
1. Changes initially disclosed. No notice of a change in terms
need be given if the specific change is set forth initially, such
as: rate increases under a properly disclosed variable-rate plan, a
rate increase that occurs when an employee has been under a
preferential rate agreement and terminates employment, or an
increase that occurs when the consumer has been under an agreement
to maintain a certain balance in a savings account in order to keep
a particular rate and the account balance falls below the specified
minimum. The rules in Sec. 1026.40(f) relating to home-equity plans
limit the ability of a creditor to change the terms of such plans.
2. State law issues. Examples of issues not addressed by Sec.
1026.9(c) because they are controlled by state or other applicable
law include:
i. The types of changes a creditor may make. (But see Sec.
1026.40(f))
ii. How changed terms affect existing balances, such as when a
periodic rate is changed and the consumer does not pay off the
entire existing balance before the new rate takes effect.
3. Change in billing cycle. Whenever the creditor changes the
consumer's billing cycle, it must give a change-in-terms notice if
the change either affects any of the terms required to be disclosed
under Sec. 1026.6(a) or increases the minimum payment, unless an
exception under Sec. 1026.9(c)(1)(ii) applies; for example, the
creditor must give advance notice if the creditor initially
disclosed a 25-day grace period on purchases and the consumer will
have fewer days during the billing cycle change.
9(c)(1)(i) Written Notice Required
1. Affected consumers. Change-in-terms notices need only go to
those consumers who may be affected by the change. For example, a
change in the periodic rate for check overdraft credit need not be
disclosed to consumers who do not have that feature on their
accounts.
2. Timing--effective date of change. The rule that the notice of
the change in terms be provided at least 15 days before the change
takes effect permits mid-cycle changes when there is clearly no
retroactive effect, such as the imposition of a transaction fee. Any
change in the balance computation method, in contrast, would need to
be disclosed at least 15 days prior to the billing cycle in which
the change is to be implemented.
3. Timing--advance notice not required. Advance notice of 15
days is not necessary--that is, a notice of change in terms is
required, but it may be mailed or delivered as late as the effective
date of the change--in two circumstances:
i. If there is an increased periodic rate or any other finance
charge attributable to the consumer's delinquency or default.
ii. If the consumer agrees to the particular change. This
provision is intended for use in the unusual instance when a
consumer substitutes collateral or when the creditor can advance
additional credit only if a change relatively unique to that
consumer is made, such as the consumer's providing additional
security or paying an increased minimum payment amount. Therefore,
the following are not ``agreements'' between the consumer and the
creditor for purposes of Sec. 1026.9(c)(1)(i): The consumer's
general acceptance of the creditor's contract reservation of the
right to change terms; the consumer's use of the account (which
might imply acceptance of its terms under state law); and the
consumer's acceptance of a unilateral term change that is not
particular to that consumer, but rather is of general
[[Page 79948]]
applicability to consumers with that type of account.
4. Form of change-in-terms notice. A complete new set of the
initial disclosures containing the changed term complies with Sec.
1026.9(c)(1)(i) if the change is highlighted in some way on the
disclosure statement, or if the disclosure statement is accompanied
by a letter or some other insert that indicates or draws attention
to the term change.
5. Security interest change--form of notice. A copy of the
security agreement that describes the collateral securing the
consumer's account may be used as the notice, when the term change
is the addition of a security interest or the addition or
substitution of collateral.
6. Changes to home-equity plans entered into on or after
November 7, 1989. Section 1026.9(c)(1) applies when, by written
agreement under Sec. 1026.40(f)(3)(iii), a creditor changes the
terms of a home-equity plan--entered into on or after November 7,
1989--at or before its scheduled expiration, for example, by
renewing a plan on terms different from those of the original plan.
In disclosing the change:
i. If the index is changed, the maximum annual percentage rate
is increased (to the limited extent permitted by Sec. 1026.30), or
a variable-rate feature is added to a fixed-rate plan, the creditor
must include the disclosures required by Sec. 1026.40(d)(12)(x) and
(d)(12)(xi), unless these disclosures are unchanged from those given
earlier.
ii. If the minimum payment requirement is changed, the creditor
must include the disclosures required by Sec. 1026.40(d)(5)(iii)
(and, in variable-rate plans, the disclosures required by Sec.
1026.40(d)(12)(x) and (d)(12)(xi)) unless the disclosures given
earlier contained representative examples covering the new minimum
payment requirement. (See the commentary to Sec.
1026.40(d)(5)(iii), (d)(12)(x) and (d)(12)(xi) for a discussion of
representative examples.)
iii. When the terms are changed pursuant to a written agreement
as described in Sec. 1026.40(f)(3)(iii), the advance-notice
requirement does not apply.
9(c)(1)(ii) Notice not Required
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit.
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges. (But see
Sec. 1026.40(f).)
v. Changes arising merely by operation of law; for example, if
the creditor's security interest in a consumer's car automatically
extends to the proceeds when the consumer sells the car.
2. Skip features. If a credit program allows consumers to skip
or reduce one or more payments during the year, or involves
temporary reductions in finance charges, no notice of the change in
terms is required either prior to the reduction or upon resumption
of the higher rates or payments if these features are explained on
the initial disclosure statement (including an explanation of the
terms upon resumption). For example, a merchant may allow consumers
to skip the December payment to encourage holiday shopping, or a
teachers' credit union may not require payments during summer
vacation. Otherwise, the creditor must give notice prior to resuming
the original schedule or rate, even though no notice is required
prior to the reduction. The change-in-terms notice may be combined
with the notice offering the reduction. For example, the periodic
statement reflecting the reduction or skip feature may also be used
to notify the consumer of the resumption of the original schedule or
rate, either by stating explicitly when the higher payment or
charges resume, or by indicating the duration of the skip option.
Language such as ``You may skip your October payment,'' or ``We will
waive your finance charges for January,'' may serve as the change-
in-terms notice.
9(c)(1)(iii) Notice to Restrict Credit
1. Written request for reinstatement. If a creditor requires the
request for reinstatement of credit privileges to be in writing, the
notice under Sec. 1026.9(c)(1)(iii) must state that fact.
2. Notice not required. A creditor need not provide a notice
under this paragraph if, pursuant to the commentary to Sec.
1026.40(f)(2), a creditor freezes a line or reduces a credit line
rather than terminating a plan and accelerating the balance.
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
1. Changes initially disclosed. Except as provided in Sec.
1026.9(g)(1), no notice of a change in terms need be given if the
specific change is set forth initially consistent with any
applicable requirements, such as rate or fee increases upon
expiration of a specific period of time that were disclosed in
accordance with Sec. 1026.9(c)(2)(v)(B) or rate increases under a
properly disclosed variable-rate plan in accordance with Sec.
1026.9(c)(2)(v)(C). In contrast, notice must be given if the
contract allows the creditor to increase a rate or fee at its
discretion.
2. State law issues. Some issues are not addressed by Sec.
1026.9(c)(2) because they are controlled by state or other
applicable laws. These issues include the types of changes a
creditor may make, to the extent otherwise permitted by this part.
3. Change in billing cycle. Whenever the creditor changes the
consumer's billing cycle, it must give a change-in-terms notice if
the change affects any of the terms described in Sec.
1026.9(c)(2)(i), unless an exception under Sec. 1026.9(c)(2)(v)
applies; for example, the creditor must give advance notice if the
creditor initially disclosed a 28-day grace period on purchases and
the consumer will have fewer days during the billing cycle change.
See also Sec. 1026.7(b)(11)(i)(A) regarding the general requirement
that the payment due date for a credit card account under an open-
end (not home-secured) consumer credit plan must be the same day
each month.
4. Relationship to Sec. 1026.9(b). If a creditor adds a feature
to the account on the type of terms otherwise required to be
disclosed under Sec. 1026.6, the creditor must satisfy: The
requirement to provide the finance charge disclosures for the added
feature under Sec. 1026.9(b); and any applicable requirement to
provide a change-in-terms notice under Sec. 1026.9(c), including
any advance notice that must be provided. For example, if a creditor
adds a balance transfer feature to an account more than 30 days
after account-opening disclosures are provided, it must give the
finance charge disclosures for the balance transfer feature under
Sec. 1026.9(b) as well as comply with the change-in-terms notice
requirements under Sec. 1026.9(c), including providing notice of
the change at least 45 days prior to the effective date of the
change. Similarly, if a creditor makes a balance transfer offer on
finance charge terms that are higher than those previously disclosed
for balance transfers, it would also generally be required to
provide a change-in-terms notice at least 45 days in advance of the
effective date of the change. A creditor may provide a single notice
under Sec. 1026.9(c) to satisfy the notice requirements of both
paragraphs (b) and (c) of Sec. 1026.9. For checks that access a
credit card account subject to the disclosure requirements in Sec.
1026.9(b)(3), a creditor is not subject to the notice requirements
under Sec. 1026.9(c) even if the applicable rate or fee is higher
than those previously disclosed for such checks. Thus, for example,
the creditor need not wait 45 days before applying the new rate or
fee for transactions made using such checks, but the creditor must
make the required disclosures on or with the checks in accordance
with Sec. 1026.9(b)(3).
9(c)(2)(i) Changes Where Written Advance Notice is Required
1. Affected consumers. Change-in-terms notices need only go to
those consumers who may be affected by the change. For example, a
change in the periodic rate for check overdraft credit need not be
disclosed to consumers who do not have that feature on their
accounts. If a single credit account involves multiple consumers
that may be affected by the change, the creditor should refer to
Sec. 1026.5(d) to determine the number of notices that must be
given.
2. Timing--effective date of change. The rule that the notice of
the change in terms be provided at least 45 days before the change
takes effect permits mid-cycle changes when there is clearly no
retroactive effect, such as the imposition of a transaction fee. Any
change in the balance computation method, in contrast, would need to
be disclosed at least 45 days prior to the billing cycle in which
the change is to be implemented.
3. Changes agreed to by the consumer. See also comment
5(b)(1)(i)-6.
4. Form of change-in-terms notice. Except if Sec.
1026.9(c)(2)(iv) applies, a complete new set of the initial
disclosures containing the changed term complies with Sec.
1026.9(c)(2)(i) if the change is highlighted on the disclosure
statement, or if the disclosure statement is accompanied by a letter
or some other insert that indicates or draws attention to the term
being changed.
5. Security interest change--form of notice. A creditor must
provide a description of any security interest it is acquiring under
Sec. 1026.9(c)(2)(iv). A copy of the security agreement that
describes the collateral securing the consumer's account may also be
[[Page 79949]]
used as the notice, when the term change is the addition of a
security interest or the addition or substitution of collateral.
6. Examples. See comment 55(a)-1 and 55(b)-3 for examples of how
a card issuer that is subject to Sec. 1026.55 may comply with the
timing requirements for notices required by Sec. 1026.9(c)(2)(i).
9(c)(2)(iii) Charges not Covered by Sec. 1026.6(b)(1) and (b)(2)
1. Applicability. Generally, if a creditor increases any
component of a charge, or introduces a new charge, that is imposed
as part of the plan under Sec. 1026.6(b)(3) but is not required to
be disclosed as part of the account-opening summary table under
Sec. 1026.6(b)(1) and (b)(2), the creditor must either, at its
option (i) provide at least 45 days' written advance notice before
the change becomes effective to comply with the requirements of
Sec. 1026.9(c)(2)(i), or (ii) provide notice orally or in writing,
or electronically if the consumer requests the service
electronically, of the amount of the charge to an affected consumer
before the consumer agrees to or becomes obligated to pay the
charge, at a time and in a manner that a consumer would be likely to
notice the disclosure. (See the commentary under Sec.
1026.5(a)(1)(iii) regarding disclosure of such changes in electronic
form.) For example, a fee for expedited delivery of a credit card is
a charge imposed as part of the plan under Sec. 1026.6(b)(3) but is
not required to be disclosed in the account-opening summary table
under Sec. 1026.6(b)(1) and (b)(2). If a creditor changes the
amount of that expedited delivery fee, the creditor may provide
written advance notice of the change to affected consumers at least
45 days before the change becomes effective. Alternatively, the
creditor may provide oral or written notice, or electronic notice if
the consumer requests the service electronically, of the amount of
the charge to an affected consumer before the consumer agrees to or
becomes obligated to pay the charge, at a time and in a manner that
the consumer would be likely to notice the disclosure. (See comment
5(b)(1)(ii)-1 for examples of disclosures given at a time and in a
manner that the consumer would be likely to notice them.)
9(c)(2)(iv) Disclosure Requirements
1. Changing margin for calculating a variable rate. If a
creditor is changing a margin used to calculate a variable rate, the
creditor must disclose the amount of the new rate (as calculated
using the new margin) in the table described in Sec.
1026.9(c)(2)(iv), and include a reminder that the rate is a variable
rate. For example, if a creditor is changing the margin for a
variable rate that uses the prime rate as an index, the creditor
must disclose in the table the new rate (as calculated using the new
margin) and indicate that the rate varies with the market based on
the prime rate.
2. Changing index for calculating a variable rate. If a creditor
is changing the index used to calculate a variable rate, the
creditor must disclose the amount of the new rate (as calculated
using the new index) and indicate that the rate varies and how the
rate is determined, as explained in Sec. 1026.6(b)(2)(i)(A). For
example, if a creditor is changing from using a prime rate to using
the LIBOR in calculating a variable rate, the creditor would
disclose in the table the new rate (using the new index) and
indicate that the rate varies with the market based on the LIBOR.
3. Changing from a variable rate to a non-variable rate. If a
creditor is changing a rate applicable to a consumer's account from
a variable rate to a non-variable rate, the creditor generally must
provide a notice as otherwise required under Sec. 1026.9(c) even if
the variable rate at the time of the change is higher than the non-
variable rate. However, a creditor is not required to provide a
notice under Sec. 1026.9(c) if the creditor provides the
disclosures required by Sec. 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in
connection with changing a variable rate to a lower non-variable
rate. Similarly, a creditor is not required to provide a notice
under Sec. 1026.9(c) when changing a variable rate to a lower non-
variable rate in order to comply with 50 U.S.C. app. 527 or a
similar Federal or state statute or regulation. Finally, a creditor
is not required to provide a notice under Sec. 1026.9(c) when
changing a variable rate to a lower non-variable rate in order to
comply with Sec. 1026.55(b)(4).
4. Changing from a non-variable rate to a variable rate. If a
creditor is changing a rate applicable to a consumer's account from
a non-variable rate to a variable rate, the creditor generally must
provide a notice as otherwise required under Sec. 1026.9(c) even if
the non-variable rate is higher than the variable rate at the time
of the change. However, a creditor is not required to provide a
notice under Sec. 1026.9(c) if the creditor provides the
disclosures required by Sec. 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in
connection with changing a non-variable rate to a lower variable
rate. Similarly, a creditor is not required to provide a notice
under Sec. 1026.9(c) when changing a non-variable rate to a lower
variable rate in order to comply with 50 U.S.C. app. 527 or a
similar Federal or state statute or regulation. Finally, a creditor
is not required to provide a notice under Sec. 1026.9(c) when
changing a non-variable rate to a lower variable rate in order to
comply with Sec. 1026.55(b)(4). See comment 55(b)(2)-4 regarding
the limitations in Sec. 1026.55(b)(2) on changing the rate that
applies to a protected balance from a non-variable rate to a
variable rate.
5. Changes in the penalty rate, the triggers for the penalty
rate, or how long the penalty rate applies. If a creditor is
changing the amount of the penalty rate, the creditor must also
redisclose the triggers for the penalty rate and the information
about how long the penalty rate applies even if those terms are not
changing. Likewise, if a creditor is changing the triggers for the
penalty rate, the creditor must redisclose the amount of the penalty
rate and information about how long the penalty rate applies. If a
creditor is changing how long the penalty rate applies, the creditor
must redisclose the amount of the penalty rate and the triggers for
the penalty rate, even if they are not changing.
6. Changes in fees. If a creditor is changing part of how a fee
that is disclosed in a tabular format under Sec. 1026.6(b)(1) and
(b)(2) is determined, the creditor must redisclose all relevant
information related to that fee regardless of whether this other
information is changing. For example, if a creditor currently
charges a cash advance fee of ``Either $5 or 3% of the transaction
amount, whichever is greater(Max: $100),'' and the creditor is only
changing the minimum dollar amount from $5 to $10, the issuer must
redisclose the other information related to how the fee is
determined. For example, the creditor in this example would disclose
the following: ``Either $10 or 3% of the transaction amount,
whichever is greater (Max: $100).''
7. Combining a notice described in Sec. 1026.9(c)(2)(iv) with a
notice described in Sec. 1026.9(g)(3). If a creditor is required to
provide a notice described in Sec. 1026.9(c)(2)(iv) and a notice
described in Sec. 1026.9(g)(3) to a consumer, the creditor may
combine the two notices. This would occur if penalty pricing has
been triggered, and other terms are changing on the consumer's
account at the same time.
8. Content. Sample G-20 contains an example of how to comply
with the requirements in Sec. 1026.9(c)(2)(iv) when a variable rate
is being changed to a non-variable rate on a credit card account.
The sample explains when the new rate will apply to new transactions
and to which balances the current rate will continue to apply.
Sample G-21 contains an example of how to comply with the
requirements in Sec. 1026.9(c)(2)(iv) when the late payment fee on
a credit card account is being increased, and the returned payment
fee is also being increased. The sample discloses the consumer's
right to reject the changes in accordance with Sec. 1026.9(h).
9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required
under Sec. 1026.9(c)(2)(iv)(A)(1).
10. Terminology. See Sec. 1026.5(a)(2) for terminology
requirements applicable to disclosures required under Sec.
1026.9(c)(2)(iv)(A)(1).
11. Reasons for increase. i. In general. Section
1026.9(c)(2)(iv)(A)(8) requires card issuers to disclose the
principal reason(s) for increasing an annual percentage rate
applicable to a credit card account under an open-end (not home-
secured) consumer credit plan. The regulation does not mandate a
minimum number of reasons that must be disclosed. However, the
specific reasons disclosed under Sec. 1026.9(c)(2)(iv)(A)(8) are
required to relate to and accurately describe the principal factors
actually considered by the card issuer in increasing the rate. A
card issuer may describe the reasons for the increase in general
terms. For example, the notice of a rate increase triggered by a
decrease of 100 points in a consumer's credit score may state that
the increase is due to ``a decline in your creditworthiness'' or ``a
decline in your credit score.'' Similarly, a notice of a rate
increase triggered by a 10% increase in the card issuer's cost of
funds may be disclosed as ``a change in market conditions.'' In some
circumstances, it may be appropriate for a card issuer to combine
the disclosure of several reasons in one statement. However, Sec.
1026.9(c)(2)(iv)(A)(8)
[[Page 79950]]
requires that the notice specifically disclose any violation of the
terms of the account on which the rate is being increased, such as a
late payment or a returned payment, if such violation of the account
terms is one of the four principal reasons for the rate increase.
ii. Example. Assume that a consumer made a late payment on the
credit card account on which the rate increase is being imposed,
made a late payment on a credit card account with another card
issuer, and the consumer's credit score decreased, in part due to
such late payments. The card issuer may disclose the reasons for the
rate increase as a decline in the consumer's credit score and the
consumer's late payment on the account subject to the increase.
Because the late payment on the credit card account with the other
issuer also likely contributed to the decline in the consumer's
credit score, it is not required to be separately disclosed.
However, the late payment on the credit card account on which the
rate increase is being imposed must be specifically disclosed even
if that late payment also contributed to the decline in the
consumer's credit score.
9(c)(2)(v) Notice not Required
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit except as otherwise
required by Sec. 1026.9(c)(2)(vi).
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges.
v. Changes arising merely by operation of law; for example, if
the creditor's security interest in a consumer's car automatically
extends to the proceeds when the consumer sells the car.
2. Skip features. i. Skipped or reduced payments. If a credit
program allows consumers to skip or reduce one or more payments
during the year, no notice of the change in terms is required either
prior to the reduction in payments or upon resumption of the higher
payments if these features are explained on the account-opening
disclosure statement (including an explanation of the terms upon
resumption). For example, a merchant may allow consumers to skip the
December payment to encourage holiday shopping, or a teacher's
credit union may not require payments during summer vacation.
Otherwise, the creditor must give notice prior to resuming the
original payment schedule, even though no notice is required prior
to the reduction. The change-in-terms notice may be combined with
the notice offering the reduction. For example, the periodic
statement reflecting the skip feature may also be used to notify the
consumer of the resumption of the original payment schedule, either
by stating explicitly when the higher resumes or by indicating the
duration of the skip option. Language such as ``You may skip your
October payment'' may serve as the change-in-terms notice.
ii. Temporary reductions in interest rates or fees. If a credit
program involves temporary reductions in an interest rate or fee, no
notice of the change in terms is required either prior to the
reduction or upon resumption of the original rate or fee if these
features are disclosed in advance in accordance with the
requirements of Sec. 1026.9(c)(2)(v)(B). Otherwise, the creditor
must give notice prior to resuming the original rate or fee, even
though no notice is required prior to the reduction. The notice
provided prior to resuming the original rate or fee must comply with
the timing requirements of Sec. 1026.9(c)(2)(i) and the content and
format requirements of Sec. 1026.9(c)(2)(iv)(A), (B) (if
applicable), (C) (if applicable), and (D). See comment 55(b)-3 for
guidance regarding the application of Sec. 1026.55 in these
circumstances.
3. Changing from a variable rate to a non-variable rate. See
comment 9(c)(2)(iv)-3.
4. Changing from a non-variable rate to a variable rate. See
comment 9(c)(2)(iv)-4.
5. Temporary rate or fee reductions offered by telephone. The
timing requirements of Sec. 1026.9(c)(2)(v)(B) are deemed to have
been met, and written disclosures required by Sec.
1026.9(c)(2)(v)(B) may be provided as soon as reasonably practicable
after the first transaction subject to a rate that will be in effect
for a specified period of time (a temporary rate) or the imposition
of a fee that will be in effect for a specified period of time (a
temporary fee) if:
i. The consumer accepts the offer of the temporary rate or
temporary fee by telephone;
ii. The creditor permits the consumer to reject the temporary
rate or temporary fee offer and have the rate or rates or fee that
previously applied to the consumer's balances reinstated for 45 days
after the creditor mails or delivers the written disclosures
required by Sec. 1026.9(c)(2)(v)(B), except that the creditor need
not permit the consumer to reject a temporary rate or temporary fee
offer if the rate or rates or fee that will apply following
expiration of the temporary rate do not exceed the rate or rates or
fee that applied immediately prior to commencement of the temporary
rate or temporary fee; and
iii. The disclosures required by Sec. 1026.9(c)(2)(v)(B) and
the consumer's right to reject the temporary rate or temporary fee
offer and have the rate or rates or fee that previously applied to
the consumer's account reinstated, if applicable, are disclosed to
the consumer as part of the temporary rate or temporary fee offer.
6. First listing. The disclosures required by Sec.
1026.9(c)(2)(v)(B)(1) are only required to be provided in close
proximity and in equal prominence to the first listing of the
temporary rate or fee in the disclosure provided to the consumer.
For purposes of Sec. 1026.9(c)(2)(v)(B), the first statement of the
temporary rate or fee is the most prominent listing on the front
side of the first page of the disclosure. If the temporary rate or
fee does not appear on the front side of the first page of the
disclosure, then the first listing of the temporary rate or fee is
the most prominent listing of the temporary rate on the subsequent
pages of the disclosure. For advertising requirements for
promotional rates, see Sec. 1026.16(g).
7. Close proximity--point of sale. Creditors providing the
disclosures required by Sec. 1026.9(c)(2)(v)(B) of this section in
person in connection with financing the purchase of goods or
services may, at the creditor's option, disclose the annual
percentage rate or fee that would apply after expiration of the
period on a separate page or document from the temporary rate or fee
and the length of the period, provided that the disclosure of the
annual percentage rate or fee that would apply after the expiration
of the period is equally prominent to, and is provided at the same
time as, the disclosure of the temporary rate or fee and length of
the period.
8. Disclosure of annual percentage rates. If a rate disclosed
pursuant to Sec. 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) is a variable
rate, the creditor must disclose the fact that the rate may vary and
how the rate is determined. For example, a creditor could state
``After October 1, 2009, your APR will be 14.99%. This APR will vary
with the market based on the Prime Rate.''
9. Deferred interest or similar programs. If the applicable
conditions are met, the exception in Sec. 1026.9(c)(2)(v)(B)
applies to deferred interest or similar promotional programs under
which the consumer is not obligated to pay interest that accrues on
a balance if that balance is paid in full prior to the expiration of
a specified period of time. For purposes of this comment and Sec.
1026.9(c)(2)(v)(B), ``deferred interest'' has the same meaning as in
Sec. 1026.16(h)(2) and associated commentary. For such programs, a
creditor must disclose pursuant to Sec. 1026.9(c)(2)(v)(B)(1) the
length of the deferred interest period and the rate that will apply
to the balance subject to the deferred interest program if that
balance is not paid in full prior to expiration of the deferred
interest period. Examples of language that a creditor may use to
make the required disclosures under Sec. 1026.9(c)(2)(v)(B)(1)
include:
i. ``No interest if paid in full in 6 months. If the balance is
not paid in full in 6 months, interest will be imposed from the date
of purchase at a rate of 15.99%.''
ii. ``No interest if paid in full by December 31, 2010. If the
balance is not paid in full by that date, interest will be imposed
from the transaction date at a rate of 15%.''
10. Relationship between Sec. Sec. 1026.9(c)(2)(v)(B) and
1026.6(b). A disclosure of the information described in Sec.
1026.9(c)(2)(v)(B)(1) provided in the account-opening table in
accordance with Sec. 1026.6(b) complies with the requirements of
Sec. 1026.9(c)(2)(v)(B)(2), if the listing of the introductory rate
in such tabular disclosure also is the first listing as described in
comment 9(c)(2)(v)-6.
11. Disclosure of the terms of a workout or temporary hardship
arrangement. In order for the exception in Sec. 1026.9(c)(2)(v)(D)
to apply, the disclosure provided to the consumer pursuant to Sec.
1026.9(c)(2)(v)(D)(2) must set forth:
i. The annual percentage rate that will apply to balances
subject to the workout or temporary hardship arrangement;
ii. The annual percentage rate that will apply to such balances
if the consumer completes or fails to comply with the terms of, the
workout or temporary hardship arrangement;
[[Page 79951]]
iii. Any reduced fee or charge of a type required to be
disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), (b)(2)(viii),
(b)(2)(ix), (b)(2)(xi), or (b)(2)(xii) that will apply to balances
subject to the workout or temporary hardship arrangement, as well as
the fee or charge that will apply if the consumer completes or fails
to comply with the terms of the workout or temporary hardship
arrangement;
iv. Any reduced minimum periodic payment that will apply to
balances subject to the workout or temporary hardship arrangement,
as well as the minimum periodic payment that will apply if the
consumer completes or fails to comply with the terms of the workout
or temporary hardship arrangement; and
v. If applicable, that the consumer must make timely minimum
payments in order to remain eligible for the workout or temporary
hardship arrangement.
12. Index not under creditor's control. See comment 55(b)(2)-2
for guidance on when an index is deemed to be under a creditor's
control.
13. Temporary rates--relationship to Sec. 1026.59. i. General.
Section 1026.59 requires a card issuer to review rate increases
imposed due to the revocation of a temporary rate. In some
circumstances, Sec. 1026.59 may require an issuer to reinstate a
reduced temporary rate based on that review. If, based on a review
required by Sec. 1026.59, a creditor reinstates a temporary rate
that had been revoked, the card issuer is not required to provide an
additional notice to the consumer when the reinstated temporary rate
expires, if the card issuer provided the disclosures required by
Sec. 1026.9(c)(2)(v)(B) prior to the original commencement of the
temporary rate. See Sec. 1026.55 and the associated commentary for
guidance on the permissibility and applicability of rate increases.
ii. Example. A consumer opens a new credit card account under an
open-end (not home-secured) consumer credit plan on January 1, 2011.
The annual percentage rate applicable to purchases is 18%. The card
issuer offers the consumer a 15% rate on purchases made between
January 1, 2012 and January 1, 2014. Prior to January 1, 2012, the
card issuer discloses, in accordance with Sec. 1026.9(c)(2)(v)(B),
that the rate on purchases made during that period will increase to
the standard 18% rate on January 1, 2014. In March 2012, the
consumer makes a payment that is ten days late. The card issuer,
upon providing 45 days' advance notice of the change under Sec.
1026.9(g), increases the rate on new purchases to 18% effective as
of June 1, 2012. On December 1, 2012, the issuer performs a review
of the consumer's account in accordance with Sec. 1026.59. Based on
that review, the card issuer is required to reduce the rate to the
original 15% temporary rate as of January 15, 2013. On January 1,
2014, the card issuer may increase the rate on purchases to 18%, as
previously disclosed prior to January 1, 2012, without providing an
additional notice to the consumer.
9(d) Finance Charge Imposed at Time of Transaction
1. Disclosure prior to imposition. A person imposing a finance
charge at the time of honoring a consumer's credit card must
disclose the amount of the charge, or an explanation of how the
charge will be determined, prior to its imposition. This must be
disclosed before the consumer becomes obligated for property or
services that may be paid for by use of a credit card. For example,
disclosure must be given before the consumer has dinner at a
restaurant, stays overnight at a hotel, or makes a deposit
guaranteeing the purchase of property or services.
9(e) Disclosures Upon Renewal of Credit or Charge Card
1. Coverage. This paragraph applies to credit and charge card
accounts of the type subject to Sec. 1026.60. (See Sec.
1026.60(a)(5) and the accompanying commentary for discussion of the
types of accounts subject to Sec. 1026.60.) The disclosure
requirements are triggered when a card issuer imposes any annual or
other periodic fee on such an account or if the card issuer has
changed or amended any term of a cardholder's account required to be
disclosed under Sec. 1026.6(b)(1) and (b)(2) that has not
previously been disclosed to the consumer, whether or not the card
issuer originally was required to provide the application and
solicitation disclosures described in Sec. 1026.60.
2. Form. The disclosures under this paragraph must be clear and
conspicuous, but need not appear in a tabular format or in a
prominent location. The disclosures need not be in a form the
cardholder can retain.
3. Terms at renewal. Renewal notices must reflect the terms
actually in effect at the time of renewal. For example, a card
issuer that offers a preferential annual percentage rate to
employees during their employment must send a renewal notice to
employees disclosing the lower rate actually charged to employees
(although the card issuer also may show the rate charged to the
general public).
4. Variable rate. If the card issuer cannot determine the rate
that will be in effect if the cardholder chooses to renew a
variable-rate account, the card issuer may disclose the rate in
effect at the time of mailing or delivery of the renewal notice.
Alternatively, the card issuer may use the rate as of a specified
date within the last 30 days before the disclosure is provided.
5. Renewals more frequent than annual. If a renewal fee is
billed more often than annually, the renewal notice should be
provided each time the fee is billed. In this instance, the fee need
not be disclosed as an annualized amount. Alternatively, the card
issuer may provide the notice no less than once every 12 months if
the notice explains the amount and frequency of the fee that will be
billed during the time period covered by the disclosure, and also
discloses the fee as an annualized amount. The notice under this
alternative also must state the consequences of a cardholder's
decision to terminate the account after the renewal-notice period
has expired. For example, if a $2 fee is billed monthly but the
notice is given annually, the notice must inform the cardholder that
the monthly charge is $2, the annualized fee is $24, and $2 will be
billed to the account each month for the coming year unless the
cardholder notifies the card issuer. If the cardholder is obligated
to pay an amount equal to the remaining unpaid monthly charges if
the cardholder terminates the account during the coming year but
after the first month, the notice must disclose the fact.
6. Terminating credit availability. Card issuers have some
flexibility in determining the procedures for how and when an
account may be terminated. However, the card issuer must clearly
disclose the time by which the cardholder must act to terminate the
account to avoid paying a renewal fee, if applicable. State and
other applicable law govern whether the card issuer may impose
requirements such as specifying that the cardholder's response be in
writing or that the outstanding balance be repaid in full upon
termination.
7. Timing of termination by cardholder. When a card issuer
provides notice under Sec. 1026.9(e)(1), a cardholder must be given
at least 30 days or one billing cycle, whichever is less, from the
date the notice is mailed or delivered to make a decision whether to
terminate an account.
8. Timing of notices. A renewal notice is deemed to be provided
when mailed or delivered. Similarly, notice of termination is deemed
to be given when mailed or delivered.
9. Prompt reversal of renewal fee upon termination. In a
situation where a cardholder has provided timely notice of
termination and a renewal fee has been billed to a cardholder's
account, the card issuer must reverse or otherwise withdraw the fee
promptly. Once a cardholder has terminated an account, no additional
action by the cardholder may be required.
10. Disclosure of changes in terms required to be disclosed
pursuant to Sec. 1026.6(b)(1) and (b)(2). Clear and conspicuous
disclosure of a changed term on a periodic statement provided to a
consumer prior to renewal of the consumer's account constitutes
prior disclosure of that term for purposes of Sec. 1026.9(e)(1).
Card issuers should refer to Sec. 1026.9(c)(2) for additional
timing, content, and formatting requirements that apply to certain
changes in terms under that paragraph.
9(e)(2) Notification on Periodic Statements
1. Combined disclosures. If a single disclosure is used to
comply with both Sec. Sec. 1026.9(e) and 1026.7, the periodic
statement must comply with the rules in Sec. Sec. 1026.60 and
1026.7. For example, a description substantially similar to the
heading describing the grace period required by Sec. 1026.60(b)(5)
must be used and the name of the balance-calculation method must be
identified (if listed in Sec. 1026.60(g)) to comply with the
requirements of Sec. 1026.60. A card issuer may include some of the
renewal disclosures on a periodic statement and others on a separate
document so long as there is some reference indicating that the
disclosures relate to one another. All renewal disclosures must be
provided to a cardholder at the same time.
2. Preprinted notices on periodic statements. A card issuer may
preprint the
[[Page 79952]]
required information on its periodic statements. A card issuer that
does so, however, must make clear on the periodic statement when the
preprinted renewal disclosures are applicable. For example, the card
issuer could include a special notice (not preprinted) at the
appropriate time that the renewal fee will be billed in the
following billing cycle, or could show the renewal date as a regular
(preprinted) entry on all periodic statements.
9(f) Change in Credit Card Account Insurance Provider
1. Coverage. This paragraph applies to credit card accounts of
the type subject to Sec. 1026.60 if credit insurance (typically
life, disability, and unemployment insurance) is offered on the
outstanding balance of such an account. (Credit card accounts
subject to Sec. 1026.9(f) are the same as those subject to Sec.
1026.9(e); see comment 9(e)-1.) Charge card accounts are not covered
by this paragraph. In addition, the disclosure requirements of this
paragraph apply only where the card issuer initiates the change in
insurance provider. For example, if the card issuer's current
insurance provider is merged into or acquired by another company,
these disclosures would not be required. Disclosures also need not
be given in cases where card issuers pay for credit insurance
themselves and do not separately charge the cardholder.
2. No increase in rate or decrease in coverage. The requirement
to provide the disclosure arises when the card issuer changes the
provider of insurance, even if there will be no increase in the
premium rate charged to the consumer and no decrease in coverage
under the insurance policy.
3. Form of notice. If a substantial decrease in coverage will
result from the change in provider, the card issuer either must
explain the decrease or refer to an accompanying copy of the policy
or group certificate for details of the new terms of coverage. (See
the commentary to AppendixG-13 to part 1026.)
4. Discontinuation of insurance. In addition to stating that the
cardholder may cancel the insurance, the card issuer may explain the
effect the cancellation would have on the consumer's credit card
plan.
5. Mailing by third party. Although the card issuer is
responsible for the disclosures, the insurance provider or another
third party may furnish the disclosures on the card issuer's behalf.
9(f)(3) Substantial Decrease in Coverage
1. Determination. Whether a substantial decrease in coverage
will result from the change in provider is determined by the two-
part test in Sec. 1026.9(f)(3): First, whether the decrease is in a
significant term of coverage; and second, whether the decrease might
reasonably be expected to affect a cardholder's decision to continue
the insurance. If both conditions are met, the decrease must be
disclosed in the notice.
9(g) Increase in Rates Due to Delinquency or Default or as a Penalty
1. Relationship between Sec. 1026.9(c) and (g) and Sec.
1026.55--examples. Card issuers subject to Sec. 1026.55 are
prohibited from increasing the annual percentage rate for a category
of transactions on any consumer credit card account unless
specifically permitted by one of the exceptions in Sec. 1026.55(b).
See comments 55(a)-1 and 55(b)-3 and the commentary to Sec.
1026.55(b)(4) for examples that illustrate the relationship between
the notice requirements of Sec. 1026.9(c) and (g) and Sec.
1026.55.
2. Affected consumers. If a single credit account involves
multiple consumers that may be affected by the change, the creditor
should refer to Sec. 1026.5(d) to determine the number of notices
that must be given.
3. Combining a notice described in Sec. 1026.9(g)(3) with a
notice described in Sec. 1026.9(c)(2)(iv). If a creditor is
required to provide notices pursuant to both Sec. 1026.9(c)(2)(iv)
and (g)(3) to a consumer, the creditor may combine the two notices.
This would occur when penalty pricing has been triggered, and other
terms are changing on the consumer's account at the same time.
4. Content. Sample G-22 contains an example of how to comply
with the requirements in Sec. 1026.9(g)(3)(i) when the rate on a
consumer's credit card account is being increased to a penalty rate
as described in Sec. 1026.9(g)(1)(ii), based on a late payment that
is not more than 60 days late. Sample G-23 contains an example of
how to comply with the requirements in Sec. 1026.9(g)(3)(i) when
the rate increase is triggered by a delinquency of more than 60
days.
5. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required
under Sec. 1026.9(g).
6. Terminology. See Sec. 1026.5(a)(2) for terminology
requirements applicable to disclosures required under Sec.
1026.9(g).
7. Reasons for increase. See comment 9(c)(2)(iv)-11 for guidance
on disclosure of the reasons for a rate increase for a credit card
account under an open-end (not home-secured) consumer credit plan.
9(g)(4) Exception for Decrease in Credit Limit
1. The following illustrates the requirements of Sec.
1026.9(g)(4). Assume that a creditor decreased the credit limit
applicable to a consumer's account and sent a notice pursuant to
Sec. 1026.9(g)(4) on January 1, stating among other things that the
penalty rate would apply if the consumer's balance exceeded the new
credit limit as of February 16. If the consumer's balance exceeded
the credit limit on February 16, the creditor could impose the
penalty rate on that date. However, a creditor could not apply the
penalty rate if the consumer's balance did not exceed the new credit
limit on February 16, even if the consumer's balance had exceeded
the new credit limit on several dates between January 1 and February
15. If the consumer's balance did not exceed the new credit limit on
February 16 but the consumer conducted a transaction on February 17
that caused the balance to exceed the new credit limit, the general
rule in Sec. 1026.9(g)(1)(ii) would apply and the creditor would be
required to give an additional 45 days' notice prior to imposition
of the penalty rate (but under these circumstances the consumer
would have no ability to cure the over-the-limit balance in order to
avoid penalty pricing).
9(h) Consumer Rejection of Certain Significant Changes in Terms
1. Circumstances in which Sec. 1026.9(h) does not apply.
Section 1026.9(h) applies when Sec. 1026.9(c)(2)(iv)(B) requires
disclosure of the consumer's right to reject a significant change to
an account term. Thus, for example, Sec. 1026.9(h) does not apply
to changes to the terms of home equity plans subject to the
requirements of Sec. 1026.40 that are accessible by a credit or
charge card because Sec. 1026.9(c)(2) does not apply to such plans.
Similarly, Sec. 1026.9(h) does not apply in the following
circumstances because Sec. 1026.9(c)(2)(iv)(B) does not require
disclosure of the right to reject in those circumstances: (i) An
increase in the required minimum periodic payment; (ii) a change in
an annual percentage rate applicable to a consumer's account (such
as changing the margin or index for calculating a variable rate,
changing from a variable rate to a non-variable rate, or changing
from a non-variable rate to a variable rate); (iii) a change in the
balance computation method necessary to comply with Sec. 1026.54;
and (iv) when the change results from the creditor not receiving the
consumer's required minimum periodic payment within 60 days after
the due date for that payment.
9(h)(1) Right To Reject
1. Reasonable requirements for submission of rejections. A
creditor may establish reasonable requirements for the submission of
rejections pursuant to Sec. 1026.9(h)(1). For example:
i. It would be reasonable for a creditor to require that
rejections be made by the primary account holder and that the
consumer identify the account number.
ii. It would be reasonable for a creditor to require that
rejections be made only using the toll-free telephone number
disclosed pursuant to Sec. 1026.9(c). It would also be reasonable
for a creditor to designate additional channels for the submission
of rejections (such as an address for rejections submitted by mail)
so long as the creditor does not require that rejections be
submitted through such additional channels.
iii. It would be reasonable for a creditor to require that
rejections be received before the effective date disclosed pursuant
to Sec. 1026.9(c) and to treat the account as not subject to Sec.
1026.9(h) if a rejection is received on or after that date. It would
not, however, be reasonable to require that rejections be submitted
earlier than the day before the effective date. If a creditor is
unable to process all rejections received before the effective date,
the creditor may delay implementation of the change in terms until
all rejections have been processed. In the alternative, the creditor
could implement the change on the effective date and then, on any
account for which a timely rejection was received, reverse the
change and remove or credit any interest charges or fees imposed as
a result of the change. For example, if the effective date for a
change in terms is June 15 and the creditor cannot process all
rejections received by telephone on June 14 until June 16, the
creditor may delay imposition of the change until June 17.
Alternatively, the creditor could implement
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the change for all affected accounts on June 15 and then, once all
rejections have been processed, return any account for which a
timely rejection was received to the prior terms and ensure that the
account is not assessed any additional interest or fees as a result
of the change or that the account is credited for such interest or
fees.
2. Use of account following provision of notice. A consumer does
not waive or forfeit the right to reject a significant change in
terms by using the account for transactions prior to the effective
date of the change. Similarly, a consumer does not revoke a
rejection by using the account for transactions after the rejection
is received.
Paragraph 9(h)(2)(ii)
1. Termination or suspension of credit availability. Section
1026.9(h)(2)(ii) does not prohibit a creditor from terminating or
suspending credit availability as a result of the consumer's
rejection of a significant change in terms.
2. Solely as a result of rejection. A creditor is prohibited
from imposing a fee or charge or treating an account as in default
solely as a result of the consumer's rejection of a significant
change in terms. For example, if credit availability is terminated
or suspended as a result of the consumer's rejection of a
significant change in terms, a creditor is prohibited from imposing
a periodic fee that was not charged before the consumer rejected the
change (such as a closed account fee). See also comment 55(d)-1.
However, regardless of whether credit availability is terminated or
suspended as a result of the consumer's rejection, a creditor is not
prohibited from continuing to charge a periodic fee that was charged
before the rejection. Similarly, a creditor that charged a fee for
late payment before a change was rejected is not prohibited from
charging that fee after rejection of the change.
Paragraph 9(h)(2)(iii)
1. Relevant date for repayment methods. Once a consumer has
rejected a significant change in terms, Sec. 1026.9(h)(2)(iii)
prohibits the creditor from requiring repayment of the balance on
the account using a method that is less beneficial to the consumer
than one of the methods listed in Sec. 1026.55(c)(2). When applying
the methods listed in Sec. 1026.55(c)(2) pursuant to Sec.
1026.9(h)(2)(iii), a creditor may utilize the date on which the
creditor was notified of the rejection or a later date (such as the
date on which the change would have gone into effect but for the
rejection). For example, assume that on April 16 a creditor provides
a notice pursuant to Sec. 1026.9(c) informing the consumer that the
monthly maintenance fee for the account will increase effective June
1. The notice also states that the consumer may reject the increase
by calling a specified toll-free telephone number before June 1 but
that, if the consumer does so, credit availability for the account
will be terminated. On May 5, the consumer calls the toll-free
number and exercises the right to reject. If the creditor chooses to
establish a five-year amortization period for the balance on the
account consistent with Sec. 1026.55(c)(2)(ii), that period may
begin no earlier than the date on which the creditor was notified of
the rejection (May 5). However, the creditor may also begin the
amortization period on the date on which the change would have gone
into effect but for the rejection (June 1).
2. Balance on the account. i. In general. When applying the
methods listed in Sec. 1026.55(c)(2) pursuant to Sec.
1026.9(h)(2)(iii), the provisions in Sec. 1026.55(c)(2) and the
guidance in the commentary to Sec. 1026.55(c)(2) regarding
protected balances also apply to a balance on the account subject to
Sec. 1026.9(h)(2)(iii). If a creditor terminates or suspends credit
availability based on a consumer's rejection of a significant change
in terms, the balance on the account that is subject to Sec.
1026.9(h)(2)(iii) is the balance at the end of the day on which
credit availability is terminated or suspended. However, if a
creditor does not terminate or suspend credit availability based on
the consumer's rejection, the balance on the account subject to
Sec. 1026.9(h)(2)(iii) is the balance at the end of the day on
which the creditor was notified of the rejection or, at the
creditor's option, a later date.
ii. Example. Assume that on June 16 a creditor provides a notice
pursuant to Sec. 1026.9(c) informing the consumer that the annual
fee for the account will increase effective August 1. The notice
also states that the consumer may reject the increase by calling a
specified toll-free telephone number before August 1 but that, if
the consumer does so, credit availability for the account will be
terminated. On July 20, the account has a purchase balance of $1,000
and the consumer calls the toll-free number and exercises the right
to reject. On July 22, a $200 purchase is charged to the account. If
the creditor terminates credit availability on July 25 as a result
of the rejection, the balance subject to the repayment limitations
in Sec. 1026.9(h)(2)(iii) is the $1,200 purchase balance at the end
of the day on July 25. However, if the creditor does not terminate
credit availability as a result of the rejection, the balance
subject to the repayment limitations in Sec. 1026.9(h)(2)(iii) is
the $1,000 purchase balance at the end of the day on the date the
creditor was notified of the rejection (July 20), although the
creditor may, at its option, treat the $200 purchase as part of the
balance subject to Sec. 1026.9(h)(2)(iii).
9(h)(3) Exception
1. Examples. Section 1026.9(h)(3) provides that Sec. 1026.9(h)
does not apply when the creditor has not received the consumer's
required minimum periodic payment within 60 days after the due date
for that payment. The following examples illustrate the application
of this exception:
i. Account becomes more than 60 days delinquent before notice
provided. Assume that a credit card account is opened on January 1
of year one and that the payment due date for the account is the
fifteenth day of the month. On June 20 of year two, the creditor has
not received the required minimum periodic payments due on April 15,
May 15, and June 15. On June 20, the creditor provides a notice
pursuant to Sec. 1026.9(c) informing the consumer that a monthly
maintenance fee of $10 will be charged beginning on August 4.
However, Sec. 1026.9(c)(2)(iv)(B) does not require the creditor to
notify the consumer of the right to reject because the creditor has
not received the April 15 minimum payment within 60 days after the
due date. Furthermore, the exception in Sec. 1026.9(h)(3) applies
and the consumer may not reject the fee.
ii. Account becomes more than 60 days delinquent after
rejection. Assume that a credit card account is opened on January 1
of year one and that the payment due date for the account is the
fifteenth day of the month. On April 20 of year two, the creditor
has not received the required minimum periodic payment due on April
15. On April 20, the creditor provides a notice pursuant to Sec.
1026.9(c) informing the consumer that an annual fee of $100 will be
charged beginning on June 4. The notice further states that the
consumer may reject the fee by calling a specified toll-free
telephone number before June 4 but that, if the consumer does so,
credit availability for the account will be terminated. On May 5,
the consumer calls the toll-free telephone number and rejects the
fee. Section 1026.9(h)(2)(i) prohibits the creditor from charging
the $100 fee to the account. If, however, the creditor does not
receive the minimum payments due on April 15 and May 15 by June 15,
Sec. 1026.9(h)(3) permits the creditor to charge the $100 fee. The
creditor must provide a second notice of the fee pursuant to Sec.
1026.9(c), but Sec. 1026.9(c)(2)(iv)(B) does not require the
creditor to disclose the right to reject and Sec. 1026.9(h)(3) does
not allow the consumer to reject the fee. Similarly, the
restrictions in Sec. 1026.9(h)(2)(ii) and (iii) no longer apply.
Section 1026.10--Payments
10(a) General Rule.
1. Crediting date. Section 1026.10(a) does not require the
creditor to post the payment to the consumer's account on a
particular date; the creditor is only required to credit the payment
as of the date of receipt.
2. Date of receipt. The ``date of receipt'' is the date that the
payment instrument or other means of completing the payment reaches
the creditor. For example:
i. Payment by check is received when the creditor gets it, not
when the funds are collected.
ii. In a payroll deduction plan in which funds are deposited to
an asset account held by the creditor, and from which payments are
made periodically to an open-end credit account, payment is received
on the date when it is debited to the asset account (rather than on
the date of the deposit), provided the payroll deduction method is
voluntary and the consumer retains use of the funds until the
contractual payment date.
iii. If the consumer elects to have payment made by a third
party payor such as a financial institution, through a preauthorized
payment or telephone bill-payment arrangement, payment is received
when the creditor gets the third party payor's check or other
transfer medium, such as an electronic fund transfer, as long as the
payment meets the creditor's requirements as specified under Sec.
1026.10(b).
iv. Payment made via the creditor's Web site is received on the
date on which the consumer authorizes the creditor to effect the
payment, even if the consumer gives the instruction authorizing that
payment in
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advance of the date on which the creditor is authorized to effect
the payment. If the consumer authorizes the creditor to effect the
payment immediately, but the consumer's instruction is received
after 5 p.m. or any later cut-off time specified by the creditor,
the date on which the consumer authorizes the creditor to effect the
payment is deemed to be the next business day.
10(b) Specific Requirements for Payments
1. Payment by electronic fund transfer. A creditor may be
prohibited from specifying payment by preauthorized electronic fund
transfer. (See Section 913 of the Electronic Fund Transfer Act.)
2. Payment methods promoted by creditor. If a creditor promotes
a specific payment method, any payments made via that method (prior
to any cut-off time specified by the creditor, to the extent
permitted by Sec. 1026.10(b)(2)) are generally conforming payments
for purposes of Sec. 1026.10(b). For example:
i. If a creditor promotes electronic payment via its Web site
(such as by disclosing on the Web site itself that payments may be
made via the Web site), any payments made via the creditor's Web
site prior to the creditor's specified cut-off time, if any, would
generally be conforming payments for purposes of Sec. 1026.10(b).
ii. If a creditor promotes payment by telephone (for example, by
including the option to pay by telephone in a menu of options
provided to consumers at a toll-free number disclosed on its
periodic statement), payments made by telephone would generally be
conforming payments for purposes of Sec. 1026.10(b).
iii. If a creditor promotes in-person payments, for example by
stating in an advertisement that payments may be made in person at
its branch locations, such in-person payments made at a branch or
office of the creditor generally would be conforming payments for
purposes of Sec. 1026.10(b).
iv. If a creditor promotes that payments may be made through an
unaffiliated third party, such as by disclosing the Web site address
of that third party on the periodic statement, payments made via
that third party's Web site generally would be conforming payments
for purposes of Sec. 1026.10(b). In contrast, if a customer service
representative of the creditor confirms to a consumer that payments
may be made via an unaffiliated third party, but the creditor does
not otherwise promote that method of payment, Sec. 1026.10(b)
permits the creditor to treat payments made via such third party as
nonconforming payments in accordance with Sec. 1026.10(b)(4).
3. Acceptance of nonconforming payments. If the creditor accepts
a nonconforming payment (for example, payment mailed to a branch
office, when the creditor had specified that payment be sent to a
different location), finance charges may accrue for the period
between receipt and crediting of payments.
4. Implied guidelines for payments. In the absence of specified
requirements for making payments (see Sec. 1026.10(b)):
i. Payments may be made at any location where the creditor
conducts business.
ii. Payments may be made any time during the creditor's normal
business hours.
iii. Payment may be by cash, money order, draft, or other
similar instrument in properly negotiable form, or by electronic
fund transfer if the creditor and consumer have so agreed.
5. Payments made at point of sale. If a card issuer that is a
financial institution issues a credit card under an open-end (not
home-secured) consumer credit plan that can be used only for
transactions with a particular merchant or merchants or a credit
card that is cobranded with the name of a particular merchant or
merchants, and a consumer is able to make a payment on that credit
card account at a retail location maintained by such a merchant,
that retail location is not considered to be a branch or office of
the card issuer for purposes of Sec. 1026.10(b)(3).
6. In-person payments on credit card accounts. For purposes of
Sec. 1026.10(b)(3), payments made in person at a branch or office
of a financial institution include payments made with the direct
assistance of, or to, a branch or office employee, for example a
teller at a bank branch. A payment made at the bank branch without
the direct assistance of a branch or office employee, for example a
payment placed in a branch or office mail slot, is not a payment
made in person for purposes of Sec. 1026.10(b)(3).
7. In-person payments at affiliate of card issuer. If an
affiliate of a card issuer that is a financial institution shares a
name with the card issuer, such as ``ABC,'' and accepts in-person
payments on the card issuer's credit card accounts, those payments
are subject to the requirements of Sec. 1026.10(b)(3).
10(d) Crediting of Payments When Creditor Does Not Receive or Accept
Payments on Due Date
1. Example. A day on which the creditor does not receive or
accept payments by mail may occur, for example, if the U.S. Postal
Service does not deliver mail on that date.
2. Treating a payment as late for any purpose. See comment
5(b)(2)(ii)-2 for guidance on treating a payment as late for any
purpose. When an account is not eligible for a grace period,
imposing a finance charge due to a periodic interest rate does not
constitute treating a payment as late.
10(e) Limitations on Fees Related to Method of Payment
1. Separate fee to allow consumers to make a payment. For
purposes of Sec. 1026.10(e), the term ``separate fee'' means a fee
imposed on a consumer for making a payment to the consumer's
account. A fee or other charge imposed if payment is made after the
due date, such as a late fee or finance charge, is not a separate
fee to allow consumers to make a payment for purposes of Sec.
1026.10(e).
2. Expedited. For purposes of Sec. 1026.10(e), the term
``expedited'' means crediting a payment the same day or, if the
payment is received after any cut-off time established by the
creditor, the next business day.
3. Service by a customer service representative. Service by a
customer service representative of a creditor means any payment made
to the consumer's account with the assistance of a live
representative or agent of the creditor, including those made in
person, on the telephone, or by electronic means. A customer service
representative does not include automated means of making payment
that do not involve a live representative or agent of the creditor,
such as a voice response unit or interactive voice response system.
Service by a customer service representative includes any payment
transaction which involves the assistance of a live representative
or agent of the creditor, even if an automated system is required
for a portion of the transaction.
4. Creditor. For purposes of Sec. 1026.10(e), the term
``creditor'' includes a third party that collects, receives, or
processes payments on behalf of a creditor. For example:
i. Assume that a creditor uses a service provider to receive,
collect, or process on the creditor's behalf payments made through
the creditor's Web site or made through an automated telephone
payment service. In these circumstances, the service provider would
be considered a creditor for purposes of paragraph (e).
ii. Assume that a consumer pays a fee to a money transfer or
payment service in order to transmit a payment to the creditor on
the consumer's behalf. In these circumstances, the money transfer or
payment service would not be considered a creditor for purposes of
paragraph (e).
iii. Assume that a consumer has a checking account at a
depository institution. The consumer makes a payment to the creditor
from the checking account using a bill payment service provided by
the depository institution. In these circumstances, the depository
institution would not be considered a creditor for purposes of
paragraph (e).
10(f) Changes by Card Issuer
1. Address for receiving payment. For purposes of Sec.
1026.10(f), ``address for receiving payment'' means a mailing
address for receiving payment, such as a post office box, or the
address of a branch or office at which payments on credit card
accounts are accepted.
2. Materiality. For purposes of Sec. 1026.10(f), a ``material
change'' means any change in the address for receiving payment or
procedures for handling cardholder payments which causes a material
delay in the crediting of a payment. ``Material delay'' means any
delay in crediting payment to a consumer's account which would
result in a late payment and the imposition of a late fee or finance
charge. A delay in crediting a payment which does not result in a
late fee or finance charge would be immaterial.
3. Safe harbor. i. General. A card issuer may elect not to
impose a late fee or finance charge on a consumer's account for the
60-day period following a change in address for receiving payment or
procedures for handling cardholder payments which could reasonably
be expected to cause a material delay in crediting of a payment to
the consumer's account. For purposes of Sec. 1026.10(f), a late fee
or finance charge is not imposed if the fee or charge is waived or
removed, or an amount equal to the fee or charge is credited to the
account.
ii. Retail location. For a material change in the address of a
retail location or procedures for handling cardholder payments at a
retail
[[Page 79955]]
location, a card issuer may impose a late fee or finance charge on a
consumer's account for a late payment during the 60-day period
following the date on which the change took effect. However, if a
card issuer is notified by a consumer no later than 60 days after
the card issuer transmitted the first periodic statement that
reflects the late fee or finance charge for a late payment that the
late payment was caused by such change, the card issuer must waive
or remove any late fee or finance charge, or credit an amount equal
to any late fee or finance charge, imposed on the account during the
60-day period following the date on which the change took effect.
4. Examples. i. A card issuer changes the mailing address for
receiving payments by mail from a five-digit postal zip code to a
nine-digit postal zip code. A consumer mails a payment using the
five-digit postal zip code. The change in mailing address is
immaterial and it does not cause a delay. Therefore, a card issuer
may impose a late fee or finance charge for a late payment on the
account.
ii. A card issuer changes the mailing address for receiving
payments by mail from one post office box number to another post
office box number. For a 60-day period following the change, the
card issuer continues to use both post office box numbers for the
collection of payments received by mail. The change in mailing
address would not cause a material delay in crediting a payment
because payments would be received and credited at both addresses.
Therefore, a card issuer may impose a late fee or finance charge for
a late payment on the account during the 60-day period following the
date on which the change took effect.
iii. Same facts as paragraph ii above, except the prior post
office box number is no longer valid and mail sent to that address
during the 60-day period following the change would be returned to
sender. The change in mailing address is material and the change
could cause a material delay in the crediting of a payment because a
payment sent to the old address could be delayed past the due date.
If, as a result, a consumer makes a late payment on the account
during the 60-day period following the date on which the change took
effect, a card issuer may not impose any late fee or finance charge
for the late payment.
iv. A card issuer permanently closes a local branch office at
which payments are accepted on credit card accounts. The permanent
closing of the local branch office is a material change in address
for receiving payment. Relying on the safe harbor, the card issuer
elects not to impose a late fee or finance charge for the 60-day
period following the local branch closing for late payments on
consumer accounts which the issuer reasonably determines are
associated with the local branch and which could reasonably be
expected to have been caused by the branch closing.
v. A consumer has elected to make payments automatically to a
credit card account, such as through a payroll deduction plan or a
third party payor's preauthorized payment arrangement. A card issuer
changes the procedures for handling such payments and as a result, a
payment is delayed and not credited to the consumer's account before
the due date. In these circumstances, a card issuer may not impose
any late fee or finance charge during the 60-day period following
the date on which the change took effect for a late payment on the
account.
vi. A card issuer no longer accepts payments in person at a
retail location as a conforming method of payment, which is a
material change in the procedures for handling cardholder payment.
In the 60-day period following the date on which the change took
effect, a consumer attempts to make a payment in person at a retail
location of a card issuer. As a result, the consumer makes a late
payment and the issuer charges a late fee on the consumer's account.
The consumer notifies the card issuer of the late fee for the late
payment which was caused by the material change. In order to comply
with Sec. 1026.10(f), the card issuer must waive or remove the late
fee or finance charge, or credit the consumer's account in an amount
equal to the late fee or finance charge.
5. Finance charge due to periodic interest rate. When an account
is not eligible for a grace period, imposing a finance charge due to
a periodic interest rate does not constitute imposition of a finance
charge for a late payment for purposes of Sec. 1026.10(f).
Section 1026.11--Treatment of Credit Balances; Account Termination
11(a) Credit Balances
1. Timing of refund. The creditor may also fulfill its
obligations under Sec. 1026.11 by:
i. Refunding any credit balance to the consumer immediately.
ii. Refunding any credit balance prior to receiving a written
request (under Sec. 1026.11(a)(2)) from the consumer.
iii. Refunding any credit balance upon the consumer's oral or
electronic request.
iv. Making a good faith effort to refund any credit balance
before 6 months have passed. If that attempt is unsuccessful, the
creditor need not try again to refund the credit balance at the end
of the 6-month period.
2. Amount of refund. The phrases any part of the remaining
credit balance in Sec. 1026.11(a)(2) and any part of the credit
balance remaining in the account in Sec. 1026.11(a)(3) mean the
amount of the credit balance at the time the creditor is required to
make the refund. The creditor may take into consideration
intervening purchases or other debits to the consumer's account
(including those that have not yet been reflected on a periodic
statement) that decrease or eliminate the credit balance.
Paragraph 11(a)(2)
1. Written requests--standing orders. The creditor is not
required to honor standing orders requesting refunds of any credit
balance that may be created on the consumer's account.
Paragraph 11(a)(3)
1. Good faith effort to refund. The creditor must take positive
steps to return any credit balance that has remained in the account
for over 6 months. This includes, if necessary, attempts to trace
the consumer through the consumer's last known address or telephone
number, or both.
2. Good faith effort unsuccessful. Section 1026.11 imposes no
further duties on the creditor if a good faith effort to return the
balance is unsuccessful. The ultimate disposition of the credit
balance (or any credit balance of $1 or less) is to be determined
under other applicable law.
11(b) Account Termination
Paragraph 11(b)(1)
1. Expiration date. The credit agreement determines whether or
not an open-end plan has a stated expiration (maturity) date.
Creditors that offer accounts with no stated expiration date are
prohibited from terminating those accounts solely because a consumer
does not incur a finance charge, even if credit cards or other
access devices associated with the account expire after a stated
period. Creditors may still terminate such accounts for inactivity
consistent with Sec. 1026.11(b)(2).
11(c) Timely Settlement of Estate Debts
1. Administrator of an estate. For purposes of Sec. 1026.11(c),
the term ``administrator'' means an administrator, executor, or any
personal representative of an estate who is authorized to act on
behalf of the estate.
2. Examples. The following are examples of reasonable procedures
that satisfy this rule:
i. A card issuer may decline future transactions and terminate
the account upon receiving reasonable notice of the consumer's
death.
ii. A card issuer may credit the account for fees and charges
imposed after the date of receiving reasonable notice of the
consumer's death.
iii. A card issuer may waive the estate's liability for all
charges made to the account after receiving reasonable notice of the
consumer's death.
iv. A card issuer may authorize an agent to handle matters in
accordance with the requirements of this rule.
v. A card issuer may require administrators of an estate to
provide documentation indicating authority to act on behalf of the
estate.
vi. A card issuer may establish or designate a department,
business unit, or communication channel for administrators, such as
a specific mailing address or toll-free number, to handle matters in
accordance with the requirements of this rule.
vii. A card issuer may direct administrators, who call a general
customer service toll-free number or who send correspondence by mail
to an address for general correspondence, to an appropriate customer
service representative, department, business unit, or communication
channel to handle matters in accordance with the requirements of
this rule.
2. Request by an administrator of an estate. A card issuer may
receive a request for the amount of the balance on a deceased
consumer's account in writing or by telephone call from the
administrator of an estate. If a request is made in writing, such as
by mail, the request is received on the date the card issuer
receives the correspondence.
3. Timely statement of balance. A card issuer must disclose the
balance on a
[[Page 79956]]
deceased consumer's account, upon request by the administrator of
the decedent's estate. A card issuer may provide the amount, if any,
by a written statement or by telephone. This does not preclude a
card issuer from providing the balance amount to appropriate
persons, other than the administrator, such as the spouse or a
relative of the decedent, who indicate that they may pay any
balance. This provision does not relieve card issuers of the
requirements to provide a periodic statement, under Sec.
1026.5(b)(2). A periodic statement, under Sec. 1026.5(b)(2), may
satisfy the requirements of Sec. 1026.11(c)(2), if provided within
30 days of receiving a request by an administrator of the estate.
4. Imposition of fees and interest charges. Section
1026.11(c)(3) does not prohibit a card issuer from imposing fees and
finance charges due to a periodic interest rate based on balances
for days that precede the date on which the card issuer receives a
request pursuant to Sec. 1026.11(c)(2). For example, if the last
day of the billing cycle is June 30 and the card issuer receives a
request pursuant to Sec. 1026.11(c)(2) on June 25, the card issuer
may charge interest that accrued prior to June 25.
5. Example. A card issuer receives a request from an
administrator for the amount of the balance on a deceased consumer's
account on March 1. The card issuer discloses to the administrator
on March 25 that the balance is $1,000. If the card issuer receives
payment in full of the $1,000 on April 24, the card issuer must
waive or rebate any additional interest that accrued on the $1,000
balance between March 25 and April 24. If the card issuer receives a
payment of $1,000 on April 25, the card issuer is not required to
waive or rebate interest charges on the $1,000 balance in respect of
the period between March 25 and April 25. If the card issuer
receives a partial payment of $500 on April 24, the card issuer is
not required to waive or rebate interest charges on the $1,000
balance in respect of the period between March 25 and April 25.
6. Application to joint accounts. A card issuer may impose fees
and charges on an account of a deceased consumer if a joint
accountholder remains on the account. If only an authorized user
remains on the account of a deceased consumer, however, then a card
issuer may not impose fees and charges.
Section 1026.12--Special Credit Card Provisions
1. Scope. Sections 1026.12(a) and (b) deal with the issuance and
liability rules for credit cards, whether the card is intended for
consumer, business, or any other purposes. Sections 1026.12(a) and
(b) are exceptions to the general rule that the regulation applies
only to consumer credit. (See Sec. Sec. 1026.1 and 1026.3.)
2. Definition of ``accepted credit card''. For purposes of this
section, ``accepted credit card'' means any credit card that a
cardholder has requested or applied for and received, or has signed,
used, or authorized another person to use to obtain credit. Any
credit card issued as a renewal or substitute in accordance with
Sec. 1026.12(a) becomes an accepted credit card when received by
the cardholder.
12(a) Issuance of Credit Cards
Paragraph 12(a)(1)
1. Explicit request. A request or application for a card must be
explicit. For example, a request for an overdraft plan tied to a
checking account does not constitute an application for a credit
card with overdraft checking features.
2. Addition of credit features. If the consumer has a non-credit
card, the addition of credit features to the card (for example, the
granting of overdraft privileges on a checking account when the
consumer already has a check guarantee card) constitutes issuance of
a credit card.
3. Variance of card from request. The request or application
need not correspond exactly to the card that is issued. For example:
i. The name of the card requested may be different when issued.
ii. The card may have features in addition to those reflected in
the request or application.
4. Permissible form of request. The request or application may
be oral (in response to a telephone solicitation by a card issuer,
for example) or written.
5. Time of issuance. A credit card may be issued in response to
a request made before any cards are ready for issuance (for example,
if a new program is established), even if there is some delay in
issuance.
6. Persons to whom cards may be issued. A card issuer may issue
a credit card to the person who requests it, and to anyone else for
whom that person requests a card and who will be an authorized user
on the requester's account. In other words, cards may be sent to
consumer A on A's request, and also (on A's request) to consumers B
and C, who will be authorized users on A's account. In these
circumstances, the following rules apply:
i. The additional cards may be imprinted in either A's name or
in the names of B and C.
ii. No liability for unauthorized use (by persons other than B
and C), not even the $50, may be imposed on B or C since they are
merely users and not cardholders as that term is defined in Sec.
1026.2 and used in Sec. 1026.12(b); of course, liability of up to
$50 for unauthorized use of B's and C's cards may be imposed on A.
iii. Whether B and C may be held liable for their own use, or on
the account generally, is a matter of state or other applicable law.
7. Issuance of non-credit cards. i. General. Under Sec.
1026.12(a)(1), a credit card cannot be issued except in response to
a request or an application. (See comment 2(a)(15)-2 for examples of
cards or devices that are and are not credit cards.) A non-credit
card may be sent on an unsolicited basis by an issuer that does not
propose to connect the card to any credit plan; a credit feature may
be added to a previously issued non-credit card only upon the
consumer's specific request.
ii. Examples. A purchase-price discount card may be sent on an
unsolicited basis by an issuer that does not propose to connect the
card to any credit plan. An issuer demonstrates that it proposes to
connect the card to a credit plan by, for example, including
promotional materials about credit features or account agreements
and disclosures required by Sec. 1026.6. The issuer will violate
the rule against unsolicited issuance if, for example, at the time
the card is sent a credit plan can be accessed by the card or the
recipient of the unsolicited card has been preapproved for credit
that the recipient can access by contacting the issuer and
activating the card.
8. Unsolicited issuance of PINs. A card issuer may issue
personal identification numbers (PINs) to existing credit
cardholders without a specific request from the cardholders,
provided the PINs cannot be used alone to obtain credit. For
example, the PINs may be necessary if consumers wish to use their
existing credit cards at automated teller machines or at merchant
locations with point of sale terminals that require PINs.
Paragraph 12(a)(2)
1. Renewal. Renewal generally contemplates the regular
replacement of existing cards because of, for example, security
reasons or new technology or systems. It also includes the re-
issuance of cards that have been suspended temporarily, but does not
include the opening of a new account after a previous account was
closed.
2. Substitution--examples. Substitution encompasses the
replacement of one card with another because the underlying account
relationship has changed in some way--such as when the card issuer
has:
i. Changed its name.
ii. Changed the name of the card.
iii. Changed the credit or other features available on the
account. For example, the original card could be used to make
purchases and obtain cash advances at teller windows. The substitute
card might be usable, in addition, for obtaining cash advances
through automated teller machines. (If the substitute card
constitutes an access device, as defined in Regulation E, then the
Regulation E issuance rules would have to be followed.) The
substitution of one card with another on an unsolicited basis is not
permissible, however, where in conjunction with the substitution an
additional credit card account is opened and the consumer is able to
make new purchases or advances under both the original and the new
account with the new card. For example, if a retail card issuer
replaces its credit card with a combined retailer/bank card, each of
the creditors maintains a separate account, and both accounts can be
accessed for new transactions by use of the new credit card, the
card cannot be provided to a consumer without solicitation.
iv. Substituted a card user's name on the substitute card for
the cardholder's name appearing on the original card.
v. Changed the merchant base, provided that the new card is
honored by at least one of the persons that honored the original
card. However, unless the change in the merchant base is the
addition of an affiliate of the existing merchant base, the
substitution of a new card for another on an unsolicited basis is
not permissible where the account is inactive. A credit card cannot
be issued in these circumstances without a request or application.
For purposes of Sec. 1026.12(a), an account is inactive if no
credit has been
[[Page 79957]]
extended and if the account has no outstanding balance for the prior
24 months. (See Sec. 1026.11(b)(2).)
3. Substitution--successor card issuer. Substitution also occurs
when a successor card issuer replaces the original card issuer (for
example, when a new card issuer purchases the accounts of the
original issuer and issues its own card to replace the original
one). A permissible substitution exists even if the original issuer
retains the existing receivables and the new card issuer acquires
the right only to future receivables, provided use of the original
card is cut off when use of the new card becomes possible.
4. Substitution--non-credit-card plan. A credit card that
replaces a retailer's open-end credit plan not involving a credit
card is not considered a substitute for the retailer's plan--even if
the consumer used the retailer's plan. A credit card cannot be
issued in these circumstances without a request or application.
5. One-for-one rule. An accepted card may be replaced by no more
than one renewal or substitute card. For example, the card issuer
may not replace a credit card permitting purchases and cash advances
with two cards, one for the purchases and another for the cash
advances.
6. One-for-one rule--exceptions. The regulation does not
prohibit the card issuer from:
i. Replacing a debit/credit card with a credit card and another
card with only debit functions (or debit functions plus an
associated overdraft capability), since the latter card could be
issued on an unsolicited basis under Regulation E.
ii. Replacing an accepted card with more than one renewal or
substitute card, provided that:
A. No replacement card accesses any account not accessed by the
accepted card;
B. For terms and conditions required to be disclosed under Sec.
1026.6, all replacement cards are issued subject to the same terms
and conditions, except that a creditor may vary terms for which no
change in terms notice is required under Sec. 1026.9(c); and
C. Under the account's terms the consumer's total liability for
unauthorized use with respect to the account does not increase.
7. Methods of terminating replaced card. The card issuer need
not physically retrieve the original card, provided the old card is
voided in some way, for example:
i. The issuer includes with the new card a notification that the
existing card is no longer valid and should be destroyed
immediately.
ii. The original card contained an expiration date.
iii. The card issuer, in order to preclude use of the card,
reprograms computers or issues instructions to authorization
centers.
8. Incomplete replacement. If a consumer has duplicate credit
cards on the same account (Card A--one type of bank credit card, for
example), the card issuer may not replace the duplicate cards with
one Card A and one Card B (Card B--another type of bank credit card)
unless the consumer requests Card B.
9. Multiple entities. Where multiple entities share
responsibilities with respect to a credit card issued by one of
them, the entity that issued the card may replace it on an
unsolicited basis, if that entity terminates the original card by
voiding it in some way, as described in comment 12(a)(2)-7. The
other entity or entities may not issue a card on an unsolicited
basis in these circumstances.
12(b) Liability of Cardholder for Unauthorized Use
1. Meaning of cardholder. For purposes of this provision,
cardholder includes any person (including organizations) to whom a
credit card is issued for any purpose, including business. When a
corporation is the cardholder, required disclosures should be
provided to the corporation (as opposed to an employee user).
2. Imposing liability. A card issuer is not required to impose
liability on a cardholder for the unauthorized use of a credit card;
if the card issuer does not seek to impose liability, the issuer
need not conduct any investigation of the cardholder's claim.
3. Reasonable investigation. If a card issuer seeks to impose
liability when a claim of unauthorized use is made by a cardholder,
the card issuer must conduct a reasonable investigation of the
claim. In conducting its investigation, the card issuer may
reasonably request the cardholder's cooperation. The card issuer may
not automatically deny a claim based solely on the cardholder's
failure or refusal to comply with a particular request, including
providing an affidavit or filing a police report; however, if the
card issuer otherwise has no knowledge of facts confirming the
unauthorized use, the lack of information resulting from the
cardholder's failure or refusal to comply with a particular request
may lead the card issuer reasonably to terminate the investigation.
The procedures involved in investigating claims may differ, but
actions such as the following represent steps that a card issuer may
take, as appropriate, in conducting a reasonable investigation:
i. Reviewing the types or amounts of purchases made in relation
to the cardholder's previous purchasing pattern.
ii. Reviewing where the purchases were delivered in relation to
the cardholder's residence or place of business.
iii. Reviewing where the purchases were made in relation to
where the cardholder resides or has normally shopped.
iv. Comparing any signature on credit slips for the purchases to
the signature of the cardholder or an authorized user in the card
issuer's records, including other credit slips.
v. Requesting documentation to assist in the verification of the
claim.
vi. Requiring a written, signed statement from the cardholder or
authorized user. For example, the creditor may include a signature
line on a billing rights form that the cardholder may send in to
provide notice of the claim. However, a creditor may not require the
cardholder to provide an affidavit or signed statement under penalty
of perjury as part of a reasonable investigation.
vii. Requesting a copy of a police report, if one was filed.
viii. Requesting information regarding the cardholder's
knowledge of the person who allegedly used the card or of that
person's authority to do so.
4. Checks that access a credit card account. The liability
provisions for unauthorized use under Sec. 1026.12(b)(1) only apply
to transactions involving the use of a credit card, and not if an
unauthorized transaction is made using a check accessing the credit
card account. However, the billing error provisions in Sec. 1026.13
apply to both of these types of transactions.
12(b)(1)(ii) Limitation on Amount
1. Meaning of authority. Section 1026.12(b)(1)(i) defines
unauthorized use in terms of whether the user has actual, implied,
or apparent authority. Whether such authority exists must be
determined under state or other applicable law.
2. Liability limits--dollar amounts. As a general rule, the
cardholder's liability for a series of unauthorized uses cannot
exceed either $50 or the value obtained through the unauthorized use
before the card issuer is notified, whichever is less.
3. Implied or apparent authority. If a cardholder furnishes a
credit card and grants authority to make credit transactions to a
person (such as a family member or coworker) who exceeds the
authority given, the cardholder is liable for the transaction(s)
unless the cardholder has notified the creditor that use of the
credit card by that person is no longer authorized.
4. Credit card obtained through robbery or fraud. An
unauthorized use includes, but is not limited to, a transaction
initiated by a person who has obtained the credit card from the
consumer, or otherwise initiated the transaction, through fraud or
robbery.
12(b)(2) Conditions of Liability
1. Issuer's option not to comply. A card issuer that chooses not
to impose any liability on cardholders for unauthorized use need not
comply with the disclosure and identification requirements discussed
in Sec. 1026.12(b)(2).
Paragraph 12(b)(2)(ii)
1. Disclosure of liability and means of notifying issuer. The
disclosures referred to in Sec. 1026.12(b)(2)(ii) may be given, for
example, with the initial disclosures under Sec. 1026.6, on the
credit card itself, or on periodic statements. They may be given at
any time preceding the unauthorized use of the card.
2. Meaning of ``adequate notice.'' For purposes of this
provision, ``adequate notice'' means a printed notice to a
cardholder that sets forth clearly the pertinent facts so that the
cardholder may reasonably be expected to have noticed it and
understood its meaning. The notice may be given by any means
reasonably assuring receipt by the cardholder.
Paragraph 12(b)(2)(iii)
1. Means of identifying cardholder or user. To fulfill the
condition set forth in Sec. 1026.12(b)(2)(iii), the issuer must
provide some method whereby the cardholder or the authorized user
can be identified. This could include, for example, a signature,
photograph, or fingerprint on the card or other biometric means, or
electronic or mechanical confirmation.
2. Identification by magnetic strip. Unless a magnetic strip (or
similar device not
[[Page 79958]]
readable without physical aids) must be used in conjunction with a
secret code or the like, it would not constitute sufficient means of
identification. Sufficient identification also does not exist if a
``pool'' or group card, issued to a corporation and signed by a
corporate agent who will not be a user of the card, is intended to
be used by another employee for whom no means of identification is
provided.
3. Transactions not involving card. The cardholder may not be
held liable under Sec. 1026.12(b) when the card itself (or some
other sufficient means of identification of the cardholder) is not
presented. Since the issuer has not provided a means to identify the
user under these circumstances, the issuer has not fulfilled one of
the conditions for imposing liability. For example, when merchandise
is ordered by telephone or the Internet by a person without
authority to do so, using a credit card account number by itself or
with other information that appears on the card (for example, the
card expiration date and a 3- or 4-digit cardholder identification
number), no liability may be imposed on the cardholder.
12(b)(3) Notification to Card Issuer
1. How notice must be provided. Notice given in a normal
business manner--for example, by mail, telephone, or personal
visit--is effective even though it is not given to, or does not
reach, some particular person within the issuer's organization.
Notice also may be effective even though it is not given at the
address or phone number disclosed by the card issuer under Sec.
1026.12(b)(2)(ii).
2. Who must provide notice. Notice of loss, theft, or possible
unauthorized use need not be initiated by the cardholder. Notice is
sufficient so long as it gives the ``pertinent information'' which
would include the name or card number of the cardholder and an
indication that unauthorized use has or may have occurred.
3. Relationship to Sec. 1026.13. The liability protections
afforded to cardholders in Sec. 1026.12 do not depend upon the
cardholder's following the error resolution procedures in Sec.
1026.13. For example, the written notification and time limit
requirements of Sec. 1026.13 do not affect the Sec. 1026.12
protections. (See also comment 12(b)-4.)
12(b)(5) Business Use of Credit Cards
1. Agreement for higher liability for business use cards. The
card issuer may not rely on Sec. 1026.12(b)(5) if the business is
clearly not in a position to provide 10 or more cards to employees
(for example, if the business has only 3 employees). On the other
hand, the issuer need not monitor the personnel practices of the
business to make sure that it has at least 10 employees at all
times.
2. Unauthorized use by employee. The protection afforded to an
employee against liability for unauthorized use in excess of the
limits set in Sec. 1026.12(b) applies only to unauthorized use by
someone other than the employee. If the employee uses the card in an
unauthorized manner, the regulation sets no restriction on the
employee's potential liability for such use.
12(c) Right of Cardholder To Assert Claims or Defenses Against Card
Issuer
1. Relationship to Sec. 1026.13. The Sec. 1026.12(c) credit
card ``holder in due course'' provision deals with the consumer's
right to assert against the card issuer a claim or defense
concerning property or services purchased with a credit card, if the
merchant has been unwilling to resolve the dispute. Even though
certain merchandise disputes, such as non-delivery of goods, may
also constitute ``billing errors'' under Sec. 1026.13, that section
operates independently of Sec. 1026.12(c). The cardholder whose
asserted billing error involves undelivered goods may institute the
error resolution procedures of Sec. 1026.13; but whether or not the
cardholder has done so, the cardholder may assert claims or defenses
under Sec. 1026.12(c). Conversely, the consumer may pay a disputed
balance and thus have no further right to assert claims and
defenses, but still may assert a billing error if notice of that
billing error is given in the proper time and manner. An assertion
that a particular transaction resulted from unauthorized use of the
card could also be both a ``defense'' and a billing error.
2. Claims and defenses assertible. Section 1026.12(c) merely
preserves the consumer's right to assert against the card issuer any
claims or defenses that can be asserted against the merchant. It
does not determine what claims or defenses are valid as to the
merchant; this determination must be made under state or other
applicable law.
3. Transactions excluded. Section 1026.12(c) does not apply to
the use of a check guarantee card or a debit card in connection with
an overdraft credit plan, or to a check guarantee card used in
connection with cash-advance checks.
4. Method of calculating the amount of credit outstanding. The
amount of the claim or defense that the cardholder may assert shall
not exceed the amount of credit outstanding for the disputed
transaction at the time the cardholder first notifies the card
issuer or the person honoring the credit card of the existence of
the claim or defense. However, when a consumer has asserted a claim
or defense against a creditor pursuant to Sec. 1026.12(c), the
creditor must apply any payment or other credit in a manner that
avoids or minimizes any reduction in the amount subject to that
claim or defense. Accordingly, to determine the amount of credit
outstanding for purposes of this section, payments and other credits
must be applied first to amounts other than the disputed
transaction.
i. For examples of how to comply with Sec. Sec. 1026.12 and
1026.53 for credit card accounts under an open-end (not home-
secured) consumer credit plan, see comment 53-3.
ii. For other types of credit card accounts, creditors may, at
their option, apply payments consistent with Sec. 1026.53 and
comment 53-3. In the alternative, payments and other credits may be
applied to: Late charges in the order of entry to the account; then
to finance charges in the order of entry to the account; and then to
any debits other than the transaction subject to the claim or
defense in the order of entry to the account. In these
circumstances, if more than one item is included in a single
extension of credit, credits are to be distributed pro rata
according to prices and applicable taxes.
12(c)(1) General Rule
1. Situations excluded and included. The consumer may assert
claims or defenses only when the goods or services are ``purchased
with the credit card.'' This could include mail, the Internet or
telephone orders, if the purchase is charged to the credit card
account. But it would exclude:
i. Use of a credit card to obtain a cash advance, even if the
consumer then uses the money to purchase goods or services. Such a
transaction would not involve ``property or services purchased with
the credit card.''
ii. The purchase of goods or services by use of a check
accessing an overdraft account and a credit card used solely for
identification of the consumer. (On the other hand, if the credit
card is used to make partial payment for the purchase and not merely
for identification, the right to assert claims or defenses would
apply to credit extended via the credit card, although not to the
credit extended on the overdraft line.)
iii. Purchases made by use of a check guarantee card in
conjunction with a cash advance check (or by cash advance checks
alone). (See comment 12(c)-3.) A cash advance check is a check that,
when written, does not draw on an asset account; instead, it is
charged entirely to an open-end credit account.
iv. Purchases effected by use of either a check guarantee card
or a debit card when used to draw on overdraft credit plans. (See
comment 12(c)-3.) The debit card exemption applies whether the card
accesses an asset account via point of sale terminals, automated
teller machines, or in any other way, and whether the card qualifies
as an ``access device'' under Regulation E or is only a paper based
debit card. If a card serves both as an ordinary credit card and
also as check guarantee or debit card, a transaction will be subject
to this rule on asserting claims and defenses when used as an
ordinary credit card, but not when used as a check guarantee or
debit card.
12(c)(2) Adverse Credit Reports Prohibited
1. Scope of prohibition. Although an amount in dispute may not
be reported as delinquent until the matter is resolved:
i. That amount may be reported as disputed.
ii. Nothing in this provision prohibits the card issuer from
undertaking its normal collection activities for the delinquent and
undisputed portion of the account.
2. Settlement of dispute. A card issuer may not consider a
dispute settled and report an amount disputed as delinquent or begin
collection of the disputed amount until it has completed a
reasonable investigation of the cardholder's claim. A reasonable
investigation requires an independent assessment of the cardholder's
claim based on information obtained from both the cardholder and the
merchant, if possible. In conducting an investigation, the card
issuer may request the cardholder's reasonable cooperation. The card
issuer may not automatically consider a dispute settled if the
[[Page 79959]]
cardholder fails or refuses to comply with a particular request.
However, if the card issuer otherwise has no means of obtaining
information necessary to resolve the dispute, the lack of
information resulting from the cardholder's failure or refusal to
comply with a particular request may lead the card issuer reasonably
to terminate the investigation.
12(c)(3) Limitations
Paragraph 12(c)(3)(i)(A)
1. Resolution with merchant. The consumer must have tried to
resolve the dispute with the merchant. This does not require any
special procedures or correspondence between them, and is a matter
for factual determination in each case. The consumer is not required
to seek satisfaction from the manufacturer of the goods involved.
When the merchant is in bankruptcy proceedings, the consumer is not
required to file a claim in those proceedings, and may instead file
a claim for the property or service purchased with the credit card
with the card issuer directly.
Paragraph 12(c)(3)(i)(B)
1. Geographic limitation. The question of where a transaction
occurs (as in the case of mail, Internet, or telephone orders, for
example) is to be determined under state or other applicable law.
12(c)(3)(ii) Exclusion
1. Merchant honoring card. The exceptions (stated in Sec.
1026.12(c)(3)(ii)) to the amount and geographic limitations in Sec.
1026.12(c)(3)(i)(B) do not apply if the merchant merely honors, or
indicates through signs or advertising that it honors, a particular
credit card.
12(d) Offsets by Card Issuer Prohibited
Paragraph 12(d)(1)
1. Holds on accounts. ``Freezing'' or placing a hold on funds in
the cardholder's deposit account is the functional equivalent of an
offset and would contravene the prohibition in Sec. 1026.12(d)(1),
unless done in the context of one of the exceptions specified in
Sec. 1026.12(d)(2). For example, if the terms of a security
agreement permitted the card issuer to place a hold on the funds,
the hold would not violate the offset prohibition. Similarly, if an
order of a bankruptcy court required the card issuer to turn over
deposit account funds to the trustee in bankruptcy, the issuer would
not violate the regulation by placing a hold on the funds in order
to comply with the court order.
2. Funds intended as deposits. If the consumer tenders funds as
a deposit (to a checking account, for example), the card issuer may
not apply the funds to repay indebtedness on the consumer's credit
card account.
3. Types of indebtedness; overdraft accounts. The offset
prohibition applies to any indebtedness arising from transactions
under a credit card plan, including accrued finance charges and
other charges on the account. The prohibition also applies to
balances arising from transactions not using the credit card itself
but taking place under plans that involve credit cards. For example,
if the consumer writes a check that accesses an overdraft line of
credit, the resulting indebtedness is subject to the offset
prohibition since it is incurred through a credit card plan, even
though the consumer did not use an associated check guarantee or
debit card.
4. When prohibition applies in case of termination of account.
The offset prohibition applies even after the card issuer terminates
the cardholder's credit card privileges, if the indebtedness was
incurred prior to termination. If the indebtedness was incurred
after termination, the prohibition does not apply.
Paragraph 12(d)(2)
1. Security interest--limitations. In order to qualify for the
exception stated in Sec. 1026.12(d)(2), a security interest must be
affirmatively agreed to by the consumer and must be disclosed in the
issuer's account-opening disclosures under Sec. 1026.6. The
security interest must not be the functional equivalent of a right
of offset; as a result, routinely including in agreements contract
language indicating that consumers are giving a security interest in
any deposit accounts maintained with the issuer does not result in a
security interest that falls within the exception in Sec.
1026.12(d)(2). For a security interest to qualify for the exception
under Sec. 1026.12(d)(2) the following conditions must be met:
i. The consumer must be aware that granting a security interest
is a condition for the credit card account (or for more favorable
account terms) and must specifically intend to grant a security
interest in a deposit account. Indicia of the consumer's awareness
and intent include at least one of the following (or a substantially
similar procedure that evidences the consumer's awareness and
intent):
A. Separate signature or initials on the agreement indicating
that a security interest is being given.
B. Placement of the security agreement on a separate page, or
otherwise separating the security interest provisions from other
contract and disclosure provisions.
C. Reference to a specific amount of deposited funds or to a
specific deposit account number.
ii. The security interest must be obtainable and enforceable by
creditors generally. If other creditors could not obtain a security
interest in the consumer's deposit accounts to the same extent as
the card issuer, the security interest is prohibited by Sec.
1026.12(d)(2).
2. Security interest--after-acquired property. As used in Sec.
1026.12(d)(2), the term ``security interest'' does not exclude (as
it does for other Regulation Z purposes) interests in after-acquired
property. Thus, a consensual security interest in deposit-account
funds, including funds deposited after the granting of the security
interest would constitute a permissible exception to the prohibition
on offsets.
3. Court order. If the card issuer obtains a judgment against
the cardholder, and if state and other applicable law and the terms
of the judgment do not so prohibit, the card issuer may offset the
indebtedness against the cardholder's deposit account.
Paragraph 12(d)(3)
1. Automatic payment plans--scope of exception. With regard to
automatic debit plans under Sec. 1026.12(d)(3), the following rules
apply:
i. The cardholder's authorization must be in writing and signed
or initialed by the cardholder.
ii. The authorizing language need not appear directly above or
next to the cardholder's signature or initials, provided it appears
on the same document and that it clearly spells out the terms of the
automatic debit plan.
iii. If the cardholder has the option to accept or reject the
automatic debit feature (such option may be required under section
913 of the Electronic Fund Transfer Act), the fact that the option
exists should be clearly indicated.
2. Automatic payment plans--additional exceptions. The following
practices are not prohibited by Sec. 1026.12(d)(1):
i. Automatically deducting charges for participation in a
program of banking services (one aspect of which may be a credit
card plan).
ii. Debiting the cardholder's deposit account on the
cardholder's specific request rather than on an automatic periodic
basis (for example, a cardholder might check a box on the credit
card bill stub, requesting the issuer to debit the cardholder's
account to pay that bill).
12(e) Prompt Notification of Returns and Crediting of Refunds
Paragraph 12(e)(1)
1. Normal channels. The term normal channels refers to any
network or interchange system used for the processing of the
original charge slips (or equivalent information concerning the
transaction).
Paragraph 12(e)(2)
1. Crediting account. The card issuer need not actually post the
refund to the consumer's account within three business days after
receiving the credit statement, provided that it credits the account
as of a date within that time period.
Section 1026.13--Billing Error Resolution
1. Creditor's failure to comply with billing error provisions.
Failure to comply with the error resolution procedures may result in
the forfeiture of disputed amounts as prescribed in section 161(e)
of the Act. (Any failure to comply may also be a violation subject
to the liability provisions of section 130 of the Act.)
2. Charges for error resolution. If a billing error occurred,
whether as alleged or in a different amount or manner, the creditor
may not impose a charge related to any aspect of the error
resolution process (including charges for documentation or
investigation) and must credit the consumer's account if such a
charge was assessed pending resolution. Since the Act grants the
consumer error resolution rights, the creditor should avoid any
chilling effect on the good faith assertion of errors that might
result if charges are assessed when no billing error has occurred.
[[Page 79960]]
13(a) Definition of Billing Error
Paragraph 13(a)(1)
1. Actual, implied, or apparent authority. Whether use of a
credit card or open-end credit plan is authorized is determined by
state or other applicable law. (See comment 12(b)(1)(ii)-1.)
Paragraph 13(a)(3)
1. Coverage. i. Section 1026.13(a)(3) covers disputes about
goods or services that are ``not accepted'' or ``not delivered * * *
as agreed''; for example:
A. The appearance on a periodic statement of a purchase, when
the consumer refused to take delivery of goods because they did not
comply with the contract.
B. Delivery of property or services different from that agreed
upon.
C. Delivery of the wrong quantity.
D. Late delivery.
E. Delivery to the wrong location.
ii. Section 1026.13(a)(3) does not apply to a dispute relating
to the quality of property or services that the consumer accepts.
Whether acceptance occurred is determined by state or other
applicable law.
2. Application to purchases made using a third-party payment
intermediary. Section 1026.13(a)(3) generally applies to disputes
about goods and services that are purchased using a third-party
payment intermediary, such as a person-to-person Internet payment
service, funded through use of a consumer's open-end credit plan
when the goods or services are not accepted by the consumer or not
delivered to the consumer as agreed. However, the extension of
credit must be made at the time the consumer purchases the good or
service and match the amount of the transaction to purchase the good
or service (including ancillary taxes and fees). Under these
circumstances, the property or service for which the extension of
credit is made is not the payment service, but rather the good or
service that the consumer has purchased using the payment service.
Thus, for example, Sec. 1026.13(a)(3) would not apply to purchases
using a third party payment intermediary that is funded through use
of an open-end credit plan if:
i. The extension of credit is made to fund the third-party
payment intermediary ``account,'' but the consumer does not
contemporaneously use those funds to purchase a good or service at
that time.
ii. The extension of credit is made to fund only a portion of
the purchase amount, and the consumer uses other sources to fund the
remaining amount.
3. Notice to merchant not required. A consumer is not required
to first notify the merchant or other payee from whom he or she has
purchased goods or services and attempt to resolve a dispute
regarding the good or service before providing a billing-error
notice to the creditor under Sec. 1026.13(a)(3) asserting that the
goods or services were not accepted or delivered as agreed.
Paragraph 13(a)(5)
1. Computational errors. In periodic statements that are
combined with other information, the error resolution procedures are
triggered only if the consumer asserts a computational billing error
in the credit-related portion of the periodic statement. For
example, if a bank combines a periodic statement reflecting the
consumer's credit card transactions with the consumer's monthly
checking statement, a computational error in the checking account
portion of the combined statement is not a billing error.
Paragraph 13(a)(6)
1. Documentation requests. A request for documentation such as
receipts or sales slips, unaccompanied by an allegation of an error
under Sec. 1026.13(a) or a request for additional clarification
under Sec. 1026.13(a)(6), does not trigger the error resolution
procedures. For example, a request for documentation merely for
purposes such as tax preparation or recordkeeping does not trigger
the error resolution procedures.
13(b) Billing Error Notice
1. Withdrawal of billing error notice by consumer. The creditor
need not comply with the requirements of Sec. 1026.13(c) through
(g) of this section if the consumer concludes that no billing error
occurred and voluntarily withdraws the billing error notice. The
consumer's withdrawal of a billing error notice may be oral,
electronic or written.
2. Form of written notice. The creditor may require that the
written notice not be made on the payment medium or other material
accompanying the periodic statement if the creditor so stipulates in
the billing rights statement required by Sec. Sec. 1026.6(a)(5) or
(b)(5)(iii), and 1026.9(a). In addition, if the creditor stipulates
in the billing rights statement that it accepts billing error
notices submitted electronically, and states the means by which a
consumer may electronically submit a billing error notice, a notice
sent in such manner will be deemed to satisfy the written notice
requirement for purposes of Sec. 1026.13(b).
Paragraph 13(b)(1)
1. Failure to send periodic statement--timing. If the creditor
has failed to send a periodic statement, the 60-day period runs from
the time the statement should have been sent. Once the statement is
provided, the consumer has another 60 days to assert any billing
errors reflected on it.
2. Failure to reflect credit--timing. If the periodic statement
fails to reflect a credit to the account, the 60-day period runs
from transmittal of the statement on which the credit should have
appeared.
3. Transmittal. If a consumer has arranged for periodic
statements to be held at the financial institution until called for,
the statement is ``transmitted'' when it is first made available to
the consumer.
Paragraph 13(b)(2)
1. Identity of the consumer. The billing error notice need not
specify both the name and the account number if the information
supplied enables the creditor to identify the consumer's name and
account.
13(c) Time for Resolution; General Procedures
1. Temporary or provisional corrections. A creditor may
temporarily correct the consumer's account in response to a billing
error notice, but is not excused from complying with the remaining
error resolution procedures within the time limits for resolution.
2. Correction without investigation. A creditor may correct a
billing error in the manner and amount asserted by the consumer
without the investigation or the determination normally required.
The creditor must comply, however, with all other applicable
provisions. If a creditor follows this procedure, no presumption is
created that a billing error occurred.
3. Relationship with Sec. 1026.12. The consumer's rights under
the billing error provisions in Sec. 1026.13 are independent of the
provisions set forth in Sec. 1026.12(b) and (c). (See comments
12(b)-4, 12(b)(3)-3, and 12(c)-1.)
Paragraph 13(c)(2)
1. Time for resolution. The phrase two complete billing cycles
means two actual billing cycles occurring after receipt of the
billing error notice, not a measure of time equal to two billing
cycles. For example, if a creditor on a monthly billing cycle
receives a billing error notice mid-cycle, it has the remainder of
that cycle plus the next two full billing cycles to resolve the
error.
2. Finality of error resolution procedure. A creditor must
comply with the error resolution procedures and complete its
investigation to determine whether an error occurred within two
complete billing cycles as set forth in Sec. 1026.13(c)(2). Thus,
for example, Sec. 1026.13(c)(2) prohibits a creditor from reversing
amounts previously credited for an alleged billing error even if the
creditor obtains evidence after the error resolution time period has
passed indicating that the billing error did not occur as asserted
by the consumer. Similarly, if a creditor fails to mail or deliver a
written explanation setting forth the reason why the billing error
did not occur as asserted, or otherwise fails to comply with the
error resolution procedures set forth in Sec. 1026.13(f), the
creditor generally must credit the disputed amount and related
finance or other charges, as applicable, to the consumer's account.
However, if a consumer receives more than one credit to correct the
same billing error, Sec. 1026.13 does not prevent a creditor from
reversing amounts it has previously credited to correct that error,
provided that the total amount of the remaining credits is equal to
or more than the amount of the error and that the consumer does not
incur any fees or other charges as a result of the timing of the
creditor's reversal. For example, assume that a consumer asserts a
billing error with respect to a $100 transaction and that the
creditor posts a $100 credit to the consumer's account to correct
that error during the time period set forth in Sec. 1026.13(c)(2).
However, following that time period, a merchant or other person
honoring the credit card issues a $100 credit to the consumer to
correct the same error. In these circumstances, Sec. 1026.13(c)(2)
does not prohibit the creditor from reversing its $100 credit once
the $100 credit from the merchant or other person has posted to the
consumer's account.
13(d) Rules Pending Resolution
1. Disputed amount. Disputed amount is the dollar amount alleged
by the consumer to
[[Page 79961]]
be in error. When the allegation concerns the description or
identification of the transaction (such as the date or the seller's
name) rather than a dollar amount, the disputed amount is the amount
of the transaction or charge that corresponds to the disputed
transaction identification. If the consumer alleges a failure to
send a periodic statement under Sec. 1026.13(a)(7), the disputed
amount is the entire balance owing.
13(d)(1) Consumer's Right To Withhold Disputed Amount; Collection
Action Prohibited
1. Prohibited collection actions. During the error resolution
period, the creditor is prohibited from trying to collect the
disputed amount from the consumer. Prohibited collection actions
include, for example, instituting court action, taking a lien, or
instituting attachment proceedings.
2. Right to withhold payment. If the creditor reflects any
disputed amount or related finance or other charges on the periodic
statement, and is therefore required to make the disclosure under
Sec. 1026.13(d)(4), the creditor may comply with that disclosure
requirement by indicating that payment of any disputed amount is not
required pending resolution. Making a disclosure that only refers to
the disputed amount would, of course, in no way affect the
consumer's right under Sec. 1026.13(d)(1) to withhold related
finance and other charges. The disclosure under Sec. 1026.13(d)(4)
need not appear in any specific place on the periodic statement,
need not state the specific amount that the consumer may withhold,
and may be preprinted on the periodic statement.
3. Imposition of additional charges on undisputed amounts. The
consumer's withholding of a disputed amount from the total bill
cannot subject undisputed balances (including new purchases or cash
advances made during the present or subsequent cycles) to the
imposition of finance or other charges. For example, if on an
account with a grace period (that is, an account in which paying the
new balance in full allows the consumer to avoid the imposition of
additional finance charges), a consumer disputes a $2 item out of a
total bill of $300 and pays $298 within the grace period, the
consumer would not lose the grace period as to any undisputed
amounts, even if the creditor determines later that no billing error
occurred. Furthermore, finance or other charges may not be imposed
on any new purchases or advances that, absent the unpaid disputed
balance, would not have finance or other charges imposed on them.
Finance or other charges that would have been incurred even if the
consumer had paid the disputed amount would not be affected.
4. Automatic payment plans--coverage. The coverage of this
provision is limited to the card issuer's automatic payment plans,
whether or not the consumer's asset account is held by the card
issuer or by another financial institution. It does not apply to
automatic or bill-payment plans offered by financial institutions
other than the credit card issuer.
5. Automatic payment plans--time of notice. While the card
issuer does not have to restore or prevent the debiting of a
disputed amount if the billing error notice arrives after the three-
business-day cut-off, the card issuer must, however, prevent the
automatic debit of any part of the disputed amount that is still
outstanding and unresolved at the time of the next scheduled debit
date.
13(d)(2) Adverse Credit Reports Prohibited
1. Report of dispute. Although the creditor must not issue an
adverse credit report because the consumer fails to pay the disputed
amount or any related charges, the creditor may report that the
amount or the account is in dispute. Also, the creditor may report
the account as delinquent if undisputed amounts remain unpaid.
2. Person. During the error resolution period, the creditor is
prohibited from making an adverse credit report about the disputed
amount to any person--including employers, insurance companies,
other creditors, and credit bureaus.
3. Creditor's agent. Whether an agency relationship exists
between a creditor and an issuer of an adverse credit report is
determined by state or other applicable law.
13(e) Procedures If Billing Error Occurred as Asserted
1. Correction of error. The phrase as applicable means that the
necessary corrections vary with the type of billing error that
occurred. For example, a misidentified transaction (or a transaction
that is identified by one of the alternative methods in Sec.
1026.8) is cured by properly identifying the transaction and
crediting related finance and any other charges imposed. The
creditor is not required to cancel the amount of the underlying
obligation incurred by the consumer.
2. Form of correction notice. The written correction notice may
take a variety of forms. It may be sent separately, or it may be
included on or with a periodic statement that is mailed within the
time for resolution. If the periodic statement is used, the amount
of the billing error must be specifically identified. If a separate
billing error correction notice is provided, the accompanying or
subsequent periodic statement reflecting the corrected amount may
simply identify it as credit.
3. Discovery of information after investigation period. See
comment 13(c)(2)-2.
13(f) Procedures If Different Billing Error or No Billing Error
Occurred
1. Different billing error. Examples of a different billing
error include:
i. Differences in the amount of an error (for example, the
customer asserts a $55.00 error but the error was only $53.00).
ii. Differences in other particulars asserted by the consumer
(such as when a consumer asserts that a particular transaction never
occurred, but the creditor determines that only the seller's name
was disclosed incorrectly).
2. Form of creditor's explanation. The written explanation
(which also may notify the consumer of corrections to the account)
may take a variety of forms. It may be sent separately, or it may be
included on or with a periodic statement that is mailed within the
time for resolution. If the creditor uses the periodic statement for
the explanation and correction(s), the corrections must be
specifically identified. If a separate explanation, including the
correction notice, is provided, the enclosed or subsequent periodic
statement reflecting the corrected amount may simply identify it as
a credit. The explanation may be combined with the creditor's notice
to the consumer of amounts still owing, which is required under
Sec. 1026.13(g)(1), provided it is sent within the time limit for
resolution. (See commentary to Sec. 1026.13(e).)
3. Reasonable investigation. A creditor must conduct a
reasonable investigation before it determines that no billing error
occurred or that a different billing error occurred from that
asserted. In conducting its investigation of an allegation of a
billing error, the creditor may reasonably request the consumer's
cooperation. The creditor may not automatically deny a claim based
solely on the consumer's failure or refusal to comply with a
particular request, including providing an affidavit or filing a
police report. However, if the creditor otherwise has no knowledge
of facts confirming the billing error, the lack of information
resulting from the consumer's failure or refusal to comply with a
particular request may lead the creditor reasonably to terminate the
investigation. The procedures involved in investigating alleged
billing errors may differ depending on the billing error type.
i. Unauthorized transaction. In conducting an investigation of a
notice of billing error alleging an unauthorized transaction under
Sec. 1026.13(a)(1), actions such as the following represent steps
that a creditor may take, as appropriate, in conducting a reasonable
investigation:
A. Reviewing the types or amounts of purchases made in relation
to the consumer's previous purchasing pattern.
B. Reviewing where the purchases were delivered in relation to
the consumer's residence or place of business.
C. Reviewing where the purchases were made in relation to where
the consumer resides or has normally shopped.
D. Comparing any signature on credit slips for the purchases to
the signature of the consumer (or an authorized user in the case of
a credit card account) in the creditor's records, including other
credit slips.
E. Requesting documentation to assist in the verification of the
claim.
F. Requiring a written, signed statement from the consumer (or
authorized user, in the case of a credit card account). For example,
the creditor may include a signature line on a billing rights form
that the consumer may send in to provide notice of the claim.
However, a creditor may not require the consumer to provide an
affidavit or signed statement under penalty of perjury as a part of
a reasonable investigation.
G. Requesting a copy of a police report, if one was filed.
H. Requesting information regarding the consumer's knowledge of
the person who allegedly obtained an extension of credit on the
account or of that person's authority to do so.
ii. Nondelivery of property or services. In conducting an
investigation of a billing error
[[Page 79962]]
notice alleging the nondelivery of property or services under Sec.
1026.13(a)(3), the creditor shall not deny the assertion unless it
conducts a reasonable investigation and determines that the property
or services were actually delivered, mailed, or sent as agreed.
iii. Incorrect information. In conducting an investigation of a
billing error notice alleging that information appearing on a
periodic statement is incorrect because a person honoring the
consumer's credit card or otherwise accepting an access device for
an open-end plan has made an incorrect report to the creditor, the
creditor shall not deny the assertion unless it conducts a
reasonable investigation and determines that the information was
correct.
13(g) Creditor's Rights and Duties After Resolution
Paragraph 13(g)(1)
1. Amounts owed by consumer. Amounts the consumer still owes may
include both minimum periodic payments and related finance and other
charges that accrued during the resolution period. As explained in
the commentary to Sec. 1026.13(d)(1), even if the creditor later
determines that no billing error occurred, the creditor may not
include finance or other charges that are imposed on undisputed
balances solely as a result of a consumer's withholding payment of a
disputed amount.
2. Time of notice. The creditor need not send the notice of
amount owed within the time period for resolution, although it is
under a duty to send the notice promptly after resolution of the
alleged error. If the creditor combines the notice of the amount
owed with the explanation required under Sec. 1026.13(f)(1), the
combined notice must be provided within the time limit for
resolution.
Paragraph 13(g)(2)
1. Grace period if no error occurred. If the creditor
determines, after a reasonable investigation, that a billing error
did not occur as asserted, and the consumer was entitled to a grace
period at the time the consumer provided the billing error notice,
the consumer must be given a period of time equal to the grace
period disclosed under Sec. 1026.6(a)(1) or (b)(2) and Sec.
1026.7(a)(8) or (b)(8) to pay any disputed amounts due without
incurring additional finance or other charges. However, the creditor
need not allow a grace period disclosed under the above-mentioned
sections to pay the amount due under Sec. 1026.13(g)(1) if no error
occurred and the consumer was not entitled to a grace period at the
time the consumer asserted the error. For example, assume that a
creditor provides a consumer a grace period of 20 days to pay a new
balance to avoid finance charges, and that the consumer did not
carry an outstanding balance from the prior month. If the consumer
subsequently asserts a billing error for the current statement
period within the 20-day grace period, and the creditor determines
that no billing error in fact occurred, the consumer must be given
at least 20 days (i.e., the full disclosed grace period) to pay the
amount due without incurring additional finance charges. Conversely,
if the consumer was not entitled to a grace period at the time the
consumer asserted the billing error, for example, if the consumer
did not pay the previous monthly balance of undisputed charges in
full, the creditor may assess finance charges on the disputed
balance for the entire period the item was in dispute.
Paragraph 13(g)(3)
1. Time for payment. The consumer has a minimum of 10 days to
pay (measured from the time the consumer could reasonably be
expected to have received notice of the amount owed) before the
creditor may issue an adverse credit report; if an initially
disclosed grace period allows the consumer a longer time in which to
pay, the consumer has the benefit of that longer period.
Paragraph 13(g)(4)
1. Credit reporting. Under Sec. 1026.13(g)(4)(i) and (iii) the
creditor's additional credit reporting responsibilities must be
accomplished promptly. The creditor need not establish costly
procedures to fulfill this requirement. For example, a creditor that
reports to a credit bureau on scheduled updates need not transmit
corrective information by an unscheduled computer or magnetic tape;
it may provide the credit bureau with the correct information by
letter or other commercially reasonable means when using the
scheduled update would not be ``prompt.'' The creditor is not
responsible for ensuring that the credit bureau corrects its
information immediately.
2. Adverse report to credit bureau. If a creditor made an
adverse report to a credit bureau that disseminated the information
to other creditors, the creditor fulfills its Sec.
1026.13(g)(4)(ii) obligations by providing the consumer with the
name and address of the credit bureau.
13(i) Relation to Electronic Fund Transfer Act and Regulation E
1. Coverage. Credit extended directly from a non-overdraft
credit line is governed solely by Regulation Z, even though a
combined credit card/access device is used to obtain the extension.
2. Incidental credit under agreement. Credit extended incident
to an electronic fund transfer under an agreement between the
consumer and the financial institution is governed by Sec.
1026.13(i), which provides that certain error resolution procedures
in both this part and Regulation E apply. Incidental credit that is
not extended under an agreement between the consumer and the
financial institution is governed solely by the error resolution
procedures in Regulation E. For example, credit inadvertently
extended incident to an electronic fund-transfer, such as under an
overdraft service not subject to Regulation Z, is governed solely by
the Regulation E error resolution procedures, if the bank and the
consumer do not have an agreement to extend credit when the
consumer's account is overdrawn.
3. Application to debit/credit transactions-examples. If a
consumer withdraws money at an automated teller machine and
activates an overdraft credit feature on the checking account:
i. An error asserted with respect to the transaction is subject,
for error resolution purposes, to the applicable Regulation E (12
CFR Part 1005) provisions (such as timing and notice) for the entire
transaction.
ii. The creditor need not provisionally credit the consumer's
account, under 12 CFR 1005.11(c)(2)(i), for any portion of the
unpaid extension of credit.
iii. The creditor must credit the consumer's account under Sec.
1005.11(c) with any finance or other charges incurred as a result of
the alleged error.
iv. The provisions of Sec. Sec. 1026.13(d) and (g) apply only
to the credit portion of the transaction.
Section 1026.14--Determination of Annual Percentage Rate
14(a) General Rule
1. Tolerance. The tolerance of 1/8th of 1 percentage point above
or below the annual percentage rate applies to any required
disclosure of the annual percentage rate. The disclosure of the
annual percentage rate is required in Sec. Sec. 1026.60, 1026.40,
1026.6, 1026.7, 1026.9, 1026.15, 1026.16, 1026.26, 1026.55, and
1026.56.
2. Rounding. The regulation does not require that the annual
percentage rate be calculated to any particular number of decimal
places; rounding is permissible within the 1/8th of 1 percent
tolerance. For example, an exact annual percentage rate of 14.33333%
may be stated as 14.33% or as 14.3%, or even as 14\1/4\%; but it
could not be stated as 14.2% or 14%, since each varies by more than
the permitted tolerance.
3. Periodic rates. No explicit tolerance exists for any periodic
rate as such; a disclosed periodic rate may vary from precise
accuracy (for example, due to rounding) only to the extent that its
annualized equivalent is within the tolerance permitted by Sec.
1026.14(a). Further, a periodic rate need not be calculated to any
particular number of decimal places.
4. Finance charges. The regulation does not prohibit creditors
from assessing finance charges on balances that include prior,
unpaid finance charges; state or other applicable law may do so,
however.
5. Good faith reliance on faulty calculation tools. The
regulation relieves a creditor of liability for an error in the
annual percentage rate or finance charge that resulted from a
corresponding error in a calculation tool used in good faith by the
creditor. Whether or not the creditor's use of the tool was in good
faith must be determined on a case-by-case basis, but the creditor
must in any case have taken reasonable steps to verify the accuracy
of the tool, including any instructions, before using it. Generally,
the safe harbor from liability is available only for errors directly
attributable to the calculation tool itself, including software
programs; it is not intended to absolve a creditor of liability for
its own errors, or for errors arising from improper use of the tool,
from incorrect data entry, or from misapplication of the law.
6. Effect of leap year. Any variance in the annual percentage
rate that occurs solely by reason of the addition of February 29 in
a leap year may be disregarded, and such a rate may be disclosed
without regard to such variance.
[[Page 79963]]
14(b) Annual Percentage Rate--In General
1. Corresponding annual percentage rate computation. For
purposes of Sec. Sec. 1026.60, 1026.40, 1026.6, 1026.7(a)(4) or
(b)(4), 1026.9, 1026.15, 1026.16, 1026.26, 1026.55, and 1026.56, the
annual percentage rate is determined by multiplying the periodic
rate by the number of periods in the year. This computation reflects
the fact that, in such disclosures, the rate (known as the
corresponding annual percentage rate) is prospective and does not
involve any particular finance charge or periodic balance.
14(c) Optional Effective Annual Percentage Rate for Periodic Statements
for Creditors Offering Open-End Credit Plans Secured by a Consumer's
Dwelling
1. General rule. The periodic statement may reflect (under Sec.
1026.7(a)(7)) the annualized equivalent of the rate actually applied
during a particular cycle; this rate may differ from the
corresponding annual percentage rate because of the inclusion of,
for example, fixed, minimum, or transaction charges. Sections
1026.14(c)(1) through (c)(4) state the computation rules for the
effective rate.
2. Charges related to opening, renewing, or continuing an
account. Sections 1026.14(c)(2) and (c)(3) exclude from the
calculation of the effective annual percentage rate finance charges
that are imposed during the billing cycle such as a loan fee,
points, or similar charge that relates to opening, renewing, or
continuing an account. The charges involved here do not relate to a
specific transaction or to specific activity on the account, but
relate solely to the opening, renewing, or continuing of the
account. For example, an annual fee to renew an open-end credit
account that is a percentage of the credit limit on the account, or
that is charged only to consumers that have not used their credit
card for a certain dollar amount in transactions during the
preceding year, would not be included in the calculation of the
annual percentage rate, even though the fee may not be excluded from
the finance charge under Sec. 1026.4(c)(4). (See comment 4(c)(4)-
2.) This rule applies even if the loan fee, points, or similar
charges are billed on a subsequent periodic statement or withheld
from the proceeds of the first advance on the account.
3. Classification of charges. If the finance charge includes a
charge not due to the application of a periodic rate, the creditor
must use the annual percentage rate computation method that
corresponds to the type of charge imposed. If the charge is tied to
a specific transaction (for example, 3 percent of the amount of each
transaction), then the method in Sec. 1026.14(c)(3) must be used.
If a fixed or minimum charge is applied, that is, one not tied to
any specific transaction, then the formula in Sec. 1026.14(c)(2) is
appropriate.
4. Small finance charges. Section 1026.14(c)(4) gives the
creditor an alternative to Sec. 1026.14(c)(2) and (c)(3) if small
finance charges (50 cents or less) are involved; that is, if the
finance charge includes minimum or fixed fees not due to the
application of a periodic rate and the total finance charge for the
cycle does not exceed 50 cents. For example, while a monthly
activity fee of 50 cents on a balance of $20 would produce an annual
percentage rate of 30 percent under the rule in Sec. 1026.14(c)(2),
the creditor may disclose an annual percentage rate of 18 percent if
the periodic rate generally applicable to all balances is 1 and \1/
2\ percent per month.
5. Prior-cycle adjustments. i. The annual percentage rate
reflects the finance charges imposed during the billing cycle.
However, finance charges imposed during the billing cycle may relate
to activity in a prior cycle. Examples of circumstances when this
may occur are:
A. A cash advance occurs on the last day of a billing cycle on
an account that uses the transaction date to figure finance charges,
and it is impracticable to post the transaction until the following
cycle.
B. An adjustment to the finance charge is made following the
resolution of a billing error dispute.
C. A consumer fails to pay the purchase balance under a deferred
payment feature by the payment due date, and finance charges are
imposed from the date of purchase.
ii. Finance charges relating to activity in prior cycles should
be reflected on the periodic statement as follows:
A. If a finance charge imposed in the current billing cycle is
attributable to periodic rates applicable to prior billing cycles
(such as when a deferred payment balance was not paid in full by the
payment due date and finance charges from the date of purchase are
now being debited to the account, or when a cash advance occurs on
the last day of a billing cycle on an account that uses the
transaction date to figure finance charges and it is impracticable
to post the transaction until the following cycle), and the creditor
uses the quotient method to calculate the annual percentage rate,
the numerator would include the amount of any transaction charges
plus any other finance charges posted during the billing cycle. At
the creditor's option, balances relating to the finance charge
adjustment may be included in the denominator if permitted by the
legal obligation, if it was impracticable to post the transaction in
the previous cycle because of timing, or if the adjustment is
covered by comment 14(c)-5.ii.B.
B. If a finance charge that is posted to the account relates to
activity for which a finance charge was debited or credited to the
account in a previous billing cycle (for example, if the finance
charge relates to an adjustment such as the resolution of a billing
error dispute, or an unintentional posting error, or a payment by
check that was later returned unpaid for insufficient funds or other
reasons), the creditor shall at its option:
1. Calculate the annual percentage rate in accordance with ii.A
of this paragraph, or
2. Disclose the finance charge adjustment on the periodic
statement and calculate the annual percentage rate for the current
billing cycle without including the finance charge adjustment in the
numerator and balances associated with the finance charge adjustment
in the denominator.
14(c)(1) Solely Periodic Rates Imposed
1. Periodic rates. Section 1026.14(c)(1) applies if the only
finance charge imposed is due to the application of a periodic rate
to a balance. The creditor may compute the annual percentage rate
either:
i. By multiplying each periodic rate by the number of periods in
the year; or
ii. By the ``quotient'' method. This method refers to a
composite annual percentage rate when different periodic rates apply
to different balances. For example, a particular plan may involve a
periodic rate of \1/2\ percent on balances up to $500, and 1 percent
on balances over $500. If, in a given cycle, the consumer has a
balance of $800, the finance charge would consist of $7.50 (500 x
.015) plus $3.00 (300 x .01), for a total finance charge of $10.50.
The annual percentage rate for this period may be disclosed either
as 18% on $500 and 12 percent on $300, or as 15.75 percent on a
balance of $800 (the quotient of $10.50 divided by $800, multiplied
by 12).
14(c)(2) Minimum or Fixed Charge, But Not Transaction Charge, Imposed
1. Certain charges not based on periodic rates. Section
1026.14(c)(2) specifies use of the quotient method to determine the
annual percentage rate if the finance charge imposed includes a
certain charge not due to the application of a periodic rate (other
than a charge relating to a specific transaction). For example, if
the creditor imposes a minimum $1 finance charge on all balances
below $50, and the consumer's balance was $40 in a particular cycle,
the creditor would disclose an annual percentage rate of 30 percent
(1/40 x 12).
2. No balance. If there is no balance to which the finance
charge is applicable, an annual percentage rate cannot be determined
under Sec. 1026.14(c)(2). This could occur not only when minimum
charges are imposed on an account with no balance, but also when a
periodic rate is applied to advances from the date of the
transaction. For example, if on May 19 the consumer pays the new
balance in full from a statement dated May 1, and has no further
transactions reflected on the June 1 statement, that statement would
reflect a finance charge with no account balance.
14(c)(3) Transaction Charge Imposed
1. Transaction charges. i. Section 1026.14(c)(3) transaction
charges include, for example:
A. A loan fee of $10 imposed on a particular advance.
B. A charge of 3 percent of the amount of each transaction.
ii. The reference to avoiding duplication in the computation
requires that the amounts of transactions on which transaction
charges were imposed not be included both in the amount of total
balances and in the ``other amounts on which a finance charge was
imposed'' figure. In a multifeatured plan, creditors may consider
each bona fide feature separately in the calculation of the
denominator. A creditor has considerable flexibility in defining
features for open-end plans, as long as the creditor has a
reasonable basis for the distinctions. For further explanation and
examples of how to
[[Page 79964]]
determine the components of this formula, see Appendix F to part
1026.
2. Daily rate with specific transaction charge. Section
1026.14(c)(3) sets forth an acceptable method for calculating the
annual percentage rate if the finance charge results from a charge
relating to a specific transaction and the application of a daily
periodic rate. This section includes the requirement that the
creditor follow the rules in Appendix F to part 1026 in calculating
the annual percentage rate, especially the provision in the
introductory section of Appendix F which addresses the daily rate/
transaction charge situation by providing that the ``average of
daily balances'' shall be used instead of the ``sum of the
balances.''
14(d) Calculations Where Daily Periodic Rate Applied
1. Quotient method. Section 1026.14(d) addresses use of a daily
periodic rate(s) to determine some or all of the finance charge and
use of the quotient method to determine the annual percentage rate.
Since the quotient formula in Sec. 1026.14(c)(1)(ii) and (c)(2)
cannot be used when a daily rate is being applied to a series of
daily balances, Sec. 1026.14(d) provides two alternative ways to
calculate the annual percentage rate--either of which satisfies the
provisions of Sec. 1026.7(a)(7).
2. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and
the application of a daily periodic rate, see comment 14(c)(3)-2 for
guidance on an appropriate calculation method.
Section 1026.15--Right of Rescission
1. Transactions not covered. Credit extensions that are not
subject to the regulation are not covered by Sec. 1026.15 even if
the customer's principal dwelling is the collateral securing the
credit. For this purpose, credit extensions also would include the
occurrences listed in comment 15(a)(1)-1. For example, the right of
rescission does not apply to the opening of a business-purpose
credit line, even though the loan is secured by the customer's
principal dwelling.
15(a) Consumer's Right To Rescind
Paragraph 15(a)(1)
1. Occurrences subject to right. Under an open-end credit plan
secured by the consumer's principal dwelling, the right of
rescission generally arises with each of the following occurrences:
i. Opening the account.
ii. Each credit extension.
iii. Increasing the credit limit.
iv. Adding to an existing account a security interest in the
consumer's principal dwelling.
v. Increasing the dollar amount of the security interest taken
in the dwelling to secure the plan. For example, a consumer may open
an account with a $10,000 credit limit, $5,000 of which is initially
secured by the consumer's principal dwelling. The consumer has the
right to rescind at that time and (except as noted in Sec.
1026.15(a)(1)(ii)) with each extension on the account. Later, if the
creditor decides that it wants the credit line fully secured, and
increases the amount of its interest in the consumer's dwelling, the
consumer has the right to rescind the increase.
2. Exceptions. Although the consumer generally has the right to
rescind with each transaction on the account, Section 125(e) of the
Act provides an exception: the creditor need not provide the right
to rescind at the time of each credit extension made under an open-
end credit plan secured by the consumer's principal dwelling to the
extent that the credit extended is in accordance with a previously
established credit limit for the plan. This limited rescission
option is available whether or not the plan existed prior to the
effective date of the Act.
3. Security interest arising from transaction. i. In order for
the right of rescission to apply, the security interest must be
retained as part of the credit transaction. For example:
A. A security interest that is acquired by a contractor who is
also extending the credit in the transaction.
B. A mechanic's or materialman's lien that is retained by a
subcontractor or supplier of a contractor-creditor, even when the
latter has waived its own security interest in the consumer's home.
ii. The security interest is not part of the credit transaction,
and therefore the transaction is not subject to the right of
rescission when, for example:
A. A mechanic's or materialman's lien is obtained by a
contractor who is not a party to the credit transaction but merely
is paid with the proceeds of the consumer's cash advance.
B. All security interests that may arise in connection with the
credit transaction are validly waived.
C. The creditor obtains a lien and completion bond that in
effect satisfies all liens against the consumer's principal dwelling
as a result of the credit transaction.
iii. Although liens arising by operation of law are not
considered security interests for purposes of disclosure under Sec.
1026.2, that section specifically includes them in the definition
for purposes of the right of rescission. Thus, even though an
interest in the consumer's principal dwelling is not a required
disclosure under Sec. 1026.6(c), it may still give rise to the
right of rescission.
4. Consumer. To be a consumer within the meaning of Sec.
1026.2, that person must at least have an ownership interest in the
dwelling that is encumbered by the creditor's security interest,
although that person need not be a signatory to the credit
agreement. For example, if only one spouse enters into a secured
plan, the other spouse is a consumer if the ownership interest of
that spouse is subject to the security interest.
5. Principal dwelling. A consumer can only have one principal
dwelling at a time. (But see comment 15(a)(1)-6.) A vacation or
other second home would not be a principal dwelling. A transaction
secured by a second home (such as a vacation home) that is not
currently being used as the consumer's principal dwelling is not
rescindable, even if the consumer intends to reside there in the
future. When a consumer buys or builds a new dwelling that will
become the consumer's principal dwelling within one year or upon
completion of construction, the new dwelling is considered the
principal dwelling if it secures the open-end credit line. In that
case, the transaction secured by the new dwelling is a residential
mortgage transaction and is not rescindable. For example, if a
consumer whose principal dwelling is currently A builds B, to be
occupied by the consumer upon completion of construction, an advance
on an open-end line to finance B and secured by B is a residential
mortgage transaction. Dwelling, as defined in Sec. 1026.2, includes
structures that are classified as personalty under state law. For
example, a transaction secured by a mobile home, trailer, or
houseboat used as the consumer's principal dwelling may be
rescindable.
6. Special rule for principal dwelling. Notwithstanding the
general rule that consumers may have only one principal dwelling,
when the consumer is acquiring or constructing a new principal
dwelling, a credit plan or extension that is subject to Regulation Z
and is secured by the equity in the consumer's current principal
dwelling is subject to the right of rescission regardless of the
purpose of that loan (for example, an advance to be used as a bridge
loan). For example, if a consumer whose principal dwelling is
currently A builds B, to be occupied by the consumer upon completion
of construction, a loan to finance B and secured by A is subject to
the right of rescission. Moreover, a loan secured by both A and B
is, likewise, rescindable.
Paragraph 15(a)(2)
1. Consumer's exercise of right. The consumer must exercise the
right of rescission in writing but not necessarily on the notice
supplied under Sec. 1026.15(b). Whatever the means of sending the
notification of rescission--mail, telegram or other written means--
the time period for the creditor's performance under Sec.
1026.15(d)(2) does not begin to run until the notification has been
received. The creditor may designate an agent to receive the
notification so long as the agent's name and address appear on the
notice provided to the consumer under Sec. 1026.15(b). Where the
creditor fails to provide the consumer with a designated address for
sending the notification of rescission, delivery of the notification
to the person or address to which the consumer has been directed to
send payments constitutes delivery to the creditor or assignee.
State law determines whether delivery of the notification to a third
party other than the person to whom payments are made is delivery to
the creditor or assignee, in the case where the creditor fails to
designate an address for sending the notification of rescission.
Paragraph 15(a)(3)
1. Rescission period. i. The period within which the consumer
may exercise the right to rescind runs for 3 business days from the
last of 3 events:
A. The occurrence that gives rise to the right of rescission.
B. Delivery of all material disclosures that are relevant to the
plan.
C. Delivery to the consumer of the required rescission notice.
[[Page 79965]]
ii. For example, an account is opened on Friday, June 1, and the
disclosures and notice of the right to rescind were given on
Thursday, May 31; the rescission period will expire at midnight of
the third business day after June 1--that is, Tuesday June 5. In
another example, if the disclosures are given and the account is
opened on Friday, June 1, and the rescission notice is given on
Monday, June 4, the rescission period expires at midnight of the
third business day after June 4--that is Thursday, June 7. The
consumer must place the rescission notice in the mail, file it for
telegraphic transmission, or deliver it to the creditor's place of
business within that period in order to exercise the right.
2. Material disclosures. Section 1026.15(a)(3) sets forth the
material disclosures that must be provided before the rescission
period can begin to run. The creditor must provide sufficient
information to satisfy the requirements of Sec. 1026.6 for these
disclosures. A creditor may satisfy this requirement by giving an
initial disclosure statement that complies with the regulation.
Failure to give the other required initial disclosures (such as the
billing rights statement) or the information required under Sec.
1026.40 does not prevent the running of the rescission period,
although that failure may result in civil liability or
administrative sanctions. The payment terms set forth in Sec.
1026.15(a)(3) apply to any repayment phase set forth in the
agreement. Thus, the payment terms described in Sec. 1026.6(e)(2)
for any repayment phase as well as for the draw period are
``material disclosures.''
3. Material disclosures--variable rate program. For a variable
rate program, the material disclosures also include the disclosures
listed in Sec. 1026.6(a)(1)(ii): the circumstances under which the
rate may increase; the limitations on the increase; and the effect
of an increase. The disclosures listed in Sec. 1026.6(a)(1)(ii) for
any repayment phase also are material disclosures for variable-rate
programs.
4. Unexpired right of rescission. i. When the creditor has
failed to take the action necessary to start the three-day
rescission period running the right to rescind automatically lapses
on the occurrence of the earliest of the following three events:
A. The expiration of three years after the occurrence giving
rise to the right of rescission.
B. Transfer of all the consumer's interest in the property.
C. Sale of the consumer's interest in the property, including a
transaction in which the consumer sells the dwelling and takes back
a purchase money note and mortgage or retains legal title through a
device such as an installment sale contract.
ii. Transfer of all the consumer's interest includes such
transfers as bequests and gifts. A sale or transfer of the property
need not be voluntary to terminate the right to rescind. For
example, a foreclosure sale would terminate an unexpired right to
rescind. As provided in section 125 of the Act, the three-year limit
may be extended by an administrative proceeding to enforce the
provisions of Sec. 1026.15. A partial transfer of the consumer's
interest, such as a transfer bestowing co-ownership on a spouse,
does not terminate the right of rescission.
Paragraph 15(a)(4)
1. Joint owners. When more than one consumer has the right to
rescind a transaction, any one of them may exercise that right and
cancel the transaction on behalf of all. For example, if both a
husband and wife have the right to rescind a transaction, either
spouse acting alone may exercise the right and both are bound by the
rescission.
15(b) Notice of Right To Rescind
1. Who receives notice. Each consumer entitled to rescind must
be given two copies of the rescission notice and the material
disclosures.In a transaction involving joint owners, both of whom
are entitled to rescind, both must receive the notice of the right
to rescind and disclosures. For example, if both spouses are
entitled to rescind a transaction, each must receive two copies of
the rescission notice (one copy to each if the notice is provided in
electronic form in accordance with the consumer consent and other
applicable provisions of the E-Sign Act) and one copy of the
disclosures.
2. Format. The rescission notice may be physically separated
from the material disclosures or combined with the material
disclosures, so long as the information required to be included on
the notice is set forth in a clear and conspicuous manner. See the
model notices in Appendix G.
3. Content. The notice must include all of the information
outlined in Sec. 1026.15(b)(1) through (5). The requirement in
Sec. 1026.15(b) that the transaction or occurrence be identified
may be met by providing the date of the transaction or occurrence.
The notice may include additional information related to the
required information, such as:
i. A description of the property subject to the security
interest.
ii. A statement that joint owners may have the right to rescind
and that a rescission by one is effective for all.
iii. The name and address of an agent of the creditor to receive
notice of rescission.
4. Time of providing notice. The notice required by Sec.
1026.15(b) need not be given before the occurrence giving rise to
the right of rescission. The creditor may deliver the notice after
the occurrence, but the rescission period will not begin to run
until the notice is given. For example, if the creditor provides the
notice on May 15, but disclosures were given and the credit limit
was raised on May 10, the 3-business-day rescission period will run
from May 15.
15(c) Delay of Creditor's Performance
1. General rule. i. Until the rescission period has expired and
the creditor is reasonably satisfied that the consumer has not
rescinded, the creditor must not, either directly or through a third
party:
A. Disburse advances to the consumer.
B. Begin performing services for the consumer.
C. Deliver materials to the consumer.
ii. A creditor may, however, continue to allow transactions
under an existing open-end credit plan during a rescission period
that results solely from the addition of a security interest in the
consumer's principal dwelling. (See comment 15(c)-3 for other
actions that may be taken during the delay period.)
2. Escrow. The creditor may disburse advances during the
rescission period in a valid escrow arrangement. The creditor may
not, however, appoint the consumer as ``trustee'' or ``escrow
agent'' and distribute funds to the consumer in that capacity during
the delay period.
3. Actions during the delay period. Section 1026.15(c) does not
prevent the creditor from taking other steps during the delay, short
of beginning actual performance. Unless otherwise prohibited, such
as by state law, the creditor may, for example:
i. Prepare the cash advance check.
ii. Perfect the security interest.
iii. Accrue finance charges during the delay period.
4. Performance by third party. The creditor is relieved from
liability for failure to delay performance if a third party with no
knowledge that the rescission right has been activated provides
materials or services, as long as any debt incurred for materials or
services obtained by the consumer during the rescission period is
not secured by the security interest in the consumer's dwelling. For
example, if a consumer uses a bank credit card to purchase materials
from a merchant in an amount below the floor limit, the merchant
might not contact the card issuer for authorization and therefore
would not know that materials should not be provided.
5. Delay beyond rescission period. i. The creditor must wait
until it is reasonably satisfied that the consumer has not
rescinded. For example, the creditor may satisfy itself by doing one
of the following:
A. Waiting a reasonable time after expiration of the rescission
period to allow for delivery of a mailed notice.
B. Obtaining a written statement from the consumer that the
right has not been exercised.
ii. When more than one consumer has the right to rescind, the
creditor cannot reasonably rely on the assurance of only one
consumer, because other consumers may exercise the right.
15(d) Effects of Rescission
Paragraph 15(d)(1)
1. Termination of security interest. Any security interest
giving rise to the right of rescission becomes void when the
consumer exercises the right of rescission. The security interest is
automatically negated, regardless of its status and whether or not
it was recorded or perfected. Under Sec. 1026.15(d)(2), however,
the creditor must take any action necessary to reflect the fact that
the security interest no longer exists.
2. Extent of termination. The creditor's security interest is
void to the extent that it is related to the occurrence giving rise
to the right of rescission. For example, upon rescission:
i. If the consumer's right to rescind is activated by the
opening of a plan, any security interest in the principal dwelling
is void.
ii. If the right arises due to an increase in the credit limit,
the security interest is void as to the amount of credit extensions
over the prior limit, but the security interest in
[[Page 79966]]
amounts up to the original credit limit is unaffected.
iii. If the right arises with each individual credit extension,
then the interest is void as to that extension, and other extensions
are unaffected.
Paragraph 15(d)(2)
1. Refunds to consumer. The consumer cannot be required to pay
any amount in the form of money or property either to the creditor
or to a third party as part of the occurrence subject to the right
of rescission. Any amounts of this nature already paid by the
consumer must be refunded. ``Any amount'' includes finance charges
already accrued, as well as other charges such as broker fees,
application and commitment fees, or fees for a title search or
appraisal, whether paid to the creditor, paid by the consumer
directly to a third party, or passed on from the creditor to the
third party. It is irrelevant that these amounts may not represent
profit to the creditor. For example:
i. If the occurrence is the opening of the plan, the creditor
must return any membership or application fee paid.
ii. If the occurrence is the increase in a credit limit or the
addition of a security interest, the creditor must return any fee
imposed for a new credit report or filing fees.
iii. If the occurrence is a credit extension, the creditors must
return fees such as application, title, and appraisal or survey
fees, as well as any finance charges related to the credit
extension.
2. Amounts not refundable to consumer. Creditors need not return
any money given by the consumer to a third party outside of the
occurrence, such as costs incurred for a building permit or for a
zoning variance. Similarly, the term any amount does not apply to
money or property given by the creditor to the consumer; those
amounts must be tendered by the consumer to the creditor under Sec.
1026.15(d)(3).
3. Reflection of security interest termination. The creditor
must take whatever steps are necessary to indicate that the security
interest is terminated. Those steps include the cancellation of
documents creating the security interest, and the filing of release
or termination statements in the public record. In a transaction
involving subcontractors or suppliers that also hold security
interests related to the occurrence rescinded by the consumer, the
creditor must insure that the termination of their security
interests is also reflected. The 20-day period for the creditor's
action refers to the time within which the creditor must begin the
process. It does not require all necessary steps to have been
completed within that time, but the creditor is responsible for
seeing the process through to completion.
Paragraph 15(d)(3)
1. Property exchange. Once the creditor has fulfilled its
obligation under Sec. 1026.15(d)(2), the consumer must tender to
the creditor any property or money the creditor has already
delivered to the consumer. At the consumer's option, property may be
tendered at the location of the property. For example, if fixtures
or furniture have been delivered to the consumer's home, the
consumer may tender them to the creditor by making them available
for pick-up at the home, rather than physically returning them to
the creditor's premises. Money already given to the consumer must be
tendered at the creditor's place of business. For purpose of
property exchange, the following additional rules apply:
i. A cash advance is considered money for purposes of this
section even if the creditor knows what the consumer intends to
purchase with the money.
ii. In a 3-party open-end credit plan (that is, if the creditor
and seller are not the same or related persons), extensions by the
creditor that are used by the consumer for purchases from third-
party sellers are considered to be the same as cash advances for
purposes of tendering value to the creditor, even though the
transaction is a purchase for other purposes under the regulation.
For example, if a consumer exercises the unexpired right to rescind
after using a 3-party credit card for one year, the consumer would
tender the amount of the purchase price for the items charged to the
account, rather than tendering the items themselves to the creditor.
2. Reasonable value. If returning the property would be
extremely burdensome to the consumer, the consumer may offer the
creditor its reasonable value rather than returning the property
itself. For example, if building materials have already been
incorporated into the consumer's dwelling, the consumer may pay
their reasonable value.
Paragraph 15(d)(4)
1. Modifications. The procedures outlined in Sec. 1026.15(d)(2)
and (3) may be modified by a court. For example, when a consumer is
in bankruptcy proceedings and prohibited from returning anything to
the creditor, or when the equities dictate, a modification might be
made. The sequence of procedures under Sec. 1026.15(d)(2) and (3),
or a court's modification of those procedures under Sec.
1026.15(d)(4), does not affect a consumer's substantive right to
rescind and to have the loan amount adjusted accordingly. Where the
consumer's right to rescind is contested by the creditor, a court
would normally determine whether the consumer has a right to rescind
and determine the amounts owed before establishing the procedures
for the parties to tender any money or property.
15(e) Consumer's Waiver of Right To Rescind
1. Need for waiver. To waive the right to rescind, the consumer
must have a bona fide personal financial emergency that must be met
before the end of the rescission period. The existence of the
consumer's waiver will not, of itself, automatically insulate the
creditor from liability for failing to provide the right of
rescission.
2. Procedure. To waive or modify the right to rescind, the
consumer must give a written statement that specifically waives or
modifies the right, and also includes a brief description of the
emergency. Each consumer entitled to rescind must sign the waiver
statement. In a transaction involving multiple consumers, such as a
husband and wife using their home as collateral, the waiver must
bear the signatures of both spouses.
15(f) Exempt Transactions
1. Residential mortgage transaction. Although residential
mortgage transactions would seldom be made on bona fide open-end
credit plans (under which repeated transactions must be reasonably
contemplated), an advance on an open-end plan could be for a
downpayment for the purchase of a dwelling that would then secure
the remainder of the line. In such a case, only the particular
advance for the downpayment would be exempt from the rescission
right.
2. State creditors. Cities and other political subdivisions of
states acting as creditors are not exempt from Sec. 1026.15.
3. Spreader clause. When the creditor holds a mortgage or deed
of trust on the consumer's principal dwelling and that mortgage or
deed of trust contains a ``spreader clause'' (also known as a
``dragnet'' or cross-collateralization clause), subsequent
occurrences such as the opening of a plan or individual credit
extensions are subject to the right of rescission to the same degree
as if the security interest were taken directly to secure the open-
end plan, unless the creditor effectively waives its security
interest under the spreader clause with respect to the subsequent
open-end credit extensions.
Section 1026.16--Advertising
1. Clear and conspicuous standard--general. Section 1026.16 is
subject to the general ``clear and conspicuous'' standard for
subpart B (see Sec. 1026.5(a)(1)) but prescribes no specific rules
for the format of the necessary disclosures, other than the format
requirements related to the disclosure of a promotional rate or
payment under Sec. 1026.16(d)(6), a promotional rate or promotional
fee under Sec. 1026.16(g), or a deferred interest or similar offer
under Sec. 1026.16(h). Other than the disclosure of certain terms
described in Sec. Sec. 1026.16(d)(6), (g), or (h), the credit terms
need not be printed in a certain type size nor need they appear in
any particular place in the advertisement.
2. Clear and conspicuous standard--promotional rates or
payments; deferred interest or similar offers. i. For purposes of
Sec. 1026.16(d)(6), a clear and conspicuous disclosure means that
the required information in Sec. 1026.16(d)(6)(ii)(A)-(C) is
disclosed with equal prominence and in close proximity to the
promotional rate or payment to which it applies. If the information
in Sec. 1026.16(d)(6)(ii)(A)-(C) is the same type size and is
located immediately next to or directly above or below the
promotional rate or payment to which it applies, without any
intervening text or graphical displays, the disclosures would be
deemed to be equally prominent and in close proximity.
Notwithstanding the above, for electronic advertisements that
disclose promotional rates or payments, compliance with the
requirements of Sec. 1026.16(c) is deemed to satisfy the clear and
conspicuous standard.
ii. For purposes of Sec. 1026.16(g)(4) as it applies to written
or electronic advertisements only, a clear and conspicuous
disclosure means the required information in Sec. 1026.16(g)(4)(i)
and, as applicable, (g)(4)(ii)
[[Page 79967]]
and (g)(4)(iii) must be equally prominent to the promotional rate or
promotional fee to which it applies. If the information in Sec.
1026.16(g)(4)(i) and, as applicable, (g)(4)(ii) and (g)(4)(iii) is
the same type size as the promotional rate or promotional fee to
which it applies, the disclosures would be deemed to be equally
prominent. For purposes of Sec. 1026.16(h)(3) as it applies to
written or electronic advertisements only, a clear and conspicuous
disclosure means the required information in Sec. 1026.16(h)(3)
must be equally prominent to each statement of ``no interest,'' ``no
payments,'' ``deferred interest,'' ``same as cash,'' or similar term
regarding interest or payments during the deferred interest period.
If the information required to be disclosed under Sec.
1026.16(h)(3) is the same type size as the statement of ``no
interest,'' ``no payments,'' ``deferred interest,'' ``same as
cash,'' or similar term regarding interest or payments during the
deferred interest period, the disclosure would be deemed to be
equally prominent.
3. Clear and conspicuous standard--Internet advertisements for
home-equity plans. For purposes of this section, a clear and
conspicuous disclosure for visual text advertisements on the
Internet for home-equity plans subject to the requirements of Sec.
1026.40 means that the required disclosures are not obscured by
techniques such as graphical displays, shading, coloration, or other
devices and comply with all other requirements for clear and
conspicuous disclosures under Sec. 1026.16(d). (See also comment
16(c)(1)-2.)
4. Clear and conspicuous standard--televised advertisements for
home-equity plans. For purposes of this section, including
alternative disclosures as provided for by Sec. 1026.16(e), a clear
and conspicuous disclosure in the context of visual text
advertisements on television for home-equity plans subject to the
requirements of Sec. 1026.40 means that the required disclosures
are not obscured by techniques such as graphical displays, shading,
coloration, or other devices, are displayed in a manner that allows
for a consumer to read the information required to be disclosed, and
comply with all other requirements for clear and conspicuous
disclosures under Sec. 1026.16(d). For example, very fine print in
a television advertisement would not meet the clear and conspicuous
standard if consumers cannot see and read the information required
to be disclosed.
5. Clear and conspicuous standard--oral advertisements for home-
equity plans. For purposes of this section, including alternative
disclosures as provided for by Sec. 1026.16(e), a clear and
conspicuous disclosure in the context of an oral advertisement for
home-equity plans subject to the requirements of Sec. 1026.40,
whether by radio, television, the Internet, or other medium, means
that the required disclosures are given at a speed and volume
sufficient for a consumer to hear and comprehend them. For example,
information stated very rapidly at a low volume in a radio or
television advertisement would not meet the clear and conspicuous
standard if consumers cannot hear and comprehend the information
required to be disclosed.
6. Expressing the annual percentage rate in abbreviated form.
Whenever the annual percentage rate is used in an advertisement for
open-end credit, it may be expressed using a readily understandable
abbreviation such as APR.
16(a) Actually Available Terms
1. General rule. To the extent that an advertisement mentions
specific credit terms, it may state only those terms that the
creditor is actually prepared to offer. For example, a creditor may
not advertise a very low annual percentage rate that will not in
fact be available at any time. Section 1026.16(a) is not intended to
inhibit the promotion of new credit programs, but to bar the
advertising of terms that are not and will not be available. For
example, a creditor may advertise terms that will be offered for
only a limited period, or terms that will become available at a
future date.
2. Specific credit terms. Specific credit terms is not limited
to the disclosures required by the regulation but would include any
specific components of a credit plan, such as the minimum periodic
payment amount or seller's points in a plan secured by real estate.
16(b) Advertisement of Terms That Require Additional Disclosures
Paragraph 16(b)(1)
1. Triggering terms. Negative as well as affirmative references
trigger the requirement for additional information. For example, if
a creditor states no interest or no annual membership fee in an
advertisement, additional information must be provided. Other
examples of terms that trigger additional disclosures are:
i. Small monthly service charge on the remaining balance, which
describes how the amount of a finance charge will be determined.
ii. 12 percent Annual Percentage Rate or A $15 annual membership
fee buys you $2,000 in credit, which describe required disclosures
under Sec. 1026.6.
2. Implicit terms. Section 1026.16(b) applies even if the
triggering term is not stated explicitly, but may be readily
determined from the advertisement.
3. Membership fees. A membership fee is not a triggering term
nor need it be disclosed under Sec. 1026.16(b)(1)(iii) if it is
required for participation in the plan whether or not an open-end
credit feature is attached. (See comment 6(a)(2)-1 and Sec.
1026.6(b)(3)(iii)(B).)
4. Deferred billing and deferred payment programs. Statements
such as ``Charge it--you won't be billed until May'' or ``You may
skip your January payment'' are not in themselves triggering terms,
since the timing for initial billing or for monthly payments are not
terms required to be disclosed under Sec. 1026.6. However, a
statement such as ``No interest charges until May'' or any other
statement regarding when interest or finance charges begin to accrue
is a triggering term, whether appearing alone or in conjunction with
a description of a deferred billing or deferred payment program such
as the examples above.
5. Variable-rate plans. In disclosing the annual percentage rate
in an advertisement for a variable-rate plan, as required by Sec.
1026.16(b)(1)(ii), the creditor may use an insert showing the
current rate; or may give the rate as of a specified recent date.
The additional requirement in Sec. 1026.16(b)(1)(ii) to disclose
the variable-rate feature may be satisfied by disclosing that the
annual percentage rate may vary or a similar statement, but the
advertisement need not include the information required by Sec.
1026.6(a)(1)(ii) or (b)(4)(ii).
6. Membership fees for open-end (not home-secured) plans. For
purposes of Sec. 1026.16(b)(1)(iii), membership fees that may be
imposed on open-end (not home-secured) plans shall have the same
meaning as in Sec. 1026.60(b)(2).
Paragraph 16(b)(2)
1. Assumptions. In stating the total of payments and the time
period to repay the obligation, assuming that the consumer pays only
the periodic payment amounts advertised, as required under Sec.
1026.16(b)(2), the following additional assumptions may be made:
i. Payments are made timely so as not to be considered late by
the creditor;
ii. Payments are made each period, and no debt cancellation or
suspension agreement, or skip payment feature applies to the
account;
iii. No interest rate changes will affect the account;
iv. No other balances are currently carried or will be carried
on the account;
v. No taxes or ancillary charges are or will be added to the
obligation;
vi. Goods or services are delivered on a single date; and
vii. The consumer is not currently and will not become
delinquent on the account.
2. Positive periodic payment amounts. Only positive periodic
payment amounts trigger the additional disclosures under Sec.
1026.16(b)(2). Therefore, if the periodic payment amount advertised
is not a positive amount (e.g., ``No payments''), the advertisement
need not state the total of payments and the time period to repay
the obligation.
16(c) Catalogs or Other Multiple-Page Advertisements; Electronic
Advertisements
1. Definition. The multiple-page advertisements to which Sec.
1026.16(c) refers are advertisements consisting of a series of
sequentially numbered pages--for example, a supplement to a
newspaper. A mailing consisting of several separate flyers or pieces
of promotional material in a single envelope does not constitute a
single multiple-page advertisement for purposes of Sec. 1026.16(c).
Paragraph 16(c)(1)
1. General. Section 1026.16(c)(1) permits creditors to put
credit information together in one place in a catalog or other
multiple-page advertisement or an electronic advertisement (such as
an advertisement appearing on an Internet Web site). The rule
applies only if the advertisement contains one or more of the
triggering terms from Sec. 1026.16(b).
2. Electronic advertisement. If an electronic advertisement
(such as an advertisement appearing on an Internet Web site)
contains the table or schedule permitted under
[[Page 79968]]
Sec. 1026.16(c)(1), any statement of terms set forth in Sec.
1026.6 appearing anywhere else in the advertisement must clearly
direct the consumer to the location where the table or schedule
begins. For example, a term triggering additional disclosures may be
accompanied by a link that directly takes the consumer to the
additional information.
Paragraph 16(c)(2)
1. Table or schedule if credit terms depend on outstanding
balance. If the credit terms of a plan vary depending on the amount
of the balance outstanding, rather than the amount of any property
purchased, a table or schedule complies with Sec. 1026.16(c)(2) if
it includes the required disclosures for representative balances.
For example, a creditor would disclose that a periodic rate of 1.5%
is applied to balances of $500 or less, and a 1% rate is applied to
balances greater than $500.
16(d) Additional Requirements for Home-Equity Plans
1. Trigger terms. Negative as well as affirmative references
trigger the requirement for additional information. For example, if
a creditor states no annual fee, no points, or we waive closing
costs in an advertisement, additional information must be provided.
(See comment 16(d)-4 regarding the use of a phrase such as no
closing costs.) Inclusion of a statement such as low fees, however,
would not trigger the need to state additional information.
References to payment terms include references to the draw period or
any repayment period, to the length of the plan, to how the minimum
payments are determined and to the timing of such payments.
2. Fees to open the plan. Section 1026.16(d)(1)(i) requires a
disclosure of any fees imposed by the creditor or a third party to
open the plan. In providing the fee information required under this
paragraph, the corresponding rules for disclosure of this
information apply. For example, fees to open the plan may be stated
as a range. Similarly, if property insurance is required to open the
plan, a creditor either may estimate the cost of the insurance or
provide a statement that such insurance is required. (See the
commentary to Sec. 1026.40(d)(7) and (d)(8).)
3. Statements of tax deductibility. An advertisement that refers
to deductibility for tax purposes is not misleading if it includes a
statement such as ``consult a tax advisor regarding the
deductibility of interest.'' An advertisement distributed in paper
form or through the Internet (rather than by radio or television)
that states that the advertised extension of credit may exceed the
fair market value of the consumer's dwelling is not misleading if it
clearly and conspicuously states the required information in
Sec. Sec. 1026.16(d)(4)(i) and (d)(4)(ii).
4. Misleading terms prohibited. Under Sec. 1026.16(d)(5),
advertisements may not refer to home-equity plans as free money or
use other misleading terms. For example, an advertisement could not
state ``no closing costs'' or ``we waive closing costs'' if
consumers may be required to pay any closing costs, such as
recordation fees. In the case of property insurance, however, a
creditor may state, for example, ``no closing costs'' even if
property insurance may be required, as long as the creditor also
provides a statement that such insurance may be required. (See the
commentary to this section regarding fees to open a plan.)
5. Promotional rates and payments in advertisements for home-
equity plans. Section 1026.16(d)(6) requires additional disclosures
for promotional rates or payments.
i. Variable-rate plans. In advertisements for variable-rate
plans, if the advertised annual percentage rate is based on (or the
advertised payment is derived from) the index and margin that will
be used to make rate (or payment) adjustments over the term of the
loan, then there is no promotional rate or promotional payment. If,
however, the advertised annual percentage rate is not based on (or
the advertised payment is not derived from) the index and margin
that will be used to make rate (or payment) adjustments, and a
reasonably current application of the index and margin would result
in a higher annual percentage rate (or, given an assumed balance, a
higher payment) then there is a promotional rate or promotional
payment.
ii. Equal prominence, close proximity. Information required to
be disclosed in Sec. 1026.16(d)(6)(ii) that is immediately next to
or directly above or below the promotional rate or payment (but not
in a footnote) is deemed to be closely proximate to the listing.
Information required to be disclosed in Sec. 1026.16(d)(6)(ii) that
is in the same type size as the promotional rate or payment is
deemed to be equally prominent.
iii. Amounts and time periods of payments. Section
1026.16(d)(6)(ii)(C) requires disclosure of the amount and time
periods of any payments that will apply under the plan. This section
may require disclosure of several payment amounts, including any
balloon payment. For example, if an advertisement for a home-equity
plan offers a $100,000 five-year line of credit and assumes that the
entire line is drawn resulting in a minimum payment of $800 per
month for the first six months, increasing to $1,000 per month after
month six, followed by a $50,000 balloon payment after five years,
the advertisement must disclose the amount and time period of each
of the two monthly payment streams, as well as the amount and timing
of the balloon payment, with equal prominence and in close proximity
to the promotional payment. However, if the final payment could not
be more than twice the amount of other minimum payments, the final
payment need not be disclosed.
iv. Plans other than variable-rate plans. For a plan other than
a variable-rate plan, if an advertised payment is calculated in the
same way as other payments based on an assumed balance, the fact
that the minimum payment could increase solely if the consumer made
an additional draw does not make the payment a promotional payment.
For example, if a payment of $500 results from an assumed $10,000
draw, and the payment would increase to $1,000 if the consumer made
an additional $10,000 draw, the payment is not a promotional
payment.
v. Conversion option. Some home-equity plans permit the consumer
to repay all or part of the balance during the draw period at a
fixed rate (rather than a variable rate) and over a specified time
period. The fixed-rate conversion option does not, by itself, make
the rate or payment that would apply if the consumer exercised the
fixed-rate conversion option a promotional rate or payment.
vi. Preferred-rate provisions. Some home-equity plans contain a
preferred-rate provision, where the rate will increase upon the
occurrence of some event, such as the consumer-employee leaving the
creditor's employ, the consumer closing an existing deposit account
with the creditor, or the consumer revoking an election to make
automated payments. A preferred-rate provision does not, by itself,
make the rate or payment under the preferred-rate provision a
promotional rate or payment.
6. Reasonably current index and margin. For the purposes of this
section, an index and margin is considered reasonably current if:
i. For direct mail advertisements, it was in effect within 60
days before mailing;
ii. For advertisements in electronic form it was in effect
within 30 days before the advertisement is sent to a consumer's
email address, or in the case of an advertisement made on an
Internet Web site, when viewed by the public; or
iii. For printed advertisements made available to the general
public, including ones contained in a catalog, magazine, or other
generally available publication, it was in effect within 30 days
before printing.
7. Relation to other sections. Advertisements for home-equity
plans must comply with all provisions in Sec. 1026.16, not solely
the rules in Sec. 1026.16(d). If an advertisement contains
information (such as the payment terms) that triggers the duty under
Sec. 1026.16(d) to state the annual percentage rate, the additional
disclosures in Sec. 1026.16(b) must be provided in the
advertisement. While Sec. 1026.16(d) does not require a statement
of fees to use or maintain the plan (such as membership fees and
transaction charges), such fees must be disclosed under Sec.
1026.16(b)(1)(i) and (b)(1)(iii).
8. Inapplicability of closed-end rules. Advertisements for home-
equity plans are governed solely by the requirements in Sec.
1026.16, except Sec. 1026.16(g), and not by the closed-end
advertising rules in Sec. 1026.24. Thus, if a creditor states
payment information about the repayment phase, this will trigger the
duty to provide additional information under Sec. 1026.16, but not
under Sec. 1026.24.
9. Balloon payment. See comment 40(d)(5)(ii)-3 for information
not required to be stated in advertisements, and on situations in
which the balloon payment requirement does not apply.
16(e) Alternative Disclosures--Television or Radio Advertisements
1. Multi-purpose telephone number. When an advertised telephone
number provides a recording, disclosures must be provided early in
the sequence to ensure that the consumer receives the required
disclosures. For example, in providing several options--such as
providing directions to the advertiser's
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place of business--the option allowing the consumer to request
disclosures should be provided early in the telephone message to
ensure that the option to request disclosures is not obscured by
other information.
2. Statement accompanying toll free number. Language must
accompany a telephone number indicating that disclosures are
available by calling the telephone number, such as ``call 1-(800)
000-0000 for details about credit costs and terms.''
16(g) Promotional Rates and Fees
1. Rate in effect at the end of the promotional period. If the
annual percentage rate that will be in effect at the end of the
promotional period (i.e., the post-promotional rate) is a variable
rate, the post-promotional rate for purposes of Sec.
1026.16(g)(2)(i) is the rate that would have applied at the time the
promotional rate was advertised if the promotional rate was not
offered, consistent with the accuracy requirements in Sec.
1026.60(c)(2) and (e)(4), as applicable.
2. Immediate proximity. For written or electronic
advertisements, including the term ``introductory'' or ``intro'' in
the same phrase as the listing of the introductory rate or
introductory fee is deemed to be in immediate proximity of the
listing.
3. Prominent location closely proximate. For written or
electronic advertisements, information required to be disclosed in
Sec. 1026.16(g)(4)(i) and, as applicable, (g)(4)(ii) and
(g)(4)(iii) that is in the same paragraph as the first listing of
the promotional rate or promotional fee is deemed to be in a
prominent location closely proximate to the listing. Information
disclosed in a footnote will not be considered in a prominent
location closely proximate to the listing.
4. First listing. For purposes of Sec. 1026.16(g)(4) as it
applies to written or electronic advertisements, the first listing
of the promotional rate or promotional fee is the most prominent
listing of the rate or fee on the front side of the first page of
the principal promotional document. The principal promotional
document is the document designed to be seen first by the consumer
in a mailing, such as a cover letter or solicitation letter. If the
promotional rate or promotional fee does not appear on the front
side of the first page of the principal promotional document, then
the first listing of the promotional rate or promotional fee is the
most prominent listing of the rate or fee on the subsequent pages of
the principal promotional document. If the promotional rate or
promotional fee is not listed on the principal promotional document
or there is no principal promotional document, the first listing is
the most prominent listing of the rate or fee on the front side of
the first page of each document listing the promotional rate or
promotional fee. If the promotional rate or promotional fee does not
appear on the front side of the first page of a document, then the
first listing of the promotional rate or promotional fee is the most
prominent listing of the rate or fee on the subsequent pages of the
document. If the listing of the promotional rate or promotional fee
with the largest type size on the front side of the first page (or
subsequent pages if the promotional rate or promotional fee is not
listed on the front side of the first page) of the principal
promotional document (or each document listing the promotional rate
or promotional fee if the promotional rate or promotional fee is not
listed on the principal promotional document or there is no
principal promotional document) is used as the most prominent
listing, it will be deemed to be the first listing. Consistent with
comment 16(c)-1, a catalog or multiple-page advertisement is
considered one document for purposes of Sec. 1026.16(g)(4).
5. Post-promotional rate depends on consumer's creditworthiness.
For purposes of disclosing the rate that may apply after the end of
the promotional rate period, at the advertiser's option, the
advertisement may disclose the rates that may apply as either
specific rates, or a range of rates. For example, if there are three
rates that may apply (9.99%, 12.99% or 17.99%), an issuer may
disclose these three rates as specific rates (9.99%, 12.99% or
17.99%) or as a range of rates (9.99%-17.99%).
16(h) Deferred Interest or Similar Offers
1. Deferred interest or similar offers clarified. Deferred
interest or similar offers do not include offers that allow a
consumer to skip payments during a specified period of time, and
under which the consumer is not obligated under any circumstances
for any interest or other finance charges that could be attributable
to that period. Deferred interest or similar offers also do not
include 0% annual percentage rate offers where a consumer is not
obligated under any circumstances for interest attributable to the
time period the 0% annual percentage rate was in effect, though such
offers may be considered promotional rates under Sec.
1026.16(g)(2)(i). Deferred interest or similar offers also do not
include skip payment programs that have no required minimum payment
for one or more billing cycles but where interest continues to
accrue and is imposed during that period.
2. Deferred interest period clarified. Although the terms of an
advertised deferred interest or similar offer may provide that a
creditor may charge the accrued interest if the balance is not paid
in full by a certain date, creditors sometimes have an informal
policy or practice that delays charging the accrued interest for
payment received a brief period of time after the date upon which a
creditor has the contractual right to charge the accrued interest.
The advertisement need not include the end of an informal ``courtesy
period'' in disclosing the deferred interest period under Sec.
1026.16(h)(3).
3. Immediate proximity. For written or electronic
advertisements, including the deferred interest period in the same
phrase as the statement of ``no interest,'' ``no payments,''
``deferred interest,'' or ``same as cash'' or similar term regarding
interest or payments during the deferred interest period is deemed
to be in immediate proximity of the statement.
4. Prominent location closely proximate. For written or
electronic advertisements, information required to be disclosed in
Sec. 1026.16(h)(4)(i) and (ii) that is in the same paragraph as the
first statement of ``no interest,'' ``no payments,'' ``deferred
interest,'' or ``same as cash'' or similar term regarding interest
or payments during the deferred interest period is deemed to be in a
prominent location closely proximate to the statement. Information
disclosed in a footnote is not considered in a prominent location
closely proximate to the statement.
5. First listing. For purposes of Sec. 1026.16(h)(4) as it
applies to written or electronic advertisements, the first statement
of ``no interest,'' ``no payments,'' ``deferred interest,'' ``same
as cash,'' or similar term regarding interest or payments during the
deferred interest period is the most prominent listing of one of
these statements on the front side of the first page of the
principal promotional document. The principal promotional document
is the document designed to be seen first by the consumer in a
mailing, such as a cover letter or solicitation letter. If one of
the statements does not appear on the front side of the first page
of the principal promotional document, then the first listing of one
of these statements is the most prominent listing of a statement on
the subsequent pages of the principal promotional document. If one
of the statements is not listed on the principal promotional
document or there is no principal promotional document, the first
listing of one of these statements is the most prominent listing of
the statement on the front side of the first page of each document
containing one of these statements. If one of the statements does
not appear on the front side of the first page of a document, then
the first listing of one of these statements is the most prominent
listing of a statement on the subsequent pages of the document. If
the listing of one of these statements with the largest type size on
the front side of the first page (or subsequent pages if one of
these statements is not listed on the front side of the first page)
of the principal promotional document (or each document listing one
of these statements if a statement is not listed on the principal
promotional document or there is no principal promotional document)
is used as the most prominent listing, it will be deemed to be the
first listing. Consistent with comment 16(c)-1, a catalog or
multiple-page advertisement is considered one document for purposes
of Sec. 1026.16(h)(4).
6. Additional information. Consistent with comment 5(a)-2, the
information required under Sec. 1026.16(h)(4) need not be
segregated from other information regarding the deferred interest or
similar offer. Advertisements may also be required to provide
additional information pursuant to Sec. 1026.16(b) though such
information need not be integrated with the information required
under Sec. 1026.16(h)(4).
7. Examples. Examples of disclosures that could be used to
comply with the requirements of Sec. 1026.16(h)(3) include: ``no
interest if paid in full within 6 months'' and ``no interest if paid
in full by December 31, 2010.''
Subpart C--Closed-End Credit
Section 1026.17--General Disclosure Requirements
17(a) Form of Disclosures
Paragraph 17(a)(1)
1. Clear and conspicuous. This standard requires that
disclosures be in a reasonably
[[Page 79970]]
understandable form. For example, while the regulation requires no
mathematical progression or format, the disclosures must be
presented in a way that does not obscure the relationship of the
terms to each other. In addition, although no minimum type size is
mandated (except for the interest rate and payment summary for
mortgage transactions required by Sec. 1026.18(s)), the disclosures
must be legible, whether typewritten, handwritten, or printed by
computer.
2. Segregation of disclosures. i. The disclosures may be grouped
together and segregated from other information in a variety of ways.
For example, the disclosures may appear on a separate sheet of paper
or may be set off from other information on the contract or other
documents:
A. By outlining them in a box.
B. By bold print dividing lines.
C. By a different color background.
D. By a different type style.
ii. The general segregation requirement described in this
subparagraph does not apply to the disclosures required under
Sec. Sec. 1026.19(b) and 1026.20(c) although the disclosures must
be clear and conspicuous.
3. Location. The regulation imposes no specific location
requirements on the segregated disclosures. For example:
i. They may appear on a disclosure statement separate from all
other material.
ii. They may be placed on the same document with the credit
contract or other information, so long as they are segregated from
that information.
iii. They may be shown on the front or back of a document.
iv. They need not begin at the top of a page.
v. They may be continued from one page to another.
4. Content of segregated disclosures. Section 1026.17(a)(1)
contains exceptions to the requirement that the disclosures under
Sec. 1026.18 be segregated from material that is not directly
related to those disclosures. Section 1026.17(a)(1) lists the items
that may be added to the segregated disclosures, even though not
directly related to those disclosures. The section also lists the
items required under Sec. 1026.18 that may be deleted from the
segregated disclosures and appear elsewhere. Any one or more of
these additions or deletions may be combined and appear either
together with or separate from the segregated disclosures. The
itemization of the amount financed under Sec. 1026.18(c), however,
must be separate from the other segregated disclosures under Sec.
1026.18, except for private education loan disclosures made in
compliance with Sec. 1026.47. If a creditor chooses to include the
security interest charges required to be itemized under Sec.
1026.4(e) and Sec. 1026.18(o) in the amount financed itemization,
it need not list these charges elsewhere.
5. Directly related. The segregated disclosures may, at the
creditor's option, include any information that is directly related
to those disclosures. The following is directly related information:
i. A description of a grace period after which a late payment
charge will be imposed. For example, the disclosure given under
Sec. 1026.18(l) may state that a late charge will apply to ``any
payment received more than 15 days after the due date.''
ii. A statement that the transaction is not secured. For
example, the creditor may add a category labeled ``unsecured'' or
``not secured'' to the security interest disclosures given under
Sec. 1026.18(m).
iii. The basis for any estimates used in making disclosures. For
example, if the maturity date of a loan depends solely on the
occurrence of a future event, the creditor may indicate that the
disclosures assume that event will occur at a certain time.
iv. The conditions under which a demand feature may be
exercised. For example, in a loan subject to demand after five
years, the disclosures may state that the loan will become payable
on demand in five years.
v. An explanation of the use of pronouns or other references to
the parties to the transaction. For example, the disclosures may
state, `` `You' refers to the customer and `we' refers to the
creditor.''
vi. Instructions to the creditor or its employees on the use of
a multiple-purpose form. For example, the disclosures may state,
``Check box if applicable.''
vii. A statement that the borrower may pay a minimum finance
charge upon prepayment in a simple-interest transaction. For
example, when state law prohibits penalties, but would allow a
minimum finance charge in the event of prepayment, the creditor may
make the Sec. 1026.18(k)(1) disclosure by stating, ``You may be
charged a minimum finance charge.''
viii. A brief reference to negative amortization in variable-
rate transactions. For example, in the variable-rate disclosure, the
creditor may include a short statement such as ``Unpaid interest
will be added to principal.'' (See the commentary to Sec.
1026.18(f)(1)(iii).)
ix. A brief caption identifying the disclosures. For example,
the disclosures may bear a general title such as ``Federal Truth in
Lending Disclosures'' or a descriptive title such as ``Real Estate
Loan Disclosures.''
x. A statement that a due-on-sale clause or other conditions on
assumption are contained in the loan document. For example, the
disclosure given under Sec. 1026.18(q) may state, ``Someone buying
your home may, subject to conditions in the due-on-sale clause
contained in the loan document, assume the remainder of the mortgage
on the original terms.''
xi. If a state or Federal law prohibits prepayment penalties and
excludes the charging of interest after prepayment from coverage as
a penalty, a statement that the borrower may have to pay interest
for some period after prepayment in full. The disclosure given under
Sec. 1026.18(k) may state, for example, ``If you prepay your loan
on other than the regular installment date, you may be assessed
interest charges until the end of the month.''
xii. More than one hypothetical example under Sec.
1026.18(f)(1)(iv) in transactions with more than one variable-rate
feature. For example, in a variable-rate transaction with an option
permitting consumers to convert to a fixed-rate transaction, the
disclosures may include an example illustrating the effects on the
payment terms of an increase resulting from conversion in addition
to the example illustrating an increase resulting from changes in
the index.
xiii. The disclosures set forth under Sec. 1026.18(f)(1) for
variable-rate transactions subject to Sec. 1026.18(f)(2).
xiv. A statement whether or not a subsequent purchaser of the
property securing an obligation may be permitted to assume the
remaining obligation on its original terms.
xv. A late-payment fee disclosure under Sec. 1026.18(l) on a
single payment loan.
xvi. The notice set forth in Sec. 1026.19(a)(4), in a closed-
end transaction not subject to Sec. 1026.19(a)(1)(i). In a mortgage
transaction subject to Sec. 1026.19(a)(1)(i), the creditor must
disclose the notice contained in Sec. 1026.19(a)(4) grouped
together with the disclosures made under Sec. 1026.18. See comment
19(a)(4)-1.
6. Multiple-purpose forms. The creditor may design a disclosure
statement that can be used for more than one type of transaction, so
long as the required disclosures for individual transactions are
clear and conspicuous. (See the commentary to Appendices G and H for
a discussion of the treatment of disclosures that do not apply to
specific transactions.) Any disclosure listed in Sec. 1026.18
(except the itemization of the amount financed under Sec.
1026.18(c) for transactions other than private education loans) may
be included on a standard disclosure statement even though not all
of the creditor's transactions include those features. For example,
the statement may include:
i. The variable rate disclosure under Sec. 1026.18(f).
ii. The demand feature disclosure under Sec. 1026.18(i).
iii. A reference to the possibility of a security interest
arising from a spreader clause, under Sec. 1026.18(m).
iv. The assumption policy disclosure under Sec. 1026.18(q).
v. The required deposit disclosure under Sec. 1026.18(r).
7. Balloon payment financing with leasing characteristics. In
certain credit sale or loan transactions, a consumer may reduce the
dollar amount of the payments to be made during the course of the
transaction by agreeing to make, at the end of the loan term, a
large final payment based on the expected residual value of the
property. The consumer may have a number of options with respect to
the final payment, including, among other things, retaining the
property and making the final payment, refinancing the final
payment, or transferring the property to the creditor in lieu of the
final payment. Such transactions may have some of the
characteristics of lease transactions subject to Regulation M (12
CFR Part 1013), but are considered credit transactions where the
consumer assumes the indicia of ownership, including the risks,
burdens and benefits of ownership upon consummation. These
transactions are governed by the disclosure requirements of this
part instead of Regulation M. Creditors should not include in the
segregated Truth in Lending disclosures additional information.
Thus, disclosures should show the large final
[[Page 79971]]
payment in the payment schedule and should not, for example, reflect
the other options available to the consumer at maturity.
Paragraph 17(a)(2)
1. When disclosures must be more conspicuous. The following
rules apply to the requirement that the terms ``annual percentage
rate'' (except for private education loan disclosures made in
compliance with Sec. 1026.47) and ``finance charge'' be shown more
conspicuously:
i. The terms must be more conspicuous only in relation to the
other required disclosures under Sec. 1026.18. For example, when
the disclosures are included on the contract document, those two
terms need not be more conspicuous as compared to the heading on the
contract document or information required by state law.
ii. The terms need not be more conspicuous except as part of the
finance charge and annual percentage rate disclosures under Sec.
1026.18(d) and (e), although they may, at the creditor's option, be
highlighted wherever used in the required disclosures. For example,
the terms may, but need not, be highlighted when used in disclosing
a prepayment penalty under Sec. 1026.18(k) or a required deposit
under Sec. 1026.18(r).
iii. The creditor's identity under Sec. 1026.18(a) may, but
need not, be more prominently displayed than the finance charge and
annual percentage rate.
iv. The terms need not be more conspicuous than figures
(including, for example, numbers, percentages, and dollar signs).
2. Making disclosures more conspicuous. The terms ``finance
charge'' and (except for private education loan disclosures made in
compliance with Sec. 1026.47) ``annual percentage rate'' may be
made more conspicuous in any way that highlights them in relation to
the other required disclosures. For example, they may be:
i. Capitalized when other disclosures are printed in capital and
lower case.
ii. Printed in larger type, bold print or different type face.
iii. Printed in a contrasting color.
iv. Underlined.
v. Set off with asterisks.
17(b) Time of Disclosures
1. Consummation. As a general rule, disclosures must be made
before ``consummation'' of the transaction. The disclosures need not
be given by any particular time before consummation, except in
certain mortgage transactions and variable-rate transactions secured
by the consumer's principal dwelling with a term greater than one
year under Sec. 1026.19, and in private education loan transactions
disclosed in compliance with Sec. Sec. 1026.46 and 1026.47. (See
the commentary to Sec. 1026.2(a)(13) regarding the definition of
consummation.)
2. Converting open-end to closed-end credit. Except for home
equity plans subject to Sec. 1026.40 in which the agreement
provides for a repayment phase, if an open-end credit account is
converted to a closed-end transaction under a written agreement with
the consumer, the creditor must provide a set of closed-end credit
disclosures before consummation of the closed-end transaction. (See
the commentary to Sec. 1026.19(b) for the timing rules for
additional disclosures required upon the conversion to a variable-
rate transaction secured by a consumer's principal dwelling with a
term greater than one year.) If consummation of the closed-end
transaction occurs at the same time as the consumer enters into the
open-end agreement, the closed-end credit disclosures may be given
at the time of conversion. If disclosures are delayed until
conversion and the closed-end transaction has a variable-rate
feature, disclosures should be based on the rate in effect at the
time of conversion. (See the commentary to Sec. 1026.5 regarding
conversion of closed-end to open-end credit.)
3. Disclosures provided on credit contracts. Creditors must give
the required disclosures to the consumer in writing, in a form that
the consumer may keep, before consummation of the transaction. See
Sec. 1026.17(a)(1) and (b). Sometimes the disclosures are placed on
the same document with the credit contract. Creditors are not
required to give the consumer two separate copies of the document
before consummation, one for the consumer to keep and a second copy
for the consumer to execute. The disclosure requirement is satisfied
if the creditor gives a copy of the document containing the
unexecuted credit contract and disclosures to the consumer to read
and sign; and the consumer receives a copy to keep at the time the
consumer becomes obligated. It is not sufficient for the creditor
merely to show the consumer the document containing the disclosures
before the consumer signs and becomes obligated. The consumer must
be free to take possession of and review the document in its
entirety before signing.
i. Example. To illustrate, a creditor gives a consumer a
multiple-copy form containing a credit agreement and TILA
disclosures. The consumer reviews and signs the form and returns it
to the creditor, who separates the copies and gives one copy to the
consumer to keep. The creditor has satisfied the disclosure
requirement.
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)
1. Legal obligation. The disclosures shall reflect the credit
terms to which the parties are legally bound as of the outset of the
transaction. In the case of disclosures required under Sec.
1026.20(c), the disclosures shall reflect the credit terms to which
the parties are legally bound when the disclosures are provided. The
legal obligation is determined by applicable state law or other law.
(Certain transactions are specifically addressed in this commentary.
See, for example, the discussion of buydown transactions elsewhere
in the commentary to Sec. 1026.17(c).) The fact that a term or
contract may later be deemed unenforceable by a court on the basis
of equity or other grounds does not, by itself, mean that
disclosures based on that term or contract did not reflect the legal
obligation.
2. Modification of obligation. The legal obligation normally is
presumed to be contained in the note or contract that evidences the
agreement. But this presumption is rebutted if another agreement
between the parties legally modifies that note or contract. If the
parties informally agree to a modification of the legal obligation,
the modification should not be reflected in the disclosures unless
it rises to the level of a change in the terms of the legal
obligation. For example:
i. If the creditor offers a preferential rate, such as an
employee preferred rate, the disclosures should reflect the terms of
the legal obligation. (See the commentary to Sec. 1026.19(b) for an
example of a preferred-rate transaction that is a variable-rate
transaction.)
ii. If the contract provides for a certain monthly payment
schedule but payments are made on a voluntary payroll deduction plan
or an informal principal-reduction agreement, the disclosures should
reflect the schedule in the contract.
iii. If the contract provides for regular monthly payments but
the creditor informally permits the consumer to defer payments from
time to time, for instance, to take account of holiday seasons or
seasonal employment, the disclosures should reflect the regular
monthly payments.
3. Third-party buydowns. In certain transactions, a seller or
other third party may pay an amount, either to the creditor or to
the consumer, in order to reduce the consumer's payments or buy down
the interest rate for all or a portion of the credit term. For
example, a consumer and a bank agree to a mortgage with an interest
rate of 15% and level payments over 25 years. By a separate
agreement, the seller of the property agrees to subsidize the
consumer's payments for the first 2 years of the mortgage, giving
the consumer an effective rate of 12% for that period.
i. If the lower rate is reflected in the credit contract between
the consumer and the bank, the disclosures must take the buydown
into account. For example, the annual percentage rate must be a
composite rate that takes account of both the lower initial rate and
the higher subsequent rate, and the payment schedule disclosures
must reflect the 2 payment levels. However, the amount paid by the
seller would not be specifically reflected in the disclosures given
by the bank, since that amount constitutes seller's points and thus
is not part of the finance charge.
ii. If the lower rate is not reflected in the credit contract
between the consumer and the bank and the consumer is legally bound
to the 15% rate from the outset, the disclosures given by the bank
must not reflect the seller buydown in any way. For example, the
annual percentage rate and payment schedule would not take into
account the reduction in the interest rate and payment level for the
first 2 years resulting from the buydown.
4. Consumer buydowns. In certain transactions, the consumer may
pay an amount to the creditor to reduce the payments or obtain a
lower interest rate on the transaction. Consumer buydowns must be
reflected in the disclosures given for that transaction. To
illustrate, in a mortgage transaction, the creditor and consumer
agree
[[Page 79972]]
to a note specifying a 14 percent interest rate. However, in a
separate document, the consumer agrees to pay an amount to the
creditor at consummation in return for a reduction in the interest
rate to 12 percent for a portion of the mortgage term. The amount
paid by the consumer may be deposited in an escrow account or may be
retained by the creditor. Depending upon the buydown plan, the
consumer's prepayment of the obligation may or may not result in a
portion of the amount being credited or refunded to the consumer. In
the disclosures given for the mortgage, the creditor must reflect
the terms of the buydown agreement.
i. For example:
A. The amount paid by the consumer is a prepaid finance charge
(even if deposited in an escrow account).
B. A composite annual percentage rate must be calculated, taking
into account both interest rates, as well as the effect of the
prepaid finance charge.
C. The payment schedule must reflect the multiple payment levels
resulting from the buydown.
ii. The rules regarding consumer buydowns do not apply to
transactions known as ``lender buydowns.'' In lender buydowns, a
creditor pays an amount (either into an account or to the party to
whom the obligation is sold) to reduce the consumer's payments or
interest rate for all or a portion of the credit term. Typically,
these transactions are structured as a buydown of the interest rate
during an initial period of the transaction with a higher than usual
rate for the remainder of the term. The disclosures for lender
buydowns should be based on the terms of the legal obligation
between the consumer and the creditor. (See comment 17(c)(1)-3 for
the analogous rules concerning third-party buydowns.)
5. Split buydowns. In certain transactions, a third party (such
as a seller) and a consumer both pay an amount to the creditor to
reduce the interest rate. The creditor must include the portion paid
by the consumer in the finance charge and disclose the corresponding
multiple payment levels and composite annual percentage rate. The
portion paid by the third party and the corresponding reduction in
interest rate, however, should not be reflected in the disclosures
unless the lower rate is reflected in the credit contract. (See the
discussion on third-party and consumer buydown transactions
elsewhere in the commentary to Sec. 1026.17(c).)
6. Wrap-around financing. Wrap-around transactions, usually
loans, involve the creditor's wrapping the outstanding balance on an
existing loan and advancing additional funds to the consumer. The
pre-existing loan, which is wrapped, may be to the same consumer or
to a different consumer. In either case, the consumer makes a single
payment to the new creditor, who makes the payments on the pre-
existing loan to the original creditor. Wrap-around loans or sales
are considered new single-advance transactions, with an amount
financed equaling the sum of the new funds advanced by the wrap
creditor and the remaining principal owed to the original creditor
on the pre-existing loan. In disclosing the itemization of the
amount financed, the creditor may use a label such as ``the amount
that will be paid to creditor X'' to describe the remaining
principal balance on the pre-existing loan. This approach to Truth
in Lending calculations has no effect on calculations required by
other statutes, such as state usury laws.
7. Wrap-around financing with balloon payments. For wrap-around
transactions involving a large final payment of the new funds before
the maturity of the pre-existing loan, the amount financed is the
sum of the new funds and the remaining principal on the pre-existing
loan. The disclosures should be based on the shorter term of the
wrap loan, with a large final payment of both the new funds and the
total remaining principal on the pre-existing loan (although only
the wrap loan will actually be paid off at that time).
8. Basis of disclosures in variable-rate transactions. The
disclosures for a variable-rate transaction must be given for the
full term of the transaction and must be based on the terms in
effect at the time of consummation. Creditors should base the
disclosures only on the initial rate and should not assume that this
rate will increase. For example, in a loan with an initial rate of
10 percent and a 5 percentage points rate cap, creditors should base
the disclosures on the initial rate and should not assume that this
rate will increase 5 percentage points. However, in a variable-rate
transaction with a seller buydown that is reflected in the credit
contract, a consumer buydown, or a discounted or premium rate,
disclosures should not be based solely on the initial terms. In
those transactions, the disclosed annual percentage rate should be a
composite rate based on the rate in effect during the initial period
and the rate that is the basis of the variable-rate feature for the
remainder of the term. (See the commentary to Sec. 1026.17(c) for a
discussion of buydown, discounted, and premium transactions and the
commentary to Sec. 1026.19(a)(2) for a discussion of the
redisclosure in certain mortgage transactions with a variable-rate
feature.)
9. Use of estimates in variable-rate transactions. The variable-
rate feature does not, by itself, make the disclosures estimates.
10. Discounted and premium variable-rate transactions. In some
variable-rate transactions, creditors may set an initial interest
rate that is not determined by the index or formula used to make
later interest rate adjustments. Typically, this initial rate
charged to consumers is lower than the rate would be if it were
calculated using the index or formula. However, in some cases the
initial rate may be higher. In a discounted transaction, for
example, a creditor may calculate interest rates according to a
formula using the six-month Treasury bill rate plus a 2 percent
margin. If the Treasury bill rate at consummation is 10 percent, the
creditor may forgo the 2 percent spread and charge only 10 percent
for a limited time, instead of setting an initial rate of 12
percent.
i. When creditors use an initial interest rate that is not
calculated using the index or formula for later rate adjustments,
the disclosures should reflect a composite annual percentage rate
based on the initial rate for as long as it is charged and, for the
remainder of the term, the rate that would have been applied using
the index or formula at the time of consummation. The rate at
consummation need not be used if a contract provides for a delay in
the implementation of changes in an index value. For example, if the
contract specifies that rate changes are based on the index value in
effect 45 days before the change date, creditors may use any index
value in effect during the 45 day period before consummation in
calculating a composite annual percentage rate.
ii. The effect of the multiple rates must also be reflected in
the calculation and disclosure of the finance charge, total of
payments, and payment schedule.
iii. If a loan contains a rate or payment cap that would prevent
the initial rate or payment, at the time of the first adjustment,
from changing to the rate determined by the index or formula at
consummation, the effect of that rate or payment cap should be
reflected in the disclosures.
iv. Because these transactions involve irregular payment
amounts, an annual percentage rate tolerance of [frac14] of 1
percent applies, in accordance with Sec. 1026.22(a)(3).
v. Examples of discounted variable-rate transactions include:
A. A 30-year loan for $100,000 with no prepaid finance charges
and rates determined by the Treasury bill rate plus 2 percent. Rate
and payment adjustments are made annually. Although the Treasury
bill rate at the time of consummation is 10 percent, the creditor
sets the interest rate for one year at 9 percent, instead of 12
percent according to the formula. The disclosures should reflect a
composite annual percentage rate of 11.63 percent based on 9 percent
for one year and 12 percent for 29 years. Reflecting those two rate
levels, the payment schedule should show 12 payments of $804.62 and
348 payments of $1,025.31. The finance charge should be $266,463.32
and the total of payments $366,463.32.
B. Same loan as above, except with a 2 percent rate cap on
periodic adjustments. The disclosures should reflect a composite
annual percentage rate of 11.53 percent based on 9 percent for the
first year, 11 percent for the second year, and 12 percent for the
remaining 28 years. Reflecting those three rate levels, the payment
schedule should show 12 payments of $804.62, 12 payments of $950.09,
and 336 payments of $1,024.34. The finance charge should be
$265,234.76 and the total of payments $365,234.76.
C. Same loan as above, except with a 7 \1/2\ percent cap on
payment adjustments. The disclosures should reflect a composite
annual percentage rate of 11.64 percent, based on 9 percent for one
year and 12 percent for 29 years. Because of the payment cap, five
levels of payments should be reflected. The payment schedule should
show 12 payments of $804.62, 12 payments of $864.97, 12 payments of
$929.84, 12 payments of $999.58, and 312 payments of $1,070.04. The
finance charge should be $277,040.60, and the total of payments
$377,040.60.
vi. A loan in which the initial interest rate is set according
to the index or formula used for later adjustments but is not set at
the
[[Page 79973]]
value of the index or formula at consummation is not a discounted
variable-rate loan. For example, if a creditor commits to an initial
rate based on the formula on a date prior to consummation, but the
index has moved during the period between that time and
consummation, a creditor should base its disclosures on the initial
rate.
11. Examples of variable-rate transactions. Variable-rate
transactions include:
i. Renewable balloon-payment instruments where the creditor is
both unconditionally obligated to renew the balloon-payment loan at
the consumer's option (or is obligated to renew subject to
conditions within the consumer's control) and has the option of
increasing the interest rate at the time of renewal. Disclosures
must be based on the payment amortization (unless the specified term
of the obligation with renewals is shorter) and on the rate in
effect at the time of consummation of the transaction. (Examples of
conditions within a consumer's control include requirements that a
consumer be current in payments or continue to reside in the
mortgaged property. In contrast, setting a limit on the rate at
which the creditor would be obligated to renew or reserving the
right to change the credit standards at the time of renewal are
examples of conditions outside a consumer's control.) If, however, a
creditor is not obligated to renew as described above, disclosures
must be based on the term of the balloon-payment loan. Disclosures
also must be based on the term of the balloon-payment loan in
balloon-payment instruments in which the legal obligation provides
that the loan will be renewed by a ``refinancing'' of the
obligation, as that term is defined by Sec. 1026.20(a). If it
cannot be determined from the legal obligation that the loan will be
renewed by a ``refinancing,'' disclosures must be based either on
the term of the balloon-payment loan or on the payment amortization,
depending on whether the creditor is unconditionally obligated to
renew the loan as described above. (This discussion does not apply
to construction loans subject to Sec. 1026.17(c)(6).)
ii. ``Shared-equity'' or ``shared-appreciation'' mortgages that
have a fixed rate of interest and an appreciation share based on the
consumer's equity in the mortgaged property. The appreciation share
is payable in a lump sum at a specified time. Disclosures must be
based on the fixed interest rate. (As discussed in the commentary to
Sec. 1026.2, other types of shared-equity arrangements are not
considered ``credit'' and are not subject to Regulation Z.)
iii. Preferred-rate loans where the terms of the legal
obligation provide that the initial underlying rate is fixed but
will increase upon the occurrence of some event, such as an employee
leaving the employ of the creditor, and the note reflects the
preferred rate. The disclosures are to be based on the preferred
rate.
iv. Graduated-payment mortgages and step-rate transactions
without a variable-rate feature are not considered variable-rate
transactions.
v. ``Price level adjusted mortgages'' or other indexed mortgages
that have a fixed rate of interest but provide for periodic
adjustments to payments and the loan balance to reflect changes in
an index measuring prices or inflation. Disclosures are to be based
on the fixed interest rate.
12. Graduated payment adjustable rate mortgages. These mortgages
involve both a variable interest rate and scheduled variations in
payment amounts during the loan term. For example, under these
plans, a series of graduated payments may be scheduled before rate
adjustments affect payment amounts, or the initial scheduled payment
may remain constant for a set period before rate adjustments affect
the payment amount. In any case, the initial payment amount may be
insufficient to cover the scheduled interest, causing negative
amortization from the outset of the transaction. In these
transactions, the disclosures should treat these features as
follows:
i. The finance charge includes the amount of negative
amortization based on the assumption that the rate in effect at
consummation remains unchanged.
ii. The amount financed does not include the amount of negative
amortization.
iii. As in any variable-rate transaction, the annual percentage
rate is based on the terms in effect at consummation.
iv. The schedule of payments discloses the amount of any
scheduled initial payments followed by an adjusted level of payments
based on the initial interest rate. Since some mortgage plans
contain limits on the amount of the payment adjustment, the payment
schedule may require several different levels of payments, even with
the assumption that the original interest rate does not increase.
13. Growth-equity mortgages. i. Also referred to as payment-
escalated mortgages, these mortgage plans involve scheduled payment
increases to prematurely amortize the loan. The initial payment
amount is determined as for a long-term loan with a fixed interest
rate. Payment increases are scheduled periodically, based on changes
in an index. The larger payments result in accelerated amortization
of the loan. In disclosing these mortgage plans, creditors may
either:
A. Estimate the amount of payment increases, based on the best
information reasonably available; or
B. Disclose by analogy to the variable-rate disclosures in
1026.18(f)(1).
ii. This discussion does not apply to growth-equity mortgages in
which the amount of payment increases can be accurately determined
at the time of disclosure. For these mortgages, as for graduated-
payment mortgages, disclosures should reflect the scheduled
increases in payments.
14. Reverse mortgages. Reverse mortgages, also known as reverse
annuity or home equity conversion mortgages, typically involve the
disbursement of monthly advances to the consumer for a fixed period
or until the occurrence of an event such as the consumer's death.
Repayment of the loan (generally a single payment of principal and
accrued interest) may be required to be made at the end of the
disbursements or, for example, upon the death of the consumer. In
disclosing these transactions, creditors must apply the following
rules, as applicable:
i. If the reverse mortgage has a specified period for
disbursements but repayment is due only upon the occurrence of a
future event such as the death of the consumer, the creditor must
assume that disbursements will be made until they are scheduled to
end. The creditor must assume repayment will occur when
disbursements end (or within a period following the final
disbursement which is not longer than the regular interval between
disbursements). This assumption should be used even though repayment
may occur before or after the disbursements are scheduled to end. In
such cases, the creditor may include a statement such as ``The
disclosures assume that you will repay the loan at the time our
payments to you end. As provided in your agreement, your repayment
may be required at a different time.''
ii. If the reverse mortgage has neither a specified period for
disbursements nor a specified repayment date and these terms will be
determined solely by reference to future events including the
consumer's death, the creditor may assume that the disbursements
will end upon the consumer's death (estimated by using actuarial
tables, for example) and that repayment will be required at the same
time (or within a period following the date of the final
disbursement which is not longer than the regular interval for
disbursements). Alternatively, the creditor may base the disclosures
upon another future event it estimates will be most likely to occur
first. (If terms will be determined by reference to future events
which do not include the consumer's death, the creditor must base
the disclosures upon the occurrence of the event estimated to be
most likely to occur first.)
iii. In making the disclosures, the creditor must assume that
all disbursements and accrued interest will be paid by the consumer.
For example, if the note has a nonrecourse provision providing that
the consumer is not obligated for an amount greater than the value
of the house, the creditor must nonetheless assume that the full
amount to be disbursed will be repaid. In this case, however, the
creditor may include a statement such as ``The disclosures assume
full repayment of the amount advanced plus accrued interest,
although the amount you may be required to pay is limited by your
agreement.''
iv. Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared between the
consumer and the creditor. Such loans are considered variable-rate
mortgages, as described in comment 17(c)(1)-11, and the appreciation
feature must be disclosed in accordance with Sec. 1026.18(f)(1). If
the reverse mortgage has a variable interest rate, is written for a
term greater than one year, and is secured by the consumer's
principal dwelling, the shared appreciation feature must be
described under Sec. 1026.19(b)(2)(vii).
15. Morris Plan transactions. When a deposit account is created
for the sole purpose of accumulating payments and then is applied to
satisfy entirely the consumer's obligation in the transaction, each
deposit made into the account is considered the same
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as a payment on a loan for purposes of making disclosures.
16. Number of transactions. Creditors have flexibility in
handling credit extensions that may be viewed as multiple
transactions. For example:
i. When a creditor finances the credit sale of a radio and a
television on the same day, the creditor may disclose the sales as
either 1 or 2 credit sale transactions.
ii. When a creditor finances a loan along with a credit sale of
health insurance, the creditor may disclose in one of several ways:
a single credit sale transaction, a single loan transaction, or a
loan and a credit sale transaction.
iii. The separate financing of a downpayment in a credit sale
transaction may, but need not, be disclosed as 2 transactions (a
credit sale and a separate transaction for the financing of the
downpayment).
17. Special rules for tax refund anticipation loans. Tax refund
loans, also known as refund anticipation loans (RALs), are
transactions in which a creditor will lend up to the amount of a
consumer's expected tax refund. RAL agreements typically require
repayment upon demand, but also may provide that repayment is
required when the refund is made. The agreements also typically
provide that if the amount of the refund is less than the payment
due, the consumer must pay the difference. Repayment often is made
by a preauthorized offset to a consumer's account held with the
creditor when the refund has been deposited by electronic transfer.
Creditors may charge fees for RALs in addition to fees for filing
the consumer's tax return electronically. In RAL transactions
subject to the regulation the following special rules apply:
i. If, under the terms of the legal obligation, repayment of the
loan is required when the refund is received by the consumer (such
as by deposit into the consumer's account), the disclosures should
be based on the creditor's estimate of the time the refund will be
delivered even if the loan also contains a demand clause. The
practice of a creditor to demand repayment upon delivery of refunds
does not determine whether the legal obligation requires that
repayment be made at that time; this determination must be made
according to applicable state or other law. (See comment 17(c)(5)-1
for the rules regarding disclosures if the loan is payable solely on
demand or is payable either on demand or on an alternate maturity
date.)
ii. If the consumer is required to repay more than the amount
borrowed, the difference is a finance charge unless excluded under
Sec. 1026.4. In addition, to the extent that any fees charged in
connection with the loan (such as for filing the tax return
electronically) exceed those fees for a comparable cash transaction
(that is, filing the tax return electronically without a loan), the
difference must be included in the finance charge.
18. Pawn Transactions. When, in connection with an extension of
credit, a consumer pledges or sells an item to a pawnbroker creditor
in return for a sum of money and retains the right to redeem the
item for a greater sum (the redemption price) within a specified
period of time, disclosures are required. In addition to other
disclosure requirements that may be applicable under Sec. 1026.18,
for purposes of pawn transactions:
i. The amount financed is the initial sum paid to the consumer.
The pawnbroker creditor need not provide a separate itemization of
the amount financed if that entire amount is paid directly to the
consumer and the disclosed description of the amount financed is
``the amount of cash given directly to you'' or a similar phrase.
ii. The finance charge is the difference between the initial sum
paid to the consumer and the redemption price plus any other finance
charges paid in connection with the transaction. (See Sec. 1026.4.)
iii. The term of the transaction, for calculating the annual
percentage rate, is the period of time agreed to by the pawnbroker
creditor and the consumer. The term of the transaction does not
include a grace period (including any statutory grace period) after
the agreed redemption date.
Paragraph 17(c)(2)(i)
1. Basis for estimates. Disclosures may be estimated when the
exact information is unknown at the time disclosures are made.
Information is unknown if it is not reasonably available to the
creditor at the time the disclosures are made. The ``reasonably
available'' standard requires that the creditor, acting in good
faith, exercise due diligence in obtaining information. For example,
the creditor must at a minimum utilize generally accepted
calculation tools, but need not invest in the most sophisticated
computer program to make a particular type of calculation. The
creditor normally may rely on the representations of other parties
in obtaining information. For example, the creditor might look to
the consumer for the time of consummation, to insurance companies
for the cost of insurance, or to realtors for taxes and escrow fees.
The creditor may utilize estimates in making disclosures even though
the creditor knows that more precise information will be available
by the point of consummation. However, new disclosures may be
required under Sec. 1026.17(f) or Sec. 1026.19.
2. Labeling estimates. Estimates must be designated as such in
the segregated disclosures. Even though other disclosures are based
on the same assumption on which a specific estimated disclosure was
based, the creditor has some flexibility in labeling the estimates.
Generally, only the particular disclosure for which the exact
information is unknown is labeled as an estimate. However, when
several disclosures are affected because of the unknown information,
the creditor has the option of labeling either every affected
disclosure or only the disclosure primarily affected. For example,
when the finance charge is unknown because the date of consummation
is unknown, the creditor must label the finance charge as an
estimate and may also label as estimates the total of payments and
the payment schedule. When many disclosures are estimates, the
creditor may use a general statement, such as ``all numerical
disclosures except the late payment disclosure are estimates,'' as a
method to label those disclosures as estimates.
3. Simple-interest transactions. If consumers do not make timely
payments in a simple-interest transaction, some of the amounts
calculated for Truth in Lending disclosures will differ from amounts
that consumers will actually pay over the term of the transaction.
Creditors may label disclosures as estimates in these transactions.
For example, because the finance charge and total of payments may be
larger than disclosed if consumers make late payments, creditors may
label the finance charge and total of payments as estimates. On the
other hand, creditors may choose not to label disclosures as
estimates and may base all disclosures on the assumption that
payments will be made on time, disregarding any possible
inaccuracies resulting from consumers' payment patterns.
Paragraph 17(c)(2)(ii)
1. Per-diem interest. This paragraph applies to any numerical
amount (such as the finance charge, annual percentage rate, or
payment amount) that is affected by the amount of the per-diem
interest charge that will be collected at consummation. If the
amount of per-diem interest used in preparing the disclosures for
consummation is based on the information known to the creditor at
the time the disclosure document is prepared, the disclosures are
considered accurate under this rule, and affected disclosures are
also considered accurate, even if the disclosures are not labeled as
estimates. For example, if the amount of per-diem interest used to
prepare disclosures is less than the amount of per-diem interest
charged at consummation, and as a result the finance charge is
understated by $200, the disclosed finance charge is considered
accurate even though the understatement is not within the $100
tolerance of Sec. 1026.18(d)(1), and the finance charge was not
labeled as an estimate. In this example, if in addition to the
understatement related to the per-diem interest, a $90 fee is
incorrectly omitted from the finance charge, causing it to be
understated by a total of $290, the finance charge is considered
accurate because the $90 fee is within the tolerance in Sec.
1026.18(d)(1).
Paragraph 17(c)(3)
1. Minor variations. Section 1026.17(c)(3) allows creditors to
disregard certain factors in calculating and making disclosures. For
example:
i. Creditors may ignore the effects of collecting payments in
whole cents. Because payments cannot be collected in fractional
cents, it is often difficult to amortize exactly an obligation with
equal payments; the amount of the last payment may require
adjustment to account for the rounding of the other payments to
whole cents.
ii. Creditors may base their disclosures on calculation tools
that assume that all months have an equal number of days, even if
their practice is to take account of the variations in months for
purposes of collecting interest. For example, a creditor may use a
calculation tool based on a 360-day year, when it in fact collects
interest by applying a factor of 1/365 of the annual rate to 365
days. This rule does not, however, authorize creditors to ignore,
for disclosure purposes, the effects of applying 1/360 of an annual
rate to 365 days.
[[Page 79975]]
2. Use of special rules. A creditor may utilize the special
rules in Sec. 1026.17(c)(3) for purposes of calculating and making
all disclosures for a transaction or may, at its option, use the
special rules for some disclosures and not others.
Paragraph 17(c)(4)
1. Payment schedule irregularities. When one or more payments in
a transaction differ from the others because of a long or short
first period, the variations may be ignored in disclosing the
payment schedule, finance charge, annual percentage rate, and other
terms. For example:
i. A 36-month auto loan might be consummated on June 8 with
payments due on July 1 and the first of each succeeding month. The
creditor may base its calculations on a payment schedule that
assumes 36 equal intervals and 36 equal installment payments, even
though a precise computation would produce slightly different
amounts because of the shorter first period.
ii. By contrast, in the same example, if the first payment were
not scheduled until August 1, the irregular first period would
exceed the limits in Sec. 1026.17(c)(4); the creditor could not use
the special rule and could not ignore the extra days in the first
period in calculating its disclosures.
2. Measuring odd periods. i. In determining whether a
transaction may take advantage of the rule in Sec. 1026.17(c)(4),
the creditor must measure the variation against a regular period.
For purposes of that rule:
A. The first period is the period from the date on which the
finance charge begins to be earned to the date of the first payment.
B. The term is the period from the date on which the finance
charge begins to be earned to the date of the final payment.
C. The regular period is the most common interval between
payments in the transaction.
ii. In transactions involving regular periods that are monthly,
semimonthly or multiples of a month, the length of the irregular and
regular periods may be calculated on the basis of either the actual
number of days or an assumed 30-day month. In other transactions,
the length of the periods is based on the actual number of days.
3. Use of special rules. A creditor may utilize the special
rules in Sec. 1026.17(c)(4) for purposes of calculating and making
some disclosures but may elect not to do so for all of the
disclosures. For example, the variations may be ignored in
calculating and disclosing the annual percentage rate but taken into
account in calculating and disclosing the finance charge and payment
schedule.
4. Relation to prepaid finance charges. Prepaid finance charges,
including ``odd-days'' or ``per-diem'' interest, paid prior to or at
closing may not be treated as the first payment on a loan. Thus,
creditors may not disregard an irregularity in disclosing such
finance charges.
Paragraph 17(c)(5)
1. Demand disclosures. Disclosures for demand obligations are
based on an assumed 1-year term, unless an alternate maturity date
is stated in the legal obligation. Whether an alternate maturity
date is stated in the legal obligation is determined by applicable
law. An alternate maturity date is not inferred from an informal
principal reduction agreement or a similar understanding between the
parties. However, when the note itself specifies a principal
reduction schedule (for example, ``payable on demand or $2,000 plus
interest quarterly''), an alternate maturity is stated and the
disclosures must reflect that date.
2. Future event as maturity date. An obligation whose maturity
date is determined solely by a future event, as for example, a loan
payable only on the sale of property, is not a demand obligation.
Because no demand feature is contained in the obligation, demand
disclosures under Sec. 1026.18(i) are inapplicable. The disclosures
should be based on the creditor's estimate of the time at which the
specified event will occur, and may indicate the basis for the
creditor's estimate, as noted in the commentary to Sec. 1026.17(a).
3. Demand after stated period. Most demand transactions contain
a demand feature that may be exercised at any point during the term,
but certain transactions convert to demand status only after a fixed
period. For example, in states prohibiting due-on-sale clauses, the
Federal National Mortgage Association (FNMA) requires mortgages that
it purchases to include a call option rider that may be exercised
after 7 years. These mortgages are generally written as long-term
obligations, but contain a demand feature that may be exercised only
within a 30-day period at 7 years. The disclosures for these
transactions should be based upon the legally agreed-upon maturity
date. Thus, if a mortgage containing the 7-year FNMA call option is
written as a 20-year obligation, the disclosures should be based on
the 20-year term, with the demand feature disclosed under Sec.
1026.18(i).
4. Balloon mortgages. Balloon payment mortgages, with payments
based on a long-term amortization schedule and a large final payment
due after a shorter term, are not demand obligations unless a demand
feature is specifically contained in the contract. For example, a
mortgage with a term of 5 years and a payment schedule based on 20
years would not be treated as a mortgage with a demand feature, in
the absence of any contractual demand provisions. In this type of
mortgage, disclosures should be based on the 5-year term.
Paragraph 17(c)(6)
1. Series of advances. Section 1026.17(c)(6)(i) deals with a
series of advances under an agreement to extend credit up to a
certain amount. A creditor may treat all of the advances as a single
transaction or disclose each advance as a separate transaction. If
these advances are treated as 1 transaction and the timing and
amounts of advances are unknown, creditors must make disclosures
based on estimates, as provided in Sec. 1026.17(c)(2). If the
advances are disclosed separately, disclosures must be provided
before each advance occurs, with the disclosures for the first
advance provided by consummation.
2. Construction loans. Section 1026.17(c)(6)(ii) provides a
flexible rule for disclosure of construction loans that may be
permanently financed. These transactions have 2 distinct phases,
similar to 2 separate transactions. The construction loan may be for
initial construction or subsequent construction, such as
rehabilitation or remodeling. The construction period usually
involves several disbursements of funds at times and in amounts that
are unknown at the beginning of that period, with the consumer
paying only accrued interest until construction is completed. Unless
the obligation is paid at that time, the loan then converts to
permanent financing in which the loan amount is amortized just as in
a standard mortgage transaction. Section 1026.17(c)(6)(ii) permits
the creditor to give either one combined disclosure for both the
construction financing and the permanent financing, or a separate
set of disclosures for the 2 phases. This rule is available whether
the consumer is initially obligated to accept construction financing
only or is obligated to accept both construction and permanent
financing from the outset. If the consumer is obligated on both
phases and the creditor chooses to give 2 sets of disclosures, both
sets must be given to the consumer initially, because both
transactions would be consummated at that time. (Appendix D provides
a method of calculating the annual percentage rate and other
disclosures for construction loans, which may be used, at the
creditor's option, in disclosing construction financing.)
3. Multiple-advance construction loans. Section 1026.17(c)(6)(i)
and (ii) are not mutually exclusive. For example, in a transaction
that finances the construction of a dwelling that may be permanently
financed by the same creditor, the construction phase may consist of
a series of advances under an agreement to extend credit up to a
certain amount. In these cases, the creditor may disclose the
construction phase as either 1 or more than 1 transaction and also
disclose the permanent financing as a separate transaction.
4. Residential mortgage transaction. See the commentary to Sec.
1026.2(a)(24) for a discussion of the effect of Sec. 1026.17(c)(6)
on the definition of a residential mortgage transaction.
5. Allocation of points. When a creditor utilizes the special
rule in Sec. 1026.17(c)(6) to disclose credit extensions as
multiple transactions, buyers points or similar amounts imposed on
the consumer must be allocated for purposes of calculating
disclosures. While such amounts should not be taken into account
more than once in making calculations, they may be allocated between
the transactions in any manner the creditor chooses. For example, if
a construction-permanent loan is subject to 5 points imposed on the
consumer and the creditor chooses to disclose the 2 phases
separately, the 5 points may be allocated entirely to the
construction loan, entirely to the permanent loan, or divided in any
manner between the two. However, the entire 5 points may not be
applied twice, that is, to both the construction and the permanent
phases.
17(d) Multiple Creditors; Multiple Consumers
1. Multiple creditors. If a credit transaction involves more
than one creditor:
[[Page 79976]]
i. The creditors must choose which of them will make the
disclosures.
ii. A single, complete set of disclosures must be provided,
rather than partial disclosures from several creditors.
iii. All disclosures for the transaction must be given, even if
the disclosing creditor would not otherwise have been obligated to
make a particular disclosure. For example, if one of the creditors
is the seller, the total sale price disclosure under Sec.
1026.18(j) must be made, even though the disclosing creditor is not
the seller.
2. Multiple consumers. When two consumers are joint obligors
with primary liability on an obligation, the disclosures may be
given to either one of them. If one consumer is merely a surety or
guarantor, the disclosures must be given to the principal debtor. In
rescindable transactions, however, separate disclosures must be
given to each consumer who has the right to rescind under Sec.
1026.23, although the disclosures required under Sec. 1026.19(b)
need only be provided to the consumer who expresses an interest in a
variable-rate loan program.
17(e) Effect of Subsequent Events
1. Events causing inaccuracies. Inaccuracies in disclosures are
not violations if attributable to events occurring after the
disclosures are made. For example, when the consumer fails to
fulfill a prior commitment to keep the collateral insured and the
creditor then provides the coverage and charges the consumer for it,
such a change does not make the original disclosures inaccurate. The
creditor may, however, be required to make new disclosures under
Sec. 1026.17(f) or Sec. 1026.19 if the events occurred between
disclosure and consummation or under Sec. 1026.20 if the events
occurred after consummation.
17(f) Early Disclosures
1. Change in rate or other terms. Redisclosure is required for
changes that occur between the time disclosures are made and
consummation if the annual percentage rate in the consummated
transaction exceeds the limits prescribed in this section, even if
the initial disclosures would be considered accurate under the
tolerances in Sec. 1026.18(d) or 1026.22(a). To illustrate:
i. General. A. If disclosures are made in a regular transaction
on July 1, the transaction is consummated on July 15, and the actual
annual percentage rate varies by more than \1/8\ of 1 percentage
point from the disclosed annual percentage rate, the creditor must
either redisclose the changed terms or furnish a complete set of new
disclosures before consummation. Redisclosure is required even if
the disclosures made on July 1 are based on estimates and marked as
such.
B. In a regular transaction, if early disclosures are marked as
estimates and the disclosed annual percentage rate is within \1/8\
of 1 percentage point of the rate at consummation, the creditor need
not redisclose the changed terms (including the annual percentage
rate).
ii. Nonmortgage loan. If disclosures are made on July 1, the
transaction is consummated on July 15, and the finance charge
increased by $35 but the disclosed annual percentage rate is within
the permitted tolerance, the creditor must at least redisclose the
changed terms that were not marked as estimates. (See Sec.
1026.18(d)(2) of this part.)
iii. Mortgage loan. At the time TILA disclosures are prepared in
July, the loan closing is scheduled for July 31 and the creditor
does not plan to collect per-diem interest at consummation.
Consummation actually occurs on August 5, and per-diem interest for
the remainder of August is collected as a prepaid finance charge.
Assuming there were no other changes requiring redisclosure, the
creditor may rely on the disclosures prepared in July that were
accurate when they were prepared. However, if the creditor prepares
new disclosures in August that will be provided at consummation, the
new disclosures must take into account the amount of the per-diem
interest known to the creditor at that time.
2. Variable rate. The addition of a variable rate feature to the
credit terms, after early disclosures are given, requires new
disclosures.
3. Content of new disclosures. If redisclosure is required, the
creditor has the option of either providing a complete set of new
disclosures, or providing disclosures of only the terms that vary
from those originally disclosed. (See the commentary to Sec.
1026.19(a)(2).)
4. Special rules. In mortgage transactions subject to Sec.
1026.19, the creditor must redisclose if, between the delivery of
the required early disclosures and consummation, the annual
percentage rate changes by more than a stated tolerance. When
subsequent events occur after consummation, new disclosures are
required only if there is a refinancing or an assumption within the
meaning of Sec. 1026.20.
Paragraph 17(f)(2)
1. Irregular transactions. For purposes of this paragraph, a
transaction is deemed to be ``irregular'' according to the
definition in Sec. 1026.22(a)(3).
17(g) Mail or Telephone Orders--Delay in Disclosures
1. Conditions for use. When the creditor receives a mail or
telephone request for credit, the creditor may delay making the
disclosures until the first payment is due if the following
conditions are met:
i. The credit request is initiated without face-to-face or
direct telephone solicitation. (Creditors may, however, use the
special rule when credit requests are solicited by mail.)
ii. The creditor has supplied the specified credit information
about its credit terms either to the individual consumer or to the
public generally. That information may be distributed through
advertisements, catalogs, brochures, special mailers, or similar
means.
2. Insurance. The location requirements for the insurance
disclosures under Sec. 1026.18(n) permit them to appear apart from
the other disclosures. Therefore, a creditor may mail an insurance
authorization to the consumer and then prepare the other disclosures
to reflect whether or not the authorization is completed by the
consumer. Creditors may also disclose the insurance cost on a unit-
cost basis, if the transaction meets the requirements of Sec.
1026.17(g).
17(h) Series of Sales--Delay in Disclosures
1. Applicability. The creditor may delay the disclosures for
individual credit sales in a series of such sales until the first
payment is due on the current sale, assuming the two conditions in
this paragraph are met. If those conditions are not met, the general
timing rules in Sec. 1026.17(b) apply.
2. Basis of disclosures. Creditors structuring disclosures for a
series of sales under Sec. 1026.17(h) may compute the total sale
price as either:
i. The cash price for the sale plus that portion of the finance
charge and other charges applicable to that sale; or
ii. The cash price for the sale, other charges applicable to the
sale, and the total finance charge and outstanding principal.
17(i) Interim Student Credit Extensions
1. Definition. Student credit plans involve extensions of credit
for education purposes where the repayment amount and schedule are
not known at the time credit is advanced. These plans include loans
made under any student credit plan, whether government or private,
where the repayment period does not begin immediately. (Certain
student credit plans that meet this definition are exempt from
Regulation Z. See Sec. 1026.3(f).)
2. Relation to other sections. For disclosures made before the
mandatory compliance date of the disclosures required under
Sec. Sec. 1026.46, 47, and 48, paragraph 17(i) permitted creditors
to omit from the disclosures the terms set forth in that paragraph
at the time the credit was actually extended. However, creditors
were required to make complete disclosures at the time the creditor
and consumer agreed upon the repayment schedule for the total
obligation. At that time, a new set of disclosures of all applicable
items under Sec. 1026.18 was required. Most student credit plans
are subject to the requirements in Sec. Sec. 1026.46, 47, and 48.
Consequently, for applications for student credit plans received on
or after the mandatory compliance date of Sec. Sec. 1026.46, 47,
and 48, the creditor may not omit from the disclosures the terms set
forth in paragraph 17(i). Instead, the creditor must comply with
Sec. Sec. 1026.46, 47, and 48, if applicable, or with Sec. Sec.
1026.17 and 1026.18.
3. Basis of disclosures. The disclosures given at the time of
execution of the interim note should reflect two annual percentage
rates, one for the interim period and one for the repayment period.
The use of Sec. 1026.17(i) in making disclosures does not, by
itself, make those disclosures estimates. Any portion of the finance
charge, such as statutory interest, that is attributable to the
interim period and is paid by the student (either as a prepaid
finance charge, periodically during the interim period, in one
payment at the end of the interim period, or capitalized at the
beginning of the repayment period) must be reflected in the interim
annual percentage rate. Interest subsidies, such as payments made by
either a state or the Federal Government on an interim loan, must be
excluded in computing the annual percentage rate on the interim
obligation, when the consumer has no contingent liability for
payment of those amounts. Any finance charges that are paid
separately by
[[Page 79977]]
the student at the outset or withheld from the proceeds of the loan
are prepaid finance charges. An example of this type of charge is
the loan guarantee fee. The sum of the prepaid finance charges is
deducted from the loan proceeds to determine the amount financed and
included in the calculation of the finance charge.
4. Consolidation. Consolidation of the interim student credit
extensions through a renewal note with a set repayment schedule is
treated as a new transaction with disclosures made as they would be
for a refinancing. Any unearned portion of the finance charge must
be reflected in the new finance charge and annual percentage rate,
and is not added to the new amount financed. In itemizing the amount
financed under Sec. 1026.18(c), the creditor may combine the
principal balances remaining on the interim extensions at the time
of consolidation and categorize them as the amount paid on the
consumer's account.
5. Approved student credit forms. See the commentary to Appendix
H regarding disclosure forms approved for use in certain student
credit programs for which applications were received prior to the
mandatory compliance date of Sec. Sec. 1026.46, 1026.47, and
1026.48.
Section 1026.18--Content of Disclosures
1. As applicable. i. The disclosures required by this section
need be made only as applicable. Any disclosure not relevant to a
particular transaction may be eliminated entirely. For example:
A. In a loan transaction, the creditor may delete disclosure of
the total sale price.
B. In a credit sale requiring disclosure of the total sale price
under Sec. 1026.18(j), the creditor may delete any reference to a
downpayment where no downpayment is involved.
ii. Where the amounts of several numerical disclosures are the
same, the ``as applicable'' language also permits creditors to
combine the terms, so long as it is done in a clear and conspicuous
manner. For example:
A. In a transaction in which the amount financed equals the
total of payments, the creditor may disclose ``amount financed/total
of payments,'' together with descriptive language, followed by a
single amount.
B. However, if the terms are separated on the disclosure
statement and separate space is provided for each amount, both
disclosures must be completed, even though the same amount is
entered in each space.
2. Format. See the commentary to Sec. 1026.17 and Appendix H
for a discussion of the format to be used in making these
disclosures, as well as acceptable modifications.
18(a) Creditor
1. Identification of creditor. The creditor making the
disclosures must be identified. This disclosure may, at the
creditor's option, appear apart from the other disclosures. Use of
the creditor's name is sufficient, but the creditor may also include
an address and/or telephone number. In transactions with multiple
creditors, any one of them may make the disclosures; the one doing
so must be identified.
18(b) Amount Financed
1. Disclosure required. The net amount of credit extended must
be disclosed using the term amount financed and a descriptive
explanation similar to the phrase in the regulation.
2. Rebates and loan premiums. In a loan transaction, the
creditor may offer a premium in the form of cash or merchandise to
prospective borrowers. Similarly, in a credit sale transaction, a
seller's or manufacturer's rebate may be offered to prospective
purchasers of the creditor's goods or services. At the creditor's
option, these amounts may be either reflected in the Truth in
Lending disclosures or disregarded in the disclosures. If the
creditor chooses to reflect them in the Sec. 1026.18 disclosures,
rather than disregard them, they may be taken into account in any
manner as part of those disclosures.
Paragraph 18(b)(1)
1. Downpayments. A downpayment is defined in Sec. 1026.2(a)(18)
to include, at the creditor's option, certain deferred downpayments
or pick-up payments. A deferred downpayment that meets the criteria
set forth in the definition may be treated as part of the
downpayment, at the creditor's option.
i. Deferred downpayments that are not treated as part of the
downpayment (either because they do not meet the definition or
because the creditor simply chooses not to treat them as
downpayments) are included in the amount financed.
ii. Deferred downpayments that are treated as part of the
downpayment are not part of the amount financed under Sec.
1026.18(b)(1).
Paragraph 18(b)(2)
1. Adding other amounts. Fees or other charges that are not part
of the finance charge and that are financed rather than paid
separately at consummation of the transaction are included in the
amount financed. Typical examples are real estate settlement charges
and premiums for voluntary credit life and disability insurance
excluded from the finance charge under Sec. 1026.4. This paragraph
does not include any amounts already accounted for under Sec.
1026.18(b)(1), such as taxes, tag and title fees, or the costs of
accessories or service policies that the creditor includes in the
cash price.
Paragraph 18(b)(3)
1. Prepaid finance charges. i. Prepaid finance charges that are
paid separately in cash or by check should be deducted under Sec.
1026.18(b)(3) in calculating the amount financed. To illustrate:
A. A consumer applies for a loan of $2,500 with a $40 loan fee.
The face amount of the note is $2,500 and the consumer pays the loan
fee separately by cash or check at closing. The principal loan
amount for purposes of Sec. 1026.18(b)(1) is $2,500 and $40 should
be deducted under Sec. 1026.18(b(3), thereby yielding an amount
financed of $2,460.
ii. In some instances, as when loan fees are financed by the
creditor, finance charges are incorporated in the face amount of the
note. Creditors have the option, when the charges are not add-on or
discount charges, of determining a principal loan amount under Sec.
1026.18(b)(1) that either includes or does not include the amount of
the finance charges. (Thus the principal loan amount may, but need
not, be determined to equal the face amount of the note.) When the
finance charges are included in the principal loan amount, they
should be deducted as prepaid finance charges under Sec.
1026.18(b)(3). When the finance charges are not included in the
principal loan amount, they should not be deducted under Sec.
1026.18(b)(3). The following examples illustrate the application of
Sec. 1026.18(b) to this type of transaction. Each example assumes a
loan request of $2,500 with a loan fee of $40; the creditor assesses
the loan fee by increasing the face amount of the note to $2,540.
A. If the creditor determines the principal loan amount under
Sec. 1026.18(b)(1) to be $2,540, it has included the loan fee in
the principal loan amount and should deduct $40 as a prepaid finance
charge under Sec. 1026.18(b)(3), thereby obtaining an amount
financed of $2,500.
B. If the creditor determines the principal loan amount under
Sec. 1026.18(b)(1) to be $2,500, it has not included the loan fee
in the principal loan amount and should not deduct any amount under
Sec. 1026.18(b)(3), thereby obtaining an amount financed of $2,500.
iii. The same rules apply when the creditor does not increase
the face amount of the note by the amount of the charge but collects
the charge by withholding it from the amount advanced to the
consumer. To illustrate, the following examples assume a loan
request of $2,500 with a loan fee of $40; the creditor prepares a
note for $2,500 and advances $2,460 to the consumer.
A. If the creditor determines the principal loan amount under
Sec. 1026.18(b)(1) to be $2,500, it has included the loan fee in
the principal loan amount and should deduct $40 as a prepaid finance
charge under Sec. 1026.18(b)(3), thereby obtaining an amount
financed of $2,460.
B. If the creditor determines the principal loan amount under
Sec. 1026.18(b)(1) to be $2,460, it has not included the loan fee
in the principal loan amount and should not deduct any amount under
Sec. 1026.18(b)(3), thereby obtaining an amount financed of $2,460.
iv. Thus in the examples where the creditor derives the net
amount of credit by determining a principal loan amount that does
not include the amount of the finance charge, no subtraction is
appropriate. Creditors should note, however, that although the
charges are not subtracted as prepaid finance charges in those
examples, they are nonetheless finance charges and must be treated
as such.
2. Add-on or discount charges. All finance charges must be
deducted from the amount of credit in calculating the amount
financed. If the principal loan amount reflects finance charges that
meet the definition of a prepaid finance charge in Sec. 1026.2,
those charges are included in the Sec. 1026.18(b)(1) amount and
deducted under Sec. 1026.18(b)(3). However, if the principal loan
amount includes finance charges that do not meet the definition of a
prepaid finance charge, the Sec. 1026.18(b)(1) amount must exclude
those finance charges.
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The following examples illustrate the application of Sec.
1026.18(b) to these types of transactions. Each example assumes a
loan request of $1000 for 1 year, subject to a 6 percent precomputed
interest rate, with a $10 loan fee paid separately at consummation.
i. The creditor assesses add-on interest of $60 which is added
to the $1000 in loan proceeds for an obligation with a face amount
of $1060. The principal for purposes of Sec. 1026.18(b)(1) is
$1000, no amounts are added under Sec. 1026.18(b)(2), and the $10
loan fee is a prepaid finance charge to be deducted under Sec.
1026.18(b)(3). The amount financed is $990.
ii. The creditor assesses discount interest of $60 and
distributes $940 to the consumer, who is liable for an obligation
with a face amount of $1000. The principal under Sec. 1026.18(b)(1)
is $940, which results in an amount financed of $930, after
deduction of the $10 prepaid finance charge under Sec.
1026.18(b)(3).
iii. The creditor assesses $60 in discount interest by
increasing the face amount of the obligation to $1060, with the
consumer receiving $1000. The principal under Sec. 1026.18(b)(1) is
thus $1000 and the amount financed $990, after deducting the $10
prepaid finance charge under Sec. 1026.18(b)(3).
18(c) Itemization of Amount Financed
1. Disclosure required. i. The creditor has 2 alternatives in
complying with Sec. 1026.18(c):
A. The creditor may inform the consumer, on the segregated
disclosures, that a written itemization of the amount financed will
be provided on request, furnishing the itemization only if the
customer in fact requests it.
B. The creditor may provide an itemization as a matter of
course, without notifying the consumer of the right to receive it or
waiting for a request.
ii. Whether given as a matter of course or only on request, the
itemization must be provided at the same time as the other
disclosures required by Sec. 1026.18, although separate from those
disclosures.
2. Additional information. Section 1026.18(c) establishes only a
minimum standard for the material to be included in the itemization
of the amount financed. Creditors have considerable flexibility in
revising or supplementing the information listed in Sec. 1026.18(c)
and shown in model form H-3, although no changes are required. The
creditor may, for example, do one or more of the following:
i. Include amounts that reflect payments not part of the amount
financed. For example, escrow items and certain insurance premiums
may be included, as discussed in the commentary to Sec. 1026.18(g).
ii. Organize the categories in any order. For example, the
creditor may rearrange the terms in a mathematical progression that
depicts the arithmetic relationship of the terms.
iii. Add categories. For example, in a credit sale, the creditor
may include the cash price and the downpayment. If the credit sale
involves a trade-in of the consumer's car and an existing lien on
that car exceeds the value of the trade-in amount, the creditor may
disclose the consumer's trade-in value, the creditor's payoff of the
existing lien, and the resulting additional amount financed.
iv. Further itemize each category. For example, the amount paid
directly to the consumer may be subdivided into the amount given by
check and the amount credited to the consumer's savings account.
v. Label categories with different language from that shown in
Sec. 1026.18(c). For example, an amount paid on the consumer's
account may be revised to specifically identify the account as
``your auto loan with us.''
vi. Delete, leave blank, mark ``N/A,'' or otherwise note
inapplicable categories in the itemization. For example, in a credit
sale with no prepaid finance charges or amounts paid to others, the
amount financed may consist of only the cash price less downpayment.
In this case, the itemization may be composed of only a single
category and all other categories may be eliminated.
3. Amounts appropriate to more than one category. When an amount
may appropriately be placed in any of several categories and the
creditor does not wish to revise the categories shown in Sec.
1026.18(c), the creditor has considerable flexibility in determining
where to show the amount. For example, in a credit sale, the portion
of the purchase price being financed by the creditor may be viewed
as either an amount paid to the consumer or an amount paid on the
consumer's account.
4. RESPA transactions. The Real Estate Settlement Procedures Act
(RESPA) requires creditors to provide a good faith estimate of
closing costs and a settlement statement listing the amounts paid by
the consumer. Transactions subject to RESPA are exempt from the
requirements of Sec. 1026.18(c) if the creditor complies with
RESPA's requirements for a good faith estimate and settlement
statement. The itemization of the amount financed need not be given,
even though the content and timing of the good faith estimate and
settlement statement under RESPA differ from the requirements of
Sec. Sec. 1026.18(c) and 1026.19(a)(2). If a creditor chooses to
substitute RESPA's settlement statement for the itemization when
redisclosure is required under Sec. 1026.19(a)(2), the statement
must be delivered to the consumer at or prior to consummation. The
disclosures required by Sec. Sec. 1026.18(c) and 1026.19(a)(2) may
appear on the same page or on the same document as the good faith
estimate or the settlement statement, so long as the requirements of
Sec. 1026.17(a) are met.
Paragraph 18(c)(1)(i)
1. Amounts paid to consumer. This encompasses funds given to the
consumer in the form of cash or a check, including joint proceeds
checks, as well as funds placed in an asset account. It may include
money in an interest-bearing account even if that amount is
considered a required deposit under Sec. 1026.18(r). For example,
in a transaction with total loan proceeds of $500, the consumer
receives a check for $300 and $200 is required by the creditor to be
put into an interest-bearing account. Whether or not the $200 is a
required deposit, it is part of the amount financed. At the
creditor's option, it may be broken out and labeled in the
itemization of the amount financed.
Paragraph 18(c)(1)(ii)
1. Amounts credited to consumer's account. The term consumer's
account refers to an account in the nature of a debt with that
creditor. It may include, for example, an unpaid balance on a prior
loan, a credit sale balance or other amounts owing to that creditor.
It does not include asset accounts of the consumer such as savings
or checking accounts.
Paragraph 18(c)(1)(iii)
1. Amounts paid to others. This includes, for example, tag and
title fees; amounts paid to insurance companies for insurance
premiums; security interest fees, and amounts paid to credit
bureaus, appraisers or public officials. When several types of
insurance premiums are financed, they may, at the creditor's option,
be combined and listed in one sum, labeled ``insurance'' or similar
term. This includes, but is not limited to, different types of
insurance premiums paid to one company and different types of
insurance premiums paid to different companies. Except for insurance
companies and other categories noted in Sec. 1026.18(c)(1)(iii),
third parties must be identified by name.
2. Charges added to amounts paid to others. A sum is sometimes
added to the amount of a fee charged to a consumer for a service
provided by a third party (such as for an extended warranty or a
service contract) that is payable in the same amount in comparable
cash and credit transactions. In the credit transaction, the amount
is retained by the creditor. Given the flexibility permitted in
meeting the requirements of the amount financed itemization (see the
commentary to Sec. 1026.18(c)), the creditor in such cases may
reflect that the creditor has retained a portion of the amount paid
to others. For example, the creditor could add to the category
``amount paid to others'' language such as ``(we may be retaining a
portion of this amount).''
Paragraph 18(c)(1)(iv)
1. Prepaid finance charge. Prepaid finance charges that are
deducted under Sec. 1026.18(b)(3) must be disclosed under this
section. The prepaid finance charges must be shown as a total amount
but may, at the creditor's option, also be further itemized and
described. All amounts must be reflected in this total, even if
portions of the prepaid finance charge are also reflected elsewhere.
For example, if at consummation the creditor collects interim
interest of $30 and a credit report fee of $10, a total prepaid
finance charge of $40 must be shown. At the creditor's option, the
credit report fee paid to a third party may also be shown elsewhere
as an amount included in Sec. 1026.18(c)(1)(iii). The creditor may
also further describe the 2 components of the prepaid finance
charge, although no itemization of this element is required by Sec.
1026.18(c)(1)(iv).
2. Prepaid mortgage insurance premiums. RESPA requires creditors
to give consumers a settlement statement disclosing the costs
associated with mortgage loan transactions. Included on the
settlement statement are mortgage insurance premiums collected at
settlement, which are prepaid finance charges. In calculating the
total amount of
[[Page 79979]]
prepaid finance charges, creditors should use the amount for
mortgage insurance listed on the line for mortgage insurance on the
settlement statement (line 1002 on HUD-1 or HUD 1-A), without
adjustment, even if the actual amount collected at settlement may
vary because of RESPA's escrow accounting rules. Figures for
mortgage insurance disclosed in conformance with RESPA shall be
deemed to be accurate for purposes of Regulation Z.
18(d) Finance Charge
1. Disclosure required. The creditor must disclose the finance
charge as a dollar amount, using the term finance charge, and must
include a brief description similar to that in Sec. 1026.18(d). The
creditor may, but need not, further modify the descriptor for
variable rate transactions with a phrase such as which is subject to
change. The finance charge must be shown on the disclosures only as
a total amount; the elements of the finance charge must not be
itemized in the segregated disclosures, although the regulation does
not prohibit their itemization elsewhere.
18(d)(2) Other Credit
1. Tolerance. When a finance charge error results in a
misstatement of the amount financed, or some other dollar amount for
which the regulation provides no specific tolerance, the misstated
disclosure does not violate the Act or the regulation if the finance
charge error is within the permissible tolerance under this
paragraph.
18(e) Annual Percentage Rate
1. Disclosure required. The creditor must disclose the cost of
the credit as an annual rate, using the term annual percentage rate,
plus a brief descriptive phrase comparable to that used in Sec.
1026.18(e). For variable rate transactions, the descriptor may be
further modified with a phrase such as which is subject to change.
Under Sec. 1026.17(a), the terms annual percentage rate and finance
charge must be more conspicuous than the other required disclosures.
2. Exception. Section 1026.18(e) provides an exception for
certain transactions in which no annual percentage rate disclosure
is required.
18(f) Variable Rate
1. Coverage. The requirements of Sec. 1026.18(f) apply to all
transactions in which the terms of the legal obligation allow the
creditor to increase the rate originally disclosed to the consumer.
It includes not only increases in the interest rate but also
increases in other components, such as the rate of required credit
life insurance. The provisions, however, do not apply to increases
resulting from delinquency (including late payment), default,
assumption, acceleration or transfer of the collateral. Section
1026.18(f)(1) applies to variable-rate transactions that are not
secured by the consumer's principal dwelling and to those that are
secured by the principal dwelling but have a term of one year or
less. Section 1026.18(f)(2) applies to variable-rate transactions
that are secured by the consumer's principal dwelling and have a
term greater than one year. Moreover, transactions subject to Sec.
1026.18(f)(2) are subject to the special early disclosure
requirements of Sec. 1026.19(b). (However, ``shared-equity'' or
``shared-appreciation'' mortgages are subject to the disclosure
requirements of Sec. 1026.18(f)(1) and not to the requirements of
Sec. Sec. 1026.18(f)(2) and 1026.19(b) regardless of the general
coverage of those sections.) Creditors are permitted under Sec.
1026.18(f)(1) to substitute in any variable-rate transaction the
disclosures required under Sec. 1026.19(b) for those disclosures
ordinarily required under Sec. 1026.18(f)(1). Creditors who provide
variable-rate disclosures under Sec. 1026.19(b) must comply with
all of the requirements of that section, including the timing of
disclosures, and must also provide the disclosures required under
Sec. 1026.18(f)(2). Creditors substituting Sec. 1026.19(b)
disclosures for Sec. 1026.18(f)(1) disclosures may, but need not,
also provide disclosures pursuant to Sec. 1026.20(c). (Substitution
of disclosures under Sec. 1026.18(f)(1) in transactions subject to
Sec. 1026.19(b) is not permitted.)
Paragraph 18(f)(1)
1. Terms used in disclosure. In describing the variable rate
feature, the creditor need not use any prescribed terminology. For
example, limitations and hypothetical examples may be described in
terms of interest rates rather than annual percentage rates. The
model forms in Appendix H provide examples of ways in which the
variable rate disclosures may be made.
2. Conversion feature. In variable-rate transactions with an
option permitting consumers to convert to a fixed-rate transaction,
the conversion option is a variable-rate feature that must be
disclosed. In making disclosures under Sec. 1026.18(f)(1),
creditors should disclose the fact that the rate may increase upon
conversion; identify the index or formula used to set the fixed
rate; and state any limitations on and effects of an increase
resulting from conversion that differ from other variable-rate
features. Because Sec. 1026.18(f)(1)(iv) requires only one
hypothetical example (such as an example of the effect on payments
resulting from changes in the index), a second hypothetical example
need not be given.
Paragraph 18(f)(1)(i)
1. Circumstances. The circumstances under which the rate may
increase include identification of any index to which the rate is
tied, as well as any conditions or events on which the increase is
contingent.
i. When no specific index is used, any identifiable factors used
to determine whether to increase the rate must be disclosed.
ii. When the increase in the rate is purely discretionary, the
fact that any increase is within the creditor's discretion must be
disclosed.
iii. When the index is internally defined (for example, by that
creditor's prime rate), the creditor may comply with this
requirement by either a brief description of that index or a
statement that any increase is in the discretion of the creditor. An
externally defined index, however, must be identified.
Paragraph 18(f)(1)(ii)
1. Limitations. This includes any maximum imposed on the amount
of an increase in the rate at any time, as well as any maximum on
the total increase over the life of the transaction. Except for
private education loans disclosures, when there are no limitations,
the creditor may, but need not, disclose that fact, and limitations
do not include legal limits in the nature of usury or rate ceilings
under state or Federal statutes or regulations. (See Sec. 1026.30
for the rule requiring that a maximum interest rate be included in
certain variable-rate transactions.) For disclosures with respect to
private education loan disclosures, see comment 47(b)(1)-2.
Paragraph 18(f)(1)(iii)
1. Effects. Disclosure of the effect of an increase refers to an
increase in the number or amount of payments or an increase in the
final payment. In addition, the creditor may make a brief reference
to negative amortization that may result from a rate increase. (See
the commentary to Sec. 1026.17(a)(1) regarding directly related
information.) If the effect cannot be determined, the creditor must
provide a statement of the possible effects. For example, if the
exercise of the variable-rate feature may result in either more or
larger payments, both possibilities must be noted.
Paragraph 18(f)(1)(iv)
1. Hypothetical example. The example may, at the creditor's
option appear apart from the other disclosures. The creditor may
provide either a standard example that illustrates the terms and
conditions of that type of credit offered by that creditor or an
example that directly reflects the terms and conditions of the
particular transaction. In transactions with more than one variable-
rate feature, only one hypothetical example need be provided. (See
the commentary to Sec. 1026.17(a)(1) regarding disclosure of more
than one hypothetical example as directly related information.)
2. Hypothetical example not required. The creditor need not
provide a hypothetical example in the following transactions with a
variable-rate feature:
i. Demand obligations with no alternate maturity date.
ii. Private education loans as defined in Sec. 1026.46(b)(5).
iii. Multiple-advance construction loans disclosed pursuant to
Appendix D, Part I.
Paragraph 18(f)(2)
1. Disclosure required. In variable-rate transactions that have
a term greater than one year and are secured by the consumer's
principal dwelling, the creditor must give special early disclosures
under Sec. 1026.19(b) in addition to the later disclosures required
under Sec. 1026.18(f)(2). The disclosures under Sec. 1026.18(f)(2)
must state that the transaction has a variable-rate feature and that
variable-rate disclosures have been provided earlier. (See the
commentary to Sec. 1026.17(a)(1) regarding the disclosure of
certain directly related information in addition to the variable-
rate disclosures required under Sec. 1026.18(f)(2).)
[[Page 79980]]
18(g) Payment Schedule
1. Amounts included in repayment schedule. The repayment
schedule should reflect all components of the finance charge, not
merely the portion attributable to interest. A prepaid finance
charge, however, should not be shown in the repayment schedule as a
separate payment. The payments may include amounts beyond the amount
financed and finance charge. For example, the disclosed payments
may, at the creditor's option, reflect certain insurance premiums
where the premiums are not part of either the amount financed or the
finance charge, as well as real estate escrow amounts such as taxes
added to the payment in mortgage transactions.
2. Deferred downpayments. As discussed in the commentary to
Sec. 1026.2(a)(18), deferred downpayments or pick-up payments that
meet the conditions set forth in the definition of downpayment may
be treated as part of the downpayment. Even if treated as a
downpayment, that amount may nevertheless be disclosed as part of
the payment schedule, at the creditor's option.
3. Total number of payments. In disclosing the number of
payments for transactions with more than one payment level,
creditors may but need not disclose as a single figure the total
number of payments for all levels. For example, in a transaction
calling for 108 payments of $350, 240 payments of $335, and 12
payments of $330, the creditor need not state that there will be a
total of 360 payments.
4. Timing of payments. i. General rule. Section 1026.18(g)
requires creditors to disclose the timing of payments. To meet this
requirement, creditors may list all of the payment due dates. They
also have the option of specifying the ``period of payments''
scheduled to repay the obligation. As a general rule, creditors that
choose this option must disclose the payment intervals or frequency,
such as ``monthly''or ``bi-weekly,'' and the calendar date that the
beginning payment is due. For example, a creditor may disclose that
payments are due ``monthly beginning on July 1, 1998.'' This
information, when combined with the number of payments, is necessary
to define the repayment period and enable a consumer to determine
all of the payment due dates.
ii. Exception. In a limited number of circumstances, the
beginning-payment date is unknown and difficult to determine at the
time disclosures are made. For example, a consumer may become
obligated on a credit contract that contemplates the delayed
disbursement of funds based on a contingent event, such as the
completion of home repairs. Disclosures may also accompany loan
checks that are sent by mail, in which case the initial disbursement
and repayment dates are solely within the consumer's control. In
such cases, if the beginning-payment date is unknown the creditor
may use an estimated date and label the disclosure as an estimate
pursuant to Sec. 1026.17(c). Alternatively, the disclosure may
refer to the occurrence of a particular event, for example, by
disclosing that the beginning payment is due ``30 days after the
first loan disbursement.'' This information also may be included
with an estimated date to explain the basis for the creditor's
estimate. See comment 17(a)(1)-5.iii.
5. Mortgage insurance. The payment schedule should reflect the
consumer's mortgage insurance payments until the date on which the
creditor must automatically terminate coverage under applicable law,
even though the consumer may have a right to request that the
insurance be cancelled earlier. The payment schedule must reflect
the legal obligation, as determined by applicable state or other
law. For example, assume that under applicable law, mortgage
insurance must terminate after the 130th scheduled monthly payment,
and the creditor collects at closing and places in escrow two months
of premiums. If, under the legal obligation, the creditor will
include mortgage insurance premiums in 130 payments and refund the
escrowed payments when the insurance is terminated, the payment
schedule should reflect 130 premium payments. If, under the legal
obligation, the creditor will apply the amount escrowed to the two
final insurance payments, the payment schedule should reflect 128
monthly premium payments. (For assumptions in calculating a payment
schedule that includes mortgage insurance that must be automatically
terminated, see comments 17(c)(1)-8 and 17(c)(1)-10.)
6. Mortgage transactions. Section 1026.18(g) applies only to
closed-end transactions other than transactions that are subject to
Sec. 1026.18(s). Section 1026.18(s) applies to closed-end
transactions secured by real property or a dwelling. Thus, if a
closed-end consumer credit transaction is secured by real property
or a dwelling, the creditor discloses an interest rate and payment
summary table in accordance with Sec. 1026.18(s) and does not
observe the requirements of Sec. 1026.18(g). On the other hand, if
a closed-end consumer credit transaction is not secured by real
property or a dwelling, the creditor discloses a payment schedule in
accordance with Sec. 1026.18(g) and does not observe the
requirements of Sec. 1026.18(s).
Paragraph 18(g)(1)
1. Demand obligations. In demand obligations with no alternate
maturity date, the creditor has the option of disclosing only the
due dates or periods of scheduled interest payments in the first
year (for example, ``interest payable quarterly'' or ``interest due
the first of each month''). The amounts of the interest payments
need not be shown.
Paragraph 18(g)(2)
1. Abbreviated disclosure. The creditor may disclose an
abbreviated payment schedule when the amount of each regularly
scheduled payment (other than the first or last payment) includes an
equal amount to be applied on principal and a finance charge
computed by application of a rate to the decreasing unpaid balance.
This option is also available when mortgage-guarantee insurance
premiums, paid either monthly or annually, cause variations in the
amount of the scheduled payments, reflecting the continual decrease
or increase in the premium due. In addition, in transactions where
payments vary because interest and principal are paid at different
intervals, the two series of payments may be disclosed separately
and the abbreviated payment schedule may be used for the interest
payments. For example, in transactions with fixed quarterly
principal payments and monthly interest payments based on the
outstanding principal balance, the amount of the interest payments
will change quarterly as principal declines. In such cases the
creditor may treat the interest and principal payments as two
separate series of payments, separately disclosing the number,
amount, and due dates of principal payments, and, using the
abbreviated payment schedule, the number, amount, and due dates of
interest payments. This option may be used when interest and
principal are scheduled to be paid on the same date of the month as
well as on different dates of the month. The creditor using this
alternative must disclose the dollar amount of the highest and
lowest payments and make reference to the variation in payments.
2. Combined payment schedule disclosures. Creditors may combine
the option in this paragraph with the general payment schedule
requirements in transactions where only a portion of the payment
schedule meets the conditions of Sec. 1026.18(g)(2). For example,
in a graduated payment mortgage where payments rise sharply for 5
years and then decline over the next 25 years because of decreasing
mortgage insurance premiums, the first 5 years would be disclosed
under the general rule in Sec. 1026.18(g) and the next 25 years
according to the abbreviated schedule in Sec. 1026.18(g)(2).
3. Effect on other disclosures. Section 1026.18(g)(2) applies
only to the payment schedule disclosure. The actual amounts of
payments must be taken into account in calculating and disclosing
the finance charge and the annual percentage rate.
Paragraph 18(h) Total of Payments
1. Disclosure required. The total of payments must be disclosed
using that term, along with a descriptive phrase similar to the one
in the regulation. The descriptive explanation may be revised to
reflect a variable rate feature with a brief phrase such as ``based
on the current annual percentage rate which may change.''
2. Calculation of total of payments. The total of payments is
the sum of the payments disclosed under Sec. 1026.18(g). For
example, if the creditor disclosed a deferred portion of the
downpayment as part of the payment schedule, that payment must be
reflected in the total disclosed under this paragraph. To calculate
the total of payments amount for transactions subject to Sec.
1026.18(s), creditors should use the rules in Sec. 1026.18(g) and
associated commentary and, for adjustable-rate transactions,
comments 17(c)(1)-8 and -10.
3. Exception. Section 1026.18(h) permits creditors to omit
disclosure of the total of payments in single-payment transactions.
This exception does not apply to a transaction calling for a single
payment of principal combined with periodic payments of interest.
4. Demand obligations. In demand obligations with no alternate
maturity date, the creditor may omit disclosure of payment
[[Page 79981]]
amounts under Sec. 1026.18(g)(1). In those transactions, the
creditor need not disclose the total of payments.
Paragraph 18(i) Demand Feature
1. Disclosure requirements. The disclosure requirements of this
provision apply not only to transactions payable on demand from the
outset, but also to transactions that are not payable on demand at
the time of consummation but convert to a demand status after a
stated period. In demand obligations in which the disclosures are
based on an assumed maturity of 1 year under Sec. 1026.17(c)(5),
that fact must also be stated. Appendix H contains model clauses
that may be used in making this disclosure.
2. Covered demand features. The type of demand feature
triggering the disclosures required by Sec. 1026.18(i) includes
only those demand features contemplated by the parties as part of
the legal obligation. For example, this provision does not apply to
transactions that covert to a demand status as a result of the
consumer's default. A due-on-sale clause is not considered a demand
feature. A creditor may, but need not, treat its contractual right
to demand payment of a loan made to its executive officers as a
demand feature to the extent that the contractual right is required
by Regulation O of the Board of Governors of the Federal Reserve
System (12 CFR 215.5) or other Federal law.
3. Relationship to payment schedule disclosures. As provided in
Sec. 1026.18(g)(1), in demand obligations with no alternate
maturity date, the creditor need only disclose the due dates or
payment periods of any scheduled interest payments for the first
year. If the demand obligation states an alternate maturity,
however, the disclosed payment schedule must reflect that stated
term; the special rule in Sec. 1026.18(g)(1) is not available.
Paragraph 18(j) Total Sale Price
1. Disclosure required. In a credit sale transaction, the total
sale price must be disclosed using that term, along with a
descriptive explanation similar to the one in the regulation. For
variable rate transactions, the descriptive phrase may, at the
creditor's option, be modified to reflect the variable rate feature.
For example, the descriptor may read: ``The total cost of your
purchase on credit, which is subject to change, including your
downpayment of * * *.'' The reference to a downpayment may be
eliminated in transactions calling for no downpayment.
2. Calculation of total sale price. The figure to be disclosed
is the sum of the cash price, other charges added under Sec.
1026.18(b)(2), and the finance charge disclosed under Sec.
1026.18(d).
3. Effect of existing liens. When a credit sale transaction
involves property that is being used as a trade-in (an automobile,
for example) and that has a lien exceeding the value of the trade-
in, the total sale price is affected by the amount of any cash
provided. (See comment 2(a)(18)-3.) To illustrate, assume a consumer
finances the purchase of an automobile with a cash price of $20,000.
Another vehicle used as a trade-in has a value of $8,000 but has an
existing lien of $10,000, leaving a $2,000 deficit that the consumer
must finance.
i. If the consumer pays $1,500 in cash, the creditor may apply
the cash first to the lien, leaving a $500 deficit, and reflect a
downpayment of $0. The total sale price would include the $20,000
cash price, an additional $500 financed under Sec. 1026.18(b)(2),
and the amount of the finance charge. Alternatively, the creditor
may reflect a downpayment of $1,500 and finance the $2,000 deficit.
In that case, the total sale price would include the sum of the
$20,000 cash price, the $2,000 lien payoff amount as an additional
amount financed, and the amount of the finance charge.
ii. If the consumer pays $3,000 in cash, the creditor may apply
the cash first to extinguish the lien and reflect the remainder as a
downpayment of $1,000. The total sale price would reflect the
$20,000 cash price and the amount of the finance charge. (The cash
payment extinguishes the trade-in deficit and no charges are added
under Sec. 1026.18(b)(2).) Alternatively, the creditor may elect to
reflect a downpayment of $3,000 and finance the $2,000 deficit. In
that case, the total sale price would include the sum of the $20,000
cash price, the $2,000 lien payoff amount as an additional amount
financed, and the amount of the finance charge.
18(k) Prepayment
1. Disclosure required. The creditor must give a definitive
statement of whether or not a penalty will be imposed or a rebate
will be given.
i. The fact that no penalty will be imposed may not simply be
inferred from the absence of a penalty disclosure; the creditor must
indicate that prepayment will not result in a penalty.
ii. If a penalty or refund is possible for one type of
prepayment, even though not for all, a positive disclosure is
required. This applies to any type of prepayment, whether voluntary
or involuntary as in the case of prepayments resulting from
acceleration.
iii. Any difference in rebate or penalty policy, depending on
whether prepayment is voluntary or not, must not be disclosed with
the segregated disclosures.
2. Rebate-penalty disclosure. A single transaction may involve
both a precomputed finance charge and a finance charge computed by
application of a rate to the unpaid balance (for example, mortgages
with mortgage-guarantee insurance). In these cases, disclosures
about both prepayment rebates and penalties are required. Sample
form H-15 in Appendix H illustrates a mortgage transaction in which
both rebate and penalty disclosures are necessary.
3. Prepaid finance charge. The existence of a prepaid finance
charge in a transaction does not, by itself, require a disclosure
under Sec. 1026.18(k). A prepaid finance charge is not considered a
penalty under Sec. 1026.18(k)(1), nor does it require a disclosure
under Sec. 1026.18(k)(2). At its option, however, a creditor may
consider a prepaid finance charge to be under Sec. 1026.18(k)(2).
If a disclosure is made under Sec. 1026.18(k)(2) with respect to a
prepaid finance charge or other finance charge, the creditor may
further identify that finance charge. For example, the disclosure
may state that the borrower ``will not be entitled to a refund of
the prepaid finance charge'' or some other term that describes the
finance charge.
Paragraph 18(k)(1)
1. Penalty. This applies only to those transactions in which the
interest calculation takes account of all scheduled reductions in
principal, as well as transactions in which interest calculations
are made daily. The term penalty as used here encompasses only those
charges that are assessed strictly because of the prepayment in full
of a simple-interest obligation, as an addition to all other
amounts. Items which are penalties include, for example:
i. Interest charges for any period after prepayment in full is
made. (See the commentary to Sec. 1026.17(a)(1) regarding
disclosure of interest charges assessed for periods after prepayment
in full as directly related information.)
ii. A minimum finance charge in a simple-interest transaction.
(See the commentary to Sec. 1026.17(a)(1) regarding the disclosure
of a minimum finance charge as directly related information.) Items
which are not penalties include, for example, loan guarantee fees.
Paragraph 18(k)(2)
1. Rebate of finance charge. i. This applies to any finance
charges that do not take account of each reduction in the principal
balance of an obligation. This category includes, for example:
A. Precomputed finance charges such as add-on charges.
B. Charges that take account of some but not all reductions in
principal, such as mortgage guarantee insurance assessed on the
basis of an annual declining balance, when the principal is reduced
on a monthly basis.
ii. No description of the method of computing earned or unearned
finance charges is required or permitted as part of the segregated
disclosures under this section.
18(l) Late Payment
1. Definition. This paragraph requires a disclosure only if
charges are added to individual delinquent installments by a
creditor who otherwise considers the transaction ongoing on its
original terms. Late payment charges do not include:
i. The right of acceleration.
ii. Fees imposed for actual collection costs, such as
repossession charges or attorney's fees.
iii. Deferral and extension charges.
iv. The continued accrual of simple interest at the contract
rate after the payment due date. However, an increase in the
interest rate is a late payment charge to the extent of the
increase.
2. Content of disclosure. Many state laws authorize the
calculation of late charges on the basis of either a percentage or a
specified dollar amount, and permit imposition of the lesser or
greater of the 2 charges. The disclosure made under Sec. 1026.18(l)
may reflect this alternative. For example, stating that the charge
in the event of a late payment is 5% of the late amount, not to
exceed $5.00, is sufficient. Many creditors also permit a grace
period during which no late charge will be assessed; this fact may
be disclosed as directly related information. (See the commentary to
Sec. 1026.17(a).)
[[Page 79982]]
18(m) Security Interest
1. Purchase money transactions. When the collateral is the item
purchased as part of, or with the proceeds of, the credit
transaction, Sec. 1026.18(m) requires only a general identification
such as ``the property purchased in this transaction.'' However, the
creditor may identify the property by item or type instead of
identifying it more generally with a phrase such as ``the property
purchased in this transaction.'' For example, a creditor may
identify collateral as ``a motor vehicle,'' or as ``the property
purchased in this transaction.'' Any transaction in which the credit
is being used to purchase the collateral is considered a purchase
money transaction and the abbreviated identification may be used,
whether the obligation is treated as a loan or a credit sale.
2. Nonpurchase money transactions. In nonpurchase money
transactions, the property subject to the security interest must be
identified by item or type. This disclosure is satisfied by a
general disclosure of the category of property subject to the
security interest, such as ``motor vehicles,'' ``securities,''
``certain household items,'' or ``household goods.'' (Creditors
should be aware, however, that the Federal credit practices rules,
as well as some state laws, prohibit certain security interests in
household goods.) At the creditor's option, however, a more precise
identification of the property or goods may be provided.
3. Mixed collateral. In some transactions in which the credit is
used to purchase the collateral, the creditor may also take other
property of the consumer as security. In those cases, a combined
disclosure must be provided, consisting of an identification of the
purchase money collateral consistent with comment 18(m)-1 and a
specific identification of the other collateral consistent with
comment 18(m)-2.
4. After-acquired property. An after-acquired property clause is
not a security interest to be disclosed under Sec. 1026.18(m).
5. Spreader clause. The fact that collateral for pre-existing
credit with the institution is being used to secure the present
obligation constitutes a security interest and must be disclosed.
(Such security interests may be known as ``spreader'' or ``dragnet''
clauses, or as ``cross-collateralization'' clauses.) A specific
identification of that collateral is unnecessary but a reminder of
the interest arising from the prior indebtedness is required. The
disclosure may be made by using language such as ``collateral
securing other loans with us may also secure this loan.'' At the
creditor's option, a more specific description of the property
involved may be given.
6. Terms used in disclosure. No specified terminology is
required in disclosing a security interest. Although the disclosure
may, at the creditor's option, use the term security interest, the
creditor may designate its interest by using, for example, pledge,
lien, or mortgage.
7. Collateral from third party. In certain transactions, the
consumer's obligation may be secured by collateral belonging to a
third party. For example, a loan to a student may be secured by an
interest in the property of the student's parents. In such cases,
the security interest is taken in connection with the transaction
and must be disclosed, even though the property encumbered is owned
by someone other than the consumer.
18(n) Insurance and Debt Cancellation
1. Location. This disclosure may, at the creditor's option,
appear apart from the other disclosures. It may appear with any
other information, including the amount financed itemization, any
information prescribed by state law, or other supplementary
material. When this information is disclosed with the other
segregated disclosures, however, no additional explanatory material
may be included.
2. Debt cancellation. Creditors may use the model credit
insurance disclosures only if the debt cancellation coverage
constitutes insurance under state law. Otherwise, they may provide a
parallel disclosure that refers to debt cancellation coverage.
18(o) Certain Security Interest Charges
1. Format. No special format is required for these disclosures;
under Sec. 1026.4(e), taxes and fees paid to government officials
with respect to a security interest may be aggregated, or may be
broken down by individual charge. For example, the disclosure could
be labeled ``filing fees and taxes'' and all funds disbursed for
such purposes may be aggregated in a single disclosure. This
disclosure may appear, at the creditor's option, apart from the
other required disclosures. The inclusion of this information on a
statement required under the Real Estate Settlement Procedures Act
is sufficient disclosure for purposes of Truth in Lending.
Paragraph 18(p) Contract Reference
1. Content. Creditors may substitute, for the phrase
``appropriate contract document,'' a reference to specific
transaction documents in which the additional information is found,
such as ``promissory note'' or ``retail installment sale contract.''
A creditor may, at its option, delete inapplicable items in the
contract reference, as for example when the contract documents
contain no information regarding the right of acceleration.
18(q) Assumption Policy
1. Policy statement. In many mortgages, the creditor cannot
determine, at the time disclosure must be made, whether a loan may
be assumable at a future date on its original terms. For example,
the assumption clause commonly used in mortgages sold to the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation conditions an assumption on a variety of factors such as
the creditworthiness of the subsequent borrower, the potential for
impairment of the lender's security, and execution of an assumption
agreement by the subsequent borrower. In cases where uncertainty
exists as to the future assumability of a mortgage, the disclosure
under Sec. 1026.18(q) should reflect that fact. In making
disclosures in such cases, the creditor may use phrases such as
``subject to conditions,'' ``under certain circumstances,'' or
``depending on future conditions.'' The creditor may provide a brief
reference to more specific criteria such as a due-on-sale clause,
although a complete explanation of all conditions is not
appropriate. For example, the disclosure may state, ``Someone buying
your home may be allowed to assume the mortgage on its original
terms, subject to certain conditions, such as payment of an
assumption fee.'' See comment 17(a)(1)-5 for an example for a
reference to a due-on-sale clause.
2. Original terms. The phrase original terms for purposes of
Sec. 1026.18(q) does not preclude the imposition of an assumption
fee, but a modification of the basic credit agreement, such as a
change in the contract interest rate, represents different terms.
18(r) Required Deposit
1. Disclosure required. The creditor must inform the consumer of
the existence of a required deposit. (Appendix H provides a model
clause that may be used in making that disclosure.) Section
1026.18(r) describes 3 types of deposits that need not be considered
required deposits. Use of the phrase ``need not'' permits creditors
to include the disclosure even in cases where there is doubt as to
whether the deposit constitutes a required deposit.
2. Pledged account mortgages. In these transactions, a consumer
pledges as collateral funds that the consumer deposits in an account
held by the creditor. The creditor withdraws sums from that account
to supplement the consumer's periodic payments. Creditors may treat
these pledged accounts as required deposits or they may treat them
as consumer buydowns in accordance with the commentary to Sec.
1026.17(c)(1).
3. Escrow accounts. The escrow exception in Sec. 1026.18(r)
applies, for example, to accounts for such items as maintenance
fees, repairs, or improvements, whether in a realty or a nonrealty
transaction. (See the commentary to Sec. 1026.17(c)(1) regarding
the use of escrow accounts in consumer buydown transactions.)
4. Interest-bearing accounts. When a deposit earns at least 5
percent interest per year, no disclosure is required under Sec.
1026.18(r). This exception applies whether the deposit is held by
the creditor or by a third party.
5. Morris Plan transactions. A deposit under a Morris Plan, in
which a deposit account is created for the sole purpose of
accumulating payments and this is applied to satisfy entirely the
consumer's obligation in the transaction, is not a required deposit.
6. Examples of amounts excluded. The following are among the
types of deposits that need not be treated as required deposits:
i. Requirement that a borrower be a customer or a member even if
that involves a fee or a minimum balance.
ii. Required property insurance escrow on a mobile home
transaction.
iii. Refund of interest when the obligation is paid in full.
iv. Deposits that are immediately available to the consumer.
v. Funds deposited with the creditor to be disbursed (for
example, for construction) before the loan proceeds are advanced.
vi. Escrow of condominium fees.
vii. Escrow of loan proceeds to be released when the repairs are
completed.
[[Page 79983]]
18(s) Interest Rate and Payment Summary for Mortgage Transactions
1. In general. Section 1026.18(s) prescribes format and content
for disclosure of interest rates and monthly (or other periodic)
payments for mortgage loans. The information in Sec. 1026.18(s)(2)-
(4) is required to be in the form of a table, except as otherwise
provided, with headings and format substantially similar to Model
Clause H-4(E), H-4(F), H-4(G), or H-4(H) in Appendix H to this part.
A disclosure that does not include the shading shown in a model
clause but otherwise follows the model clause's headings and format
is substantially similar to that model clause. Where Sec.
1026.18(s)(2)-(4) or the applicable model clause requires that a
column or row of the table be labeled using the word ``monthly'' but
the periodic payments are not due monthly, the creditor should use
the appropriate term, such as ``bi-weekly'' or ``quarterly.'' In all
cases, the table should have no more than five vertical columns
corresponding to applicable interest rates at various times during
the loan's term; corresponding payments would be shown in horizontal
rows. Certain loan types and terms are defined for purposes of Sec.
1026.18(s) in Sec. 1026.18(s)(7).
2. Amortizing loans. Loans described as amortizing in Sec. Sec.
1026.18(s)(2)(i) and 1026.18(s)(3) include interest-only loans if
they do not also permit negative amortization. (For rules relating
to loans with balloon payments, see Sec. 1026.18(s)(5)). If an
amortizing loan is an adjustable-rate mortgage with an introductory
rate (less than the fully-indexed rate), creditors must provide a
special explanation of introductory rates. See Sec.
1026.18(s)(2)(iii).
3. Negative amortization. For negative amortization loans,
creditors must follow the rules in Sec. Sec. 1026.18(s)(2)(ii) and
1026.18(s)(4) in disclosing interest rates and monthly payments.
Loans with negative amortization also require special explanatory
disclosures about rates and payments. See Sec. 1026.18(s)(6). Loans
with negative amortization include ``payment option'' loans, in
which the consumer is permitted to make minimum payments that will
cover only some of the interest accruing each month. See also
comment 17(c)(1)-12, regarding graduated-payment adjustable-rate
mortgages.
18(s)(2) Interest Rates
18(s)(2)(i) Amortizing Loans
Paragraph 18(s)(2)(i)(A)
1. Fixed rate loans--payment increases. Although the interest
rate will not change after consummation for a fixed-rate loan, some
fixed-rate loans may have periodic payments that increase after
consummation. For example, the terms of the legal obligation may
permit the consumer to make interest-only payments for a specified
period such as the first five years after consummation. In such
cases, the creditor must include the increased payment under Sec.
1026.18(s)(3)(ii)(B) in the payment row, and must show the interest
rate in the column for that payment, even though the rate has not
changed since consummation. See also comment 17(c)(1)-13, regarding
growth equity mortgages.
Paragraph 18(s)(2)(i)(B)
1. Adjustable-rate mortgages and step-rate mortgages. Creditors
must disclose more than one interest rate for adjustable-rate
mortgages and step-rate mortgages, in accordance with Sec.
1026.18(s)(2)(i)(B). Creditors must assume that an adjustable-rate
mortgage's interest rate will increase after consummation as rapidly
as possible, taking into account the terms of the legal obligation.
2. Maximum interest rate during first five years--adjustable-
rate mortgages and step-rate mortgages. The creditor must disclose
the maximum rate that could apply during the first five years after
consummation. If there are no interest rate caps other than the
maximum rate required under Sec. 1026.30, then the creditor should
disclose only the rate at consummation and the maximum rate. Such a
table would have only two columns.
i. For an adjustable-rate mortgage, the creditor must take into
account any interest rate caps when disclosing the maximum interest
rate during the first five years. The creditor must also disclose
the earliest date on which that adjustment may occur.
ii. If the transaction is a step-rate mortgage, the creditor
should disclose the rate that will apply after consummation. For
example, the legal obligation may provide that the rate is 6 percent
for the first two years following consummation, and then increases
to 7 percent for at least the next three years. The creditor should
disclose the maximum rate during the first five years as 7 percent
and the date on which the rate is scheduled to increase to 7
percent.
3. Maximum interest rate at any time. The creditor must disclose
the maximum rate that could apply at any time during the term of the
loan and the earliest date on which the maximum rate could apply.
i. For an adjustable-rate mortgage, the creditor must take into
account any interest rate caps in disclosing the maximum interest
rate. For example, if the legal obligation provides that at each
annual adjustment the rate may increase by no more than 2 percentage
points, the creditor must take this limit into account in
determining the earliest date on which the maximum possible rate may
be reached.
ii. For a step-rate mortgage, the creditor should disclose the
highest rate that could apply under the terms of the legal
obligation and the date on which that rate will first apply.
Paragraph 18(s)(2)(i)(C)
1. Payment increases. For some loans, the payment may increase
following consummation for reasons unrelated to an interest rate
adjustment. For example, an adjustable-rate mortgage may have an
introductory fixed rate for the first five years following
consummation and permit the borrower to make interest-only payments
for the first three years. The disclosure requirement of Sec.
1026.18(s)(2)(i)(C) applies to all amortizing loans, including
interest-only loans, if the consumer's payment can increase in the
manner described in Sec. 1026.18(s)(3)(i)(B), even if it is not the
type of loan covered by Sec. 1026.18(s)(3)(i). Thus, Sec.
1026.18(s)(2)(i)(C) requires that the creditor disclose the interest
rate that corresponds to the first payment that includes principal
as well as interest, even though the interest rate will not adjust
at that time. In such cases, if the loan is an interest-only loan,
the creditor also must disclose the corresponding periodic payment
pursuant to Sec. 1026.18(s)(3)(ii). The table would show, from left
to right: The interest rate and payment at consummation with the
payment itemized to show that the payment is being applied to
interest only; the interest rate and payment when the interest-only
option ends; the maximum interest rate and payment during the first
five years; and the maximum possible interest rate and payment. The
disclosure requirements of Sec. 1026.18(s)(2)(i)(C) do not apply to
minor payment variations resulting solely from the fact that months
have different numbers of days.
18(s)(2)(ii) Negative Amortization Loans
1. Rate at consummation. In all cases the interest rate in
effect at consummation must be disclosed, even if it will apply only
for a short period such as one month.
2. Rates for adjustable-rate mortgages. The creditor must assume
that interest rates rise as quickly as possible after consummation,
in accordance with any interest rate caps under the legal
obligation. For adjustable-rate mortgages with no rate caps except a
lifetime maximum, creditors must assume that interest rate reaches
the maximum at the first adjustment. For example, assume that the
legal obligation provides for an interest rate at consummation of
1.5 percent. One month after consummation, the interest rate adjusts
and will adjust monthly thereafter, according to changes in the
index. The consumer may make payments that cover only part of the
interest accrued each month, until the date the principal balance
reaches 115 percent of its original balance, or until the end of the
fifth year after consummation, whichever comes first. The maximum
possible rate is 10.5 percent. No other limits on interest rates
apply. The minimum required payment adjusts each year, and may
increase by no more than 7.5 percent over the previous year's
payment. The creditor should disclose the following rates and the
dates when they are scheduled to occur: A rate of 1.5 percent for
the first month following consummation and the minimum payment; a
rate of 10.5 percent, and the corresponding minimum payment taking
into account the 7.5 percent limit on payment increases, at the
beginning of the second year; and a rate of 10.5 percent and the
corresponding minimum payment taking into account the 7.5 percent
payment increase limit, at the beginning of the third year. The
creditor also must disclose the rate of 10.5 percent, the fully
amortizing payment, and the date on which the consumer must first
make such a payment under the terms of the legal obligation.
18(s)(2)(iii) Introductory Rate Disclosure for Amortizing Adjustable-
Rate Mortgage
1. Introductory rate. In some adjustable-rate mortgages,
creditors may set an initial interest rate that is lower than the
fully indexed rate at consummation. For amortizing loans with an
introductory rate,
[[Page 79984]]
creditors must disclose the information required in Sec.
1026.18(s)(2)(iii) directly below the table.
Paragraph 18(s)(2)(iii)(B)
1. Place in sequence. ``Designation of the place in sequence''
refers to identifying the month or year, as applicable, of the
change in the rate resulting from the expiration of an introductory
rate by its place in the sequence of months or years, as applicable,
of the transaction's term. For example, if a transaction has a
discounted rate for the first three years, Sec.
1026.18(s)(2)(iii)(B) requires a statement such as, ``In the fourth
year, even if market rates do not change, this rate will increase to
----%.''
Paragraph 18(s)(2)(iii)(C)
1. Fully indexed rate. The fully indexed rate is defined in
Sec. 1026.18(s)(7) as the index plus the margin at consummation.
For purposes of Sec. 1026.18(s)(2)(iii)(C), ``at consummation''
refers to disclosures delivered at consummation, or three business
days before consummation pursuant to Sec. 1026.19(a)(2)(ii); for
early disclosures delivered within three business days after receipt
of a consumer's application pursuant to Sec. 1026.19(a)(1), the
fully indexed rate disclosed under Sec. 1026.18(s)(2)(iii)(C) may
be based on the index in effect at the time the disclosures are
provided. The index in effect at consummation (or at the time of
early disclosures) need not be used if a contract provides for a
delay in the implementation of changes in an index value. For
example, if the contract specifies that rate changes are based on
the index value in effect 45 days before the change date, creditors
may use any index value in effect during the 45 days before
consummation (or any earlier date of disclosure) in calculating the
fully indexed rate to be disclosed.
18(s)(3) Payments for Amortizing Loans
1. Payments corresponding to interest rates. Creditors must
disclose the periodic payment that corresponds to each interest rate
disclosed under Sec. 1026.18(s)(2)(i)(A)-(C). The corresponding
periodic payment is the regular payment for each such interest rate,
without regard to any final payment that differs from others because
of the rounding of periodic payments to account for payment amounts
including fractions of cents. Balloon payments, however, must be
disclosed as provided in Sec. 1026.18(s)(5).
2. Principal and interest payment amounts; examples. i. For
fixed-rate interest-only transactions, Sec. 1026.18(s)(3)(ii)(B)
requires scheduled increases in the regular periodic payment amounts
to be disclosed along with the date of the increase. For example, in
a fixed-rate interest-only loan, a scheduled increase in the payment
amount from an interest-only payment to a fully amortizing payment
must be disclosed. Similarly, in a fixed-rate balloon loan, the
balloon payment must be disclosed in accordance with Sec.
1026.18(s)(5).
ii. For adjustable-rate mortgage transactions, Sec.
1026.18(s)(3)(i)(A) requires that for each interest rate required to
be disclosed under Sec. 1026.18(s)(2)(i) (the interest rate at
consummation, the maximum rate during the first five years, and the
maximum possible rate) a corresponding payment amount must be
disclosed.
iii. The format of the payment disclosure varies depending on
whether all regular periodic payment amounts will include principal
and interest, and whether there will be an escrow account for taxes
and insurance.
Paragraph 18(s)(3)(i)(C)
1. Taxes and insurance. An estimated payment amount for taxes
and insurance must be disclosed if the creditor will establish an
escrow account for such amounts. If the escrow account will include
amounts for items other than taxes and insurance, such as homeowners
association dues, the creditor may but is not required to include
such items in the estimate. When such estimated escrow payments must
be disclosed in multiple columns of the table, such as for
adjustable- and step-rate transactions, each column should use the
same estimate for taxes and insurance except that the estimate
should reflect changes in periodic mortgage insurance premiums that
are known to the creditor at the time the disclosure is made. The
estimated amounts of mortgage insurance premiums should be based on
the declining principal balance that will occur as a result of
changes to the interest rate that are assumed for purposes of
disclosing those rates under Sec. 1026.18(s)(2) and accompanying
commentary. The payment amount must include estimated amounts for
property taxes and premiums for mortgage-related insurance required
by the creditor, such as insurance against loss of or damage to
property, or against liability arising out of the ownership or use
of the property, or insurance protecting the creditor against the
consumer's default or other credit loss. Premiums for credit
insurance, debt suspension and debt cancellation agreements,
however, should not be included. Except for periodic mortgage
insurance premiums included in the escrow payment under Sec.
1026.18(s)(3)(i)(C), amounts included in the escrow payment
disclosure such as property taxes and homeowner's insurance
generally are not finance charges under Sec. 1026.4 and, therefore,
do not affect other disclosures, including the finance charge and
annual percentage rate.
2. Mortgage insurance. Payment amounts under Sec.
1026.18(s)(3)(i) should reflect the consumer's mortgage insurance
payments until the date on which the creditor must automatically
terminate coverage under applicable law, even though the consumer
may have a right to request that the insurance be cancelled earlier.
The payment amount must reflect the terms of the legal obligation,
as determined by applicable state or other law. For example, assume
that under applicable law, mortgage insurance must terminate after
the 130th scheduled monthly payment, and the creditor collects at
closing and places in escrow two months of premiums. If, under the
legal obligation, the creditor will include mortgage insurance
premiums in 130 payments and refund the escrowed payments when the
insurance is terminated, payment amounts disclosed through the 130th
payment should reflect premium payments. If, under the legal
obligation, the creditor will apply the amount escrowed to the two
final insurance payments, payments disclosed through the 128th
payment should reflect premium payments. The escrow amount reflected
on the disclosure should include mortgage insurance premiums even if
they are not escrowed and even if there is no escrow account
established for the transaction.
Paragraph 18(s)(3)(i)(D)
1. Total monthly payment. For amortizing loans, each column
should add up to a total estimated payment. The total estimated
payment amount should be labeled. If periodic payments are not due
monthly, the creditor should use the appropriate term such as
``quarterly'' or ``annually.''
18(s)(3)(ii) Interest-Only Payments
1. Interest-only loans that are also negative amortization
loans. The rules in Sec. 1026.18(s)(3)(ii) for disclosing payments
on interest-only loans apply only if the loan is not also a negative
amortization loan. If the loan is a negative amortization loan, even
if it also has an interest-only feature, payments are disclosed
under the rules in Sec. 1026.18(s)(4).
Paragraph 18(s)(3)(ii)(C)
1. Escrows. See the commentary under Sec. 1026.18(s)(3)(i)(C)
for guidance on escrows for purposes of Sec. 1026.18(s)(3)(ii)(C).
18(s)(4) Payments for Negative Amortization Loans
1. Table. Section 1026.18(s)(1) provides that tables shall
include only the information required in Sec. 1026.18(s)(2)-(4).
Thus, a table for a negative amortization loan must contain no more
than two horizontal rows of payments and no more than five vertical
columns of interest rates.
2. Payment amounts. The payment amounts disclosed under Sec.
1026.18(s)(4) are the minimum or fully amortizing periodic payments,
as applicable, corresponding to the interest rates disclosed under
Sec. 1026.18(s)(2)(ii). The corresponding periodic payment is the
regular payment for each such interest rate, without regard to any
final payment that differs from the rest because of the rounding of
periodic payments to account for payment amounts including fractions
of cents.
Paragraph 18(s)(4)(i)
1. Minimum required payments. In one row of the table, the
creditor must disclose the minimum required payment in each column
of the table, corresponding to each interest rate or adjustment
required in Sec. 1026.18(s)(2)(ii). The payments in this row must
be calculated based on an assumption that the consumer makes the
minimum required payment for as long as possible under the terms of
the legal obligation. This row should be identified as the minimum
payment option, and the statement required by Sec.
1026.18(s)(4)(i)(C) should be included in the heading for the row.
Paragraph 18(s)(4)(iii)
1. Fully amortizing payments. In one row of the table, the
creditor must disclose the fully amortizing payment in each column
of the table, corresponding to each interest rate required in Sec.
1026.18(s)(2)(ii). The creditor
[[Page 79985]]
must assume, for purposes of calculating the amounts in this row
that the consumer makes only fully amortizing payments starting with
the first scheduled payment.
18(s)(5) Balloon Payments
1. General. A balloon payment is one that is more than two times
the regular periodic payment. In a reverse mortgage transaction, the
single payment is not considered a balloon payment. A balloon
payment must be disclosed outside and below the table, unless the
balloon payment coincides with an interest rate adjustment or a
scheduled payment increase. In those cases, the balloon payment must
be disclosed in the table.
18(s)(6) Special Disclosures for Loans With Negative Amortization
1. Escrows. See the commentary under Sec. 1026.18(s)(3)(i)(C)
for guidance on escrows for purposes of Sec. 1026.18(s)(6). Under
that guidance, because mortgage insurance payments decline over a
loan's term, the payment amounts shown in the table should reflect
the mortgage insurance payment that will be applicable at the time
each disclosed periodic payment will be in effect. Accordingly, the
disclosed mortgage insurance payment will be zero if it corresponds
to a periodic payment that will occur after the creditor will be
legally required to terminate mortgage insurance. On the other hand,
because only one escrow amount is disclosed under Sec.
1026.18(s)(6) for negative amortization loans and escrows are not
itemized in the payment amounts, the single escrow amount disclosed
should reflect the mortgage insurance amount that will be collected
at the outset of the loan's term, even though that amount will
decline in the future and ultimately will be discontinued pursuant
to the terms of the mortgage insurance policy.
18(s)(7) Definitions
1. Negative amortization loans. Under Sec. 1026.18(s)(7)(v), a
negative amortization loan is one that requires only a minimum
periodic payment that covers only a portion of the accrued interest,
resulting in negative amortization. For such a loan, Sec.
1026.18(s)(4)(iii) requires creditors to disclose the fully
amortizing periodic payment for each interest rate disclosed under
Sec. 1026.18(s)(2)(ii), in addition to the minimum periodic
payment, regardless of whether the legal obligation explicitly
recites that the consumer may make the fully amortizing payment.
Some loan types that result in negative amortization do not meet the
definition of negative amortization loan for purposes of Sec.
1026.18(s). These include, for example, loans requiring level,
amortizing payments but having a payment schedule containing gaps
during which interest accrues and is added to the principal balance
before regular, amortizing payments begin (or resume). For example,
``seasonal income'' loans may provide for amortizing payments during
nine months of the year and no payments for the other three months;
the required minimum payments (when made) are amortizing payments,
thus such loans are not negative amortization loans under Sec.
1026.18(s)(7)(v). An adjustable-rate loan that has fixed periodic
payments that do not adjust when the interest rate adjusts also
would not be disclosed as a negative amortization loan under Sec.
1026.18(s). For example, assume the initial rate is 4%, for which
the fully amortizing payment is $1500. Under the terms of the legal
obligation, the consumer will make $1500 monthly payments even if
the interest rate increases, and the additional interest is
capitalized. The possibility (but not certainty) of negative
amortization occurring after consummation does not make this
transaction a negative amortization loan for purposes of Sec.
1026.18(s). Loans that do not meet the definition of negative
amortization loan, even if they may have negative amortization, are
amortizing loans and are disclosed under Sec. Sec. 1026.18(s)(2)(i)
and 1026.18(s)(3).
Section 1026.19--Certain Mortgage and Variable-Rate Transactions
19(a)(1)(i) Time of Disclosures
1. Coverage. This section requires early disclosure of credit
terms in mortgage transactions that are secured by a consumer's
dwelling (other than home equity lines of credit subject to Sec.
1026.40 or mortgage transactions secured by an interest in a
timeshare plan) that are also subject to the Real Estate Settlement
Procedures Act (RESPA) and its implementing Regulation X. To be
covered by Sec. 1026.19, a transaction must be a federally related
mortgage loan under RESPA. ``Federally related mortgage loan'' is
defined under RESPA (12 U.S.C. 2602) and Regulation X (12 CFR
1024.2), and is subject to any interpretations by the Bureau.
2. Timing and use of estimates. The disclosures required by
Sec. 1026.19(a)(1)(i) must be delivered or mailed not later than
three business days after the creditor receives the consumer's
written application. The general definition of ``business day'' in
Sec. 1026.2(a)(6)--a day on which the creditor's offices are open
to the public for substantially all of its business functions--is
used for purposes of Sec. 1026.19(a)(1)(i). See comment 2(a)(6)-1.
This general definition is consistent with the definition of
``business day'' in Regulation X--a day on which the creditor's
offices are open to the public for carrying on substantially all of
its business functions. See 12 CFR 1024.2. Accordingly, the three-
business-day period in Sec. 1026.19(a)(1)(i) for making early
disclosures coincides with the time period within which creditors
subject to RESPA must provide good faith estimates of settlement
costs. If the creditor does not know the precise credit terms, the
creditor must base the disclosures on the best information
reasonably available and indicate that the disclosures are estimates
under Sec. 1026.17(c)(2). If many of the disclosures are estimates,
the creditor may include a statement to that effect (such as ``all
numerical disclosures except the late-payment disclosure are
estimates'') instead of separately labeling each estimate. In the
alternative, the creditor may label as an estimate only the items
primarily affected by unknown information. (See the commentary to
Sec. 1026.17(c)(2).) The creditor may provide explanatory material
concerning the estimates and the contingencies that may affect the
actual terms, in accordance with the commentary to Sec.
1026.17(a)(1).
3. Written application. Creditors may rely on RESPA and
Regulation X (including any interpretations issued by the Bureau) in
deciding whether a ``written application'' has been received. In
general, Regulation X defines ``application'' to mean the submission
of a borrower's financial information in anticipation of a credit
decision relating to a federally related mortgage loan. See 12 CFR
1024.2(b). An application is received when it reaches the creditor
in any of the ways applications are normally transmitted--by mail,
hand delivery, or through an intermediary agent or broker. (See
comment 19(b)-3 for guidance in determining whether or not the
transaction involves an intermediary agent or broker.) If an
application reaches the creditor through an intermediary agent or
broker, the application is received when it reaches the creditor,
rather than when it reaches the agent or broker.
4. Denied or withdrawn applications. The creditor may determine
within the three-business-day period that the application will not
or cannot be approved on the terms requested, as, for example, when
a consumer applies for a type or amount of credit that the creditor
does not offer, or the consumer's application cannot be approved for
some other reason. In that case, or if the consumer withdraws the
application within the three-business-day period, the creditor need
not make the disclosures under this section. If the creditor fails
to provide early disclosures and the transaction is later
consummated on the original terms, the creditor will be in violation
of this provision. If, however, the consumer amends the application
because of the creditor's unwillingness to approve it on its
original terms, no violation occurs for not providing disclosures
based on the original terms. But the amended application is a new
application subject to Sec. 1026.19(a)(1)(i).
5. Itemization of amount financed. In many mortgage
transactions, the itemization of the amount financed required by
Sec. 1026.18(c) will contain items, such as origination fees or
points, that also must be disclosed as part of the good faith
estimates of settlement costs required under RESPA. Creditors
furnishing the RESPA good faith estimates need not give consumers
any itemization of the amount financed.
19(a)(1)(ii) Imposition of Fees
1. Timing of fees. The consumer must receive the disclosures
required by this section before paying or incurring any fee imposed
by a creditor or other person in connection with the consumer's
application for a mortgage transaction that is subject to Sec.
1026.19(a)(1)(i), except as provided in Sec. 1026.19(a)(1)(iii). If
the creditor delivers the disclosures to the consumer in person, a
fee may be imposed anytime after delivery. If the creditor places
the disclosures in the mail, the creditor may impose a fee after the
consumer receives the disclosures or, in all cases, after midnight
on the third business day following mailing of the disclosures. For
purposes of Sec. 1026.19(a)(1)(ii), the term ``business day'' means
all calendar days except Sundays and legal public holidays referred
to in Sec. 1026.2(a)(6). See comment 2(a)(6)-2. For example,
assuming that there are no intervening legal public holidays, a
[[Page 79986]]
creditor that receives the consumer's written application on Monday
and mails the early mortgage loan disclosure on Tuesday may impose a
fee on the consumer after midnight on Friday.
2. Fees restricted. A creditor or other person may not impose
any fee, such as for an appraisal, underwriting, or broker services,
until the consumer has received the disclosures required by Sec.
1026.19(a)(1)(i). The only exception to the fee restriction allows
the creditor or other person to impose a bona fide and reasonable
fee for obtaining a consumer's credit history, such as for a credit
report(s).
3. Collection of fees. A creditor complies with Sec.
1026.19(a)(1)(ii) if:
i. The creditor receives a consumer's written application
directly from the consumer and does not collect any fee, other than
a fee for obtaining a consumer's credit history, until the consumer
receives the early mortgage loan disclosure.
ii. A third party submits a consumer's written application to a
creditor and both the creditor and third party do not collect any
fee, other than a fee for obtaining a consumer's credit history,
until the consumer receives the early mortgage loan disclosure from
the creditor.
iii. A third party submits a consumer's written application to a
second creditor following a prior creditor's denial of an
application made by the same consumer (or following the consumer's
withdrawal), and, if a fee already has been assessed, the new
creditor or third party does not collect or impose any additional
fee until the consumer receives an early mortgage loan disclosure
from the new creditor.
19(a)(1)(iii) Exception to Fee Restriction
1. Requirements. A creditor or other person may impose a fee
before the consumer receives the required disclosures if it is for
obtaining the consumer's credit history, such as by purchasing a
credit report(s) on the consumer. The fee also must be bona fide and
reasonable in amount. For example, a creditor may collect a fee for
obtaining a credit report(s) if it is in the creditor's ordinary
course of business to obtain a credit report(s). If the criteria in
Sec. 1026.19(a)(1)(iii) are met, the creditor may describe or refer
to this fee, for example, as an ``application fee.''
19(a)(2) Waiting Periods for Early Disclosures and Corrected
Disclosures
1. Business day definition. For purposes of Sec. 1026.19(a)(2),
``business day'' means all calendar days except Sundays and the
legal public holidays referred to in Sec. 1026.2(a)(6). See comment
2(a)(6)-2.
2. Consummation after both waiting periods expire. Consummation
may not occur until both the seven-business-day waiting period and
the three-business-day waiting period have expired. For example,
assume a creditor delivers the early disclosures to the consumer in
person or places them in the mail on Monday, June 1, and the
creditor then delivers corrected disclosures in person to the
consumer on Wednesday, June 3. Although Saturday, June 6 is the
third business day after the consumer received the corrected
disclosures, consummation may not occur before Tuesday, June 9, the
seventh business day following delivery or mailing of the early
disclosures.
Paragraph 19(a)(2)(i)
1. Timing. The disclosures required by Sec. 1026.19(a)(1)(i)
must be delivered or placed in the mail no later than the seventh
business day before consummation. The seven-business-day waiting
period begins when the creditor delivers the early disclosures or
places them in the mail, not when the consumer receives or is deemed
to have received the early disclosures. For example, if a creditor
delivers the early disclosures to the consumer in person or places
them in the mail on Monday, June 1, consummation may occur on or
after Tuesday, June 9, the seventh business day following delivery
or mailing of the early disclosures.
Paragraph 19(a)(2)(ii)
1. Conditions for redisclosure. If, at the time of consummation,
the annual percentage rate disclosed is accurate under Sec.
1026.22, the creditor does not have to make corrected disclosures
under Sec. 1026.19(a)(2). If, on the other hand, the annual
percentage rate disclosed is not accurate under Sec. 1026.22, the
creditor must make corrected disclosures of all changed terms
(including the annual percentage rate) so that the consumer receives
them not later than the third business day before consummation. For
example, assume consummation is scheduled for Thursday, June 11 and
the early disclosures for a regular mortgage transaction disclose an
annual percentage rate of 7.00%:
i. On Thursday, June 11, the annual percentage rate will be
7.10%. The creditor is not required to make corrected disclosures
under Sec. 1026.19(a)(2).
ii. On Thursday, June 11, the annual percentage rate will be
7.15%. The creditor must make corrected disclosures so that the
consumer receives them on or before Monday, June 8.
2. Content of new disclosures. If redisclosure is required, the
creditor may provide a complete set of new disclosures, or may
redisclose only the changed terms. If the creditor chooses to
provide a complete set of new disclosures, the creditor may but need
not highlight the new terms, provided that the disclosures comply
with the format requirements of Sec. 1026.17(a). If the creditor
chooses to disclose only the new terms, all the new terms must be
disclosed. For example, a different annual percentage rate will
almost always produce a different finance charge, and often a new
schedule of payments; all of these changes would have to be
disclosed. If, in addition, unrelated terms such as the amount
financed or prepayment penalty vary from those originally disclosed,
the accurate terms must be disclosed. However, no new disclosures
are required if the only inaccuracies involve estimates other than
the annual percentage rate, and no variable rate feature has been
added. For a discussion of the requirement to redisclose when a
variable-rate feature is added, see comment 17(f)-2. For a
discussion of redisclosure requirements in general, see the
commentary on Sec. 1026.17(f).
3. Timing. When redisclosures are necessary because the annual
percentage rate has become inaccurate, they must be received by the
consumer no later than the third business day before consummation.
(For redisclosures triggered by other events, the creditor must
provide corrected disclosures before consummation. See Sec.
1026.17(f).) If the creditor delivers the corrected disclosures to
the consumer in person, consummation may occur any time on the third
business day following delivery. If the creditor provides the
corrected disclosures by mail, the consumer is considered to have
received them three business days after they are placed in the mail,
for purposes of determining when the three-business-day waiting
period required under Sec. 1026.19(a)(2)(ii) begins. Creditors that
use electronic mail or a courier other than the postal service may
also follow this approach.
4. Basis for annual percentage rate comparison. To determine
whether a creditor must make corrected disclosures under Sec.
1026.22, a creditor compares (a) what the annual percentage rate
will be at consummation to (b) the annual percentage rate stated in
the most recent disclosures the creditor made to the consumer. For
example, assume consummation for a regular mortgage transaction is
scheduled for Thursday, June 11, the early disclosures provided in
May stated an annual percentage rate of 7.00%, and corrected
disclosures received by the consumer on Friday, June 5 stated an
annual percentage rate of 7.15%:
i. On Thursday, June 11, the annual percentage rate will be
7.25%, which exceeds the most recently disclosed annual percentage
rate by less than the applicable tolerance. The creditor is not
required to make additional corrected disclosures or wait an
additional three business days under Sec. 1026.19(a)(2).
ii. On Thursday, June 11, the annual percentage rate will be
7.30%, which exceeds the most recently disclosed annual percentage
rate by more than the applicable tolerance. The creditor must make
corrected disclosures such that the consumer receives them on or
before Monday, June 8.
19(a)(3) Consumer's Waiver of Waiting Period Before Consummation
1. Modification or waiver. A consumer may modify or waive the
right to a waiting period required by Sec. 1026.19(a)(2) only after
the creditor makes the disclosures required by Sec. 1026.18. The
consumer must have a bona fide personal financial emergency that
necessitates consummating the credit transaction before the end of
the waiting period. Whether these conditions are met is determined
by the facts surrounding individual situations. The imminent sale of
the consumer's home at foreclosure, where the foreclosure sale will
proceed unless loan proceeds are made available to the consumer
during the waiting period, is one example of a bona fide personal
financial emergency. Each consumer who is primarily liable on the
legal obligation must sign the written statement for the waiver to
be effective.
2. Examples of waivers within the seven-business-day waiting
period. Assume the early disclosures are delivered to the consumer
in person on Monday, June 1, and at that time the consumer executes
a waiver of the seven-business-day waiting period (which would end
on Tuesday, June 9) so
[[Page 79987]]
that the loan can be consummated on Friday, June 5:
i. If the annual percentage rate on the early disclosures is
inaccurate under Sec. 1026.22, the creditor must provide a
corrected disclosure to the consumer before consummation, which
triggers the three-business-day waiting period in Sec.
1026.19(a)(2)(ii). After the consumer receives the corrected
disclosure, the consumer must execute a waiver of the three-
business-day waiting period in order to consummate the transaction
on Friday, June 5.
ii. If a change occurs that does not render the annual
percentage rate on the early disclosures inaccurate under Sec.
1026.22, the creditor must disclose the changed terms before
consummation, consistent with Sec. 1026.17(f). Disclosure of the
changed terms does not trigger an additional waiting period, and the
transaction may be consummated on June 5 without the consumer giving
the creditor an additional modification or waiver.
3. Examples of waivers made after the seven-business-day waiting
period. Assume the early disclosures are delivered to the consumer
in person on Monday, June 1 and consummation is scheduled for
Friday, June 19. On Wednesday, June 17, a change to the annual
percentage rate occurs:
i. If the annual percentage rate on the early disclosures is
inaccurate under Sec. 1026.22, the creditor must provide a
corrected disclosure to the consumer before consummation, which
triggers the three-business-day waiting period in Sec.
1026.19(a)(2). After the consumer receives the corrected disclosure,
the consumer must execute a waiver of the three-business-day waiting
period in order to consummate the transaction on Friday, June 19.
ii. If a change occurs that does not render the annual
percentage rate on the early disclosures inaccurate under Sec.
1026.22, the creditor must disclose the changed terms before
consummation, consistent with Sec. 1026.17(f). Disclosure of the
changed terms does not trigger an additional waiting period, and the
transaction may be consummated on Friday, June 19 without the
consumer giving the creditor an additional modification or waiver.
19(a)(4) Notice
1. Inclusion in other disclosures. The notice required by Sec.
1026.19(a)(4) must be grouped together with the disclosures required
by Sec. 1026.19(a)(1)(i) or Sec. 1026.19(a)(2). See comment
17(a)(1)-2 for a discussion of the rules for segregating
disclosures. In other cases, the notice set forth in Sec.
1026.19(a)(4) may be disclosed together with or separately from the
disclosures required under Sec. 1026.18. See comment 17(a)(1)-
5.xvi.
19(a)(5) Timeshare Plans
Paragraph 19(a)(5)(ii)
1. Timing. A mortgage transaction secured by a consumer's
interest in a ``timeshare plan,'' as defined in 11 U.S.C. 101(53D),
that is also a federally related mortgage loan under RESPA is
subject to the requirements of Sec. 1026.19(a)(5) instead of the
requirements of Sec. 1026.19(a)(1) through Sec. 1026.19(a)(4). See
comment 19(a)(1)(i)-1. Early disclosures for transactions subject to
Sec. 1026.19(a)(5) must be given (a) before consummation or (b)
within three business days after the creditor receives the
consumer's written application, whichever is earlier. The general
definition of ``business day'' in Sec. 1026.2(a)(6)--a day on which
the creditor's offices are open to the public for substantially all
of its business functions--applies for purposes of Sec.
1026.19(a)(5)(ii). See comment 2(a)(6)-1. These timing requirements
are different from the timing requirements under Sec.
1026.19(a)(1)(i). Timeshare transactions covered by Sec.
1026.19(a)(5) may be consummated any time after the disclosures
required by Sec. 1026.19(a)(5)(ii) are provided.
2. Use of estimates. If the creditor does not know the precise
credit terms, the creditor must base the disclosures on the best
information reasonably available and indicate that the disclosures
are estimates under Sec. 1026.17(c)(2). If many of the disclosures
are estimates, the creditor may include a statement to that effect
(such as ``all numerical disclosures except the late-payment
disclosure are estimates'') instead of separately labeling each
estimate. In the alternative, the creditor may label as an estimate
only the items primarily affected by unknown information. (See the
commentary to Sec. 1026.17(c)(2).) The creditor may provide
explanatory material concerning the estimates and the contingencies
that may affect the actual terms, in accordance with the commentary
to Sec. 1026.17(a)(1).
3. Written application. For timeshare transactions, creditors
may rely on comment 19(a)(1)(i)-3 in determining whether a ``written
application'' has been received.
4. Denied or withdrawn applications. For timeshare transactions,
creditors may rely on comment 19(a)(1)(i)-4 in determining that
disclosures are not required by Sec. 1026.19(a)(5)(ii) because the
consumer's application will not or cannot be approved on the terms
requested or the consumer has withdrawn the application.
5. Itemization of amount financed. For timeshare transactions,
creditors may rely on comment 19(a)(1)(i)-5 in determining whether
providing the good faith estimates of settlement costs required by
RESPA satisfies the requirement of Sec. 1026.18(c) to provide an
itemization of the amount financed.
Paragraph 19(a)(5)(iii)
1. Consummation or settlement. For extensions of credit secured
by a consumer's timeshare plan, when corrected disclosures are
required, they must be given no later than ``consummation or
settlement.'' ``Consummation'' is defined in Sec. 1026.2(a).
``Settlement'' is defined in Regulation X (12 CFR 1024.2(b)) and is
subject to any interpretations issued by the Bureau. In some cases,
a creditor may delay redisclosure until settlement, which may be at
a time later than consummation. If a creditor chooses to redisclose
at settlement, disclosures may be based on the terms in effect at
settlement, rather than at consummation. For example, in a variable-
rate transaction, a creditor may choose to base disclosures on the
terms in effect at settlement, despite the general rule in comment
17(c)(1)-8 that variable-rate disclosures should be based on the
terms in effect at consummation.
2. Content of new disclosures. Creditors may rely on comment
19(a)(2)(ii)-2 in determining the content of corrected disclosures
required under Sec. 1026.19(a)(5)(iii).
19(b) Certain Variable-Rate Transactions
1. Coverage. Section 1026.19(b) applies to all closed-end
variable-rate transactions that are secured by the consumer's
principal dwelling and have a term greater than one year. The
requirements of this section apply not only to transactions
financing the initial acquisition of the consumer's principal
dwelling, but also to any other closed-end variable-rate transaction
secured by the principal dwelling. Closed-end variable-rate
transactions that are not secured by the principal dwelling, or are
secured by the principal dwelling but have a term of one year or
less, are subject to the disclosure requirements of Sec.
1026.18(f)(1) rather than those of Sec. 1026.19(b). (Furthermore,
``shared-equity'' or ``shared-appreciation'' mortgages are subject
to the disclosure requirements of Sec. 1026.18(f)(1) rather than
those of Sec. 1026.19(b) regardless of the general coverage of
those sections.) For purposes of this section, the term of a
variable-rate demand loan is determined in accordance with the
commentary to Sec. 1026.17(c)(5). In determining whether a
construction loan that may be permanently financed by the same
creditor is covered under this section, the creditor may treat the
construction and the permanent phases as separate transactions with
distinct terms to maturity or as a single combined transaction. For
purposes of the disclosures required under Sec. 1026.18, the
creditor may nevertheless treat the two phases either as separate
transactions or as a single combined transaction in accordance with
Sec. 1026.17(c)(6). Finally, in any assumption of a variable-rate
transaction secured by the consumer's principal dwelling with a term
greater than one year, disclosures need not be provided under
Sec. Sec. 1026.18(f)(2)(ii) or 1026.19(b).
2. Timing. A creditor must give the disclosures required under
this section at the time an application form is provided or before
the consumer pays a nonrefundable fee, whichever is earlier.
i. Intermediary agent or broker. In cases where a creditor
receives a written application through an intermediary agent or
broker, however, Sec. 1026.19(b) provides a substitute timing rule
requiring the creditor to deliver the disclosures or place them in
the mail not later than three business days after the creditor
receives the consumer's written application. (See comment 19(b)-3
for guidance in determining whether or not the transaction involves
an intermediary agent or broker.) This three-day rule also applies
where the creditor takes an application over the telephone.
ii. Telephone request. In cases where the consumer merely
requests an application over the telephone, the creditor must
include the early disclosures required under this section with the
application that is sent to the consumer.
iii. Mail solicitations. In cases where the creditor solicits
applications through the
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mail, the creditor must also send the disclosures required under
this section if an application form is included with the
solicitation.
iv. Conversion. In cases where an open-end credit account will
convert to a closed-end transaction subject to this section under a
written agreement with the consumer, disclosures under this section
may be given at the time of conversion. (See the commentary to Sec.
1026.20(a) for information on the timing requirements for Sec.
1026.19(b)(2) disclosures when a variable-rate feature is later
added to a transaction.)
v. Form of electronic disclosures provided on or with electronic
applications. Creditors must provide the disclosures required by
this section (including the brochure) on or with a blank application
that is made available to the consumer in electronic form, such as
on a creditor's Internet Web site. Creditors have flexibility in
satisfying this requirement. There are various methods creditors
could use to satisfy the requirement. Whatever method is used, a
creditor need not confirm that the consumer has read the
disclosures. Methods include, but are not limited to, the following
examples:
A. The disclosures could automatically appear on the screen when
the application appears;
B. The disclosures could be located on the same web page as the
application (whether or not they appear on the initial screen), if
the application contains a clear and conspicuous reference to the
location of the disclosures and indicates that the disclosures
contain rate, fee, and other cost information, as applicable;
C. Creditors could provide a link to the electronic disclosures
on or with the application as long as consumers cannot bypass the
disclosures before submitting the application. The link would take
the consumer to the disclosures, but the consumer need not be
required to scroll completely through the disclosures; or
D. The disclosures could be located on the same web page as the
application without necessarily appearing on the initial screen,
immediately preceding the button that the consumer will click to
submit the application.
3. Intermediary agent or broker. i. In certain transactions
involving an ``intermediary agent or broker,'' a creditor may delay
providing disclosures. A creditor may not delay providing
disclosures in transactions involving either a legal agent (as
determined by applicable law) or any other third party that is not
an ``intermediary agent or broker.'' In determining whether or not a
transaction involves an ``intermediary agent or broker'' the
following factors should be considered:
A. The number of applications submitted by the broker to the
creditor as compared to the total number of applications received by
the creditor. The greater the percentage of total loan applications
submitted by the broker in any given period of time, the less likely
it is that the broker would be considered an ``intermediary agent or
broker'' of the creditor during the next period.
B. The number of applications submitted by the broker to the
creditor as compared to the total number of applications received by
the broker. (This factor is applicable only if the creditor has such
information.) The greater the percentage of total loan applications
received by the broker that is submitted to a creditor in any given
period of time, the less likely it is that the broker would be
considered an ``intermediary agent or broker'' of the creditor
during the next period.
C. The amount of work (such as document preparation) the
creditor expects to be done by the broker on an application based on
the creditor's prior dealings with the broker and on the creditor's
requirements for accepting applications, taking into consideration
the customary practice of brokers in a particular area. The more
work that the creditor expects the broker to do on an application,
in excess of what is usually expected of a broker in that area, the
less likely it is that the broker would be considered an
``intermediary agent or broker'' of the creditor.
ii. An example of an ``intermediary agent or broker'' is a
broker who, customarily within a brief period of time after
receiving an application, inquires about the credit terms of several
creditors with whom the broker does business and submits the
application to one of them. The broker is responsible for only a
small percentage of the applications received by that creditor.
During the time the broker has the application, it might request a
credit report and an appraisal (or even prepare an entire loan
package if customary in that particular area).
4. Other variable-rate regulations. Transactions in which the
creditor is required to comply with and has complied with the
disclosure requirements of the variable-rate regulations of other
Federal agencies are exempt from the requirements of Sec.
1026.19(b), by virtue of Sec. 1026.19(d), and are exempt from the
requirements of Sec. 1026.20(c), by virtue of Sec. 1026.20(d). The
exception is also available to creditors that are required by state
law to comply with the Federal variable-rate regulations noted
above. Creditors using this exception should comply with the timing
requirements of those regulations rather than the timing
requirements of Regulation Z in making the variable-rate
disclosures.
5. Examples of variable-rate transactions. i. The following
transactions, if they have a term greater than one year and are
secured by the consumer's principal dwelling, constitute variable-
rate transactions subject to the disclosure requirements of Sec.
1026.19(b).
A. Renewable balloon-payment instruments where the creditor is
both unconditionally obligated to renew the balloon-payment loan at
the consumer's option (or is obligated to renew subject to
conditions within the consumer's control) and has the option of
increasing the interest rate at the time of renewal. (See comment
17(c)(1)-11 for a discussion of conditions within a consumer's
control in connection with renewable balloon-payment loans.)
B. Preferred-rate loans where the terms of the legal obligation
provide that the initial underlying rate is fixed but will increase
upon the occurrence of some event, such as an employee leaving the
employ of the creditor, and the note reflects the preferred rate.
The disclosures under Sec. Sec. 1026.19(b)(1) and 1026.19(b)(2)(v),
(viii), (ix), and (xii) are not applicable to such loans.
C. ``Price-level-adjusted mortgages'' or other indexed mortgages
that have a fixed rate of interest but provide for periodic
adjustments to payments and the loan balance to reflect changes in
an index measuring prices or inflation. The disclosures under Sec.
1026.19(b)(1) are not applicable to such loans, nor are the
following provisions to the extent they relate to the determination
of the interest rate by the addition of a margin, changes in the
interest rate, or interest rate discounts: Section 1026.19(b)(2)
(i), (iii), (iv), (v), (vi), (vii), (viii), and (ix). (See comments
20(c)-2 and 30-1 regarding the inapplicability of variable-rate
adjustment notices and interest rate limitations to price-level-
adjusted or similar mortgages.)
ii. Graduated-payment mortgages and step-rate transactions
without a variable-rate feature are not considered variable-rate
transactions.
Paragraph 19(b)(1)
1. Substitute. Creditors who wish to use publications other than
the Consumer Handbook on Adjustable Rate Mortgages, available on the
Bureau's Web site, must make a good faith determination that their
brochures are suitable substitutes to the Consumer Handbook. A
substitute is suitable if it is, at a minimum, comparable to the
Consumer Handbook in substance and comprehensiveness. Creditors are
permitted to provide more detailed information than is contained in
the Consumer Handbook.
2. Applicability. The Consumer Handbook need not be given for
variable-rate transactions subject to this section in which the
underlying interest rate is fixed. (See comment 19(b)-5 for an
example of a variable-rate transaction where the underlying interest
rate is fixed.)
Paragraph 19(b)(2)
1. Disclosure for each variable-rate program. A creditor must
provide disclosures to the consumer that fully describe each of the
creditor's variable-rate loan programs in which the consumer
expresses an interest. If a program is made available only to
certain customers of an institution, a creditor need not provide
disclosures for that program to other consumers who express a
general interest in a creditor's ARM programs. Disclosures must be
given at the time an application form is provided or before the
consumer pays a nonrefundable fee, whichever is earlier. If program
disclosures cannot be provided because a consumer expresses an
interest in individually negotiating loan terms that are not
generally offered, disclosures reflecting those terms may be
provided as soon as reasonably possible after the terms have been
decided upon, but not later than the time a non-refundable fee is
paid. If a consumer who has received program disclosures
subsequently expresses an interest in other available variable-rate
programs subject to 1026.19(b)(2), or the creditor and consumer
decide on a program for which the consumer has not received
disclosures, the creditor
[[Page 79989]]
must provide appropriate disclosures as soon as reasonably possible.
The creditor, of course, is permitted to give the consumer
information about additional programs subject to Sec. 1026.19(b)
initially.
2. Variable-rate loan program defined. i. Generally, if the
identification, the presence or absence, or the exact value of a
loan feature must be disclosed under this section, variable-rate
loans that differ as to such features constitute separate loan
programs. For example, separate loan programs would exist based on
differences in any of the following loan features:
A. The index or other formula used to calculate interest rate
adjustments.
B. The rules relating to changes in the index value, interest
rate, payments, and loan balance.
C. The presence or absence of, and the amount of, rate or
payment caps.
D. The presence of a demand feature.
E. The possibility of negative amortization.
F. The possibility of interest rate carryover.
G. The frequency of interest rate and payment adjustments.
H. The presence of a discount feature.
I. In addition, if a loan feature must be taken into account in
preparing the disclosures required by Sec. 1026.19(b)(2)(viii),
variable-rate loans that differ as to that feature constitute
separate programs under Sec. 1026.19(b)(2).
ii. If, however, a representative value may be given for a loan
feature or the feature need not be disclosed under Sec.
1026.19(b)(2), variable-rate loans that differ as to such features
do not constitute separate loan programs. For example, separate
programs would not exist based on differences in the following loan
features:
A. The amount of a discount.
B. The amount of a margin.
3. Form of program disclosures. A creditor may provide separate
program disclosure forms for each ARM program it offers or a single
disclosure form that describes multiple programs. A disclosure form
may consist of more than one page. For example, a creditor may
attach a separate page containing the historical payment example for
a particular program. A disclosure form describing more than one
program need not repeat information applicable to each program that
is described. For example, a form describing multiple programs may
disclose the information applicable to all of the programs in one
place with the various program features (such as options permitting
conversion to a fixed rate) disclosed separately. The form, however,
must state if any program feature that is described is available
only in conjunction with certain other program features. Both the
separate and multiple program disclosures may illustrate more than
one loan maturity or payment amortization--for example, by including
multiple payment and loan balance columns in the historical payment
example. Disclosures may be inserted or printed in the Consumer
Handbook (or a suitable substitute) as long as they are identified
as the creditor's loan program disclosures.
4. As applicable. The disclosures required by this section need
only be made as applicable. Any disclosure not relevant to a
particular transaction may be eliminated. For example, if the
transaction does not contain a demand feature, the disclosure
required under Sec. 1026.19(b)(2)(x) need not be given. As used in
this section, payment refers only to a payment based on the interest
rate, loan balance and loan term, and does not refer to payment of
other elements such as mortgage insurance premiums.
5. Revisions. A creditor must revise the disclosures required
under this section once a year as soon as reasonably possible after
the new index value becomes available. Revisions to the disclosures
also are required when the loan program changes.
Paragraph 19(b)(2)(i)
1. Change in interest rate, payment, or term. A creditor must
disclose the fact that the terms of the legal obligation permit the
creditor, after consummation of the transaction, to increase (or
decrease) the interest rate, payment, or term of the loan initially
disclosed to the consumer. For example, the disclosures for a
variable-rate program in which the interest rate and payment (but
not loan term) can change might read, ``Your interest rate and
payment can change yearly.'' In transactions where the term of the
loan may change due to rate fluctuations, the creditor must state
that fact.
Paragraph 19(b)(2)(ii)
1. Identification of index or formula. If a creditor ties
interest rate changes to a particular index, this fact must be
disclosed, along with a source of information about the index. For
example, if a creditor uses the weekly average yield on U.S.
Treasury Securities adjusted to a constant maturity as its index,
the disclosure might read, ``Your index is the weekly average yield
on U.S. Treasury Securities adjusted to a constant maturity of one
year published weekly in the Wall Street Journal.'' If no particular
index is used, the creditor must briefly describe the formula used
to calculate interest rate changes.
2. Changes at creditor's discretion. If interest rate changes
are at the creditor's discretion, this fact must be disclosed. If an
index is internally defined, such as by a creditor's prime rate, the
creditor should either briefly describe that index or state that
interest rate changes are at the creditor's discretion.
Paragraph 19(b)(2)(iii)
1. Determination of interest rate and payment. This provision
requires an explanation of how the creditor will determine the
consumer's interest rate and payment. In cases where a creditor
bases its interest rate on a specific index and adjusts the index
through the addition of a margin, for example, the disclosure might
read, ``Your interest rate is based on the index plus a margin, and
your payment will be based on the interest rate, loan balance, and
remaining loan term.'' In transactions where paying the periodic
payments will not fully amortize the outstanding balance at the end
of the loan term and where the final payment will equal the periodic
payment plus the remaining unpaid balance, the creditor must
disclose this fact. For example, the disclosure might read, ``Your
periodic payments will not fully amortize your loan and you will be
required to make a single payment of the periodic payment plus the
remaining unpaid balance at the end of the loan term.'' The
creditor, however, need not reflect any irregular final payment in
the historical example or in the disclosure of the initial and
maximum rates and payments. If applicable, the creditor should also
disclose that the rate and payment will be rounded.
Paragraph 19(b)(2)(iv)
1. Current margin value and interest rate. Because the
disclosures can be prepared in advance, the interest rate and margin
may be several months old when the disclosures are delivered. A
statement, therefore, is required alerting consumers to the fact
that they should inquire about the current margin value applied to
the index and the current interest rate. For example, the disclosure
might state, ``Ask us for our current interest rate and margin.''
Paragraph 19(b)(2)(v)
1. Discounted and premium interest rate. In some variable-rate
transactions, creditors may set an initial interest rate that is not
determined by the index or formula used to make later interest rate
adjustments. Typically, this initial rate charged to consumers is
lower than the rate would be if it were calculated using the index
or formula. However, in some cases the initial rate may be higher.
If the initial interest rate will be a discount or a premium rate,
creditors must alert the consumer to this fact. For example, if a
creditor discounted a consumer's initial rate, the disclosure might
state, ``Your initial interest rate is not based on the index used
to make later adjustments.'' (See the commentary to Sec.
1026.17(c)(1) for a further discussion of discounted and premium
variable-rate transactions.) In addition, the disclosure must
suggest that consumers inquire about the amount that the program is
currently discounted. For example, the disclosure might state, ``Ask
us for the amount our adjustable rate mortgages are currently
discounted.'' In a transaction with a consumer buydown or with a
third-party buydown that will be incorporated in the legal
obligation, the creditor should disclose the program as a discounted
variable-rate transaction, but need not disclose additional
information regarding the buydown in its program disclosures. (See
the commentary to Sec. 1026.19(b)(2)(viii) for a discussion of how
to reflect the discount or premium in the historical example or the
maximum rate and payment disclosure).
Paragraph 19(b)(2)(vi)
1. Frequency. The frequency of interest rate and payment
adjustments must be disclosed. If interest rate changes will be
imposed more frequently or at different intervals than payment
changes, a creditor must disclose the frequency and timing of both
types of changes. For example, in a variable-rate transaction where
interest rate changes are made monthly, but payment changes occur on
an annual basis, this fact must be disclosed. In certain ARM
transactions, the interval between loan closing and the initial
adjustment is not known and may be
[[Page 79990]]
different from the regular interval for adjustments. In such cases,
the creditor may disclose the initial adjustment period as a range
of the minimum and maximum amount of time from consummation or
closing. For example, the creditor might state: ``The first
adjustment to your interest rate and payment will occur no sooner
than 6 months and no later than 18 months after closing. Subsequent
adjustments may occur once each year after the first adjustment.''
(See comments 19(b)(2)(viii)(A)-7 and 19(b)(2)(viii)(B)-4 for
guidance on other disclosures when this alternative disclosure rule
is used.)
Paragraph 19(b)(2)(vii)
1. Rate and payment caps. The creditor must disclose limits on
changes (increases or decreases) in the interest rate or payment. If
an initial discount is not taken into account in applying overall or
periodic rate limitations, that fact must be disclosed. If separate
overall or periodic limitations apply to interest rate increases
resulting from other events, such as the exercise of a fixed-rate
conversion option or leaving the creditor's employ, those
limitations must also be stated. Limitations do not include legal
limits in the nature of usury or rate ceilings under state or
Federal statutes or regulations. (See Sec. 1026.30 for the rule
requiring that a maximum interest rate be included in certain
variable-rate transactions.) The creditor need not disclose each
periodic or overall rate limitation that is currently available. As
an alternative, the creditor may disclose the range of the lowest
and highest periodic and overall rate limitations that may be
applicable to the creditor's ARM transactions. For example, the
creditor might state: ``The limitation on increases to your interest
rate at each adjustment will be set at an amount in the following
range: Between 1 and 2 percentage points at each adjustment. The
limitation on increases to your interest rate over the term of the
loan will be set at an amount in the following range: Between 4 and
7 percentage points above the initial interest rate.'' A creditor
using this alternative rule must include a statement in its program
disclosures suggesting that the consumer ask about the overall rate
limitations currently offered for the creditor's ARM programs. (See
comments 19(b)(2)(viii)(A)-6 and 19(b)(2)(viii)(B)-3 for an
explanation of the additional requirements for a creditor using this
alternative rule for disclosure of periodic and overall rate
limitations.)
2. Negative amortization and interest rate carryover. A creditor
must disclose, where applicable, the possibility of negative
amortization. For example, the disclosure might state, ``If any of
your payments is not sufficient to cover the interest due, the
difference will be added to your loan amount.'' Loans that provide
for more than one way to trigger negative amortization are separate
variable-rate programs requiring separate disclosures. (See the
commentary to Sec. 1026.19(b)(2) for a discussion on the definition
of a variable-rate loan program and the format for disclosure.) If a
consumer is given the option to cap monthly payments that may result
in negative amortization, the creditor must fully disclose the rules
relating to the option, including the effects of exercising the
option (such as negative amortization will occur and the principal
loan balance will increase); however, the disclosure in Sec.
1026.19(b)(2)(viii) need not be provided.
3. Conversion option. If a loan program permits consumers to
convert their variable-rate loans to fixed-rate loans, the creditor
must disclose that the interest rate may increase if the consumer
converts the loan to a fixed-rate loan. The creditor must also
disclose the rules relating to the conversion feature, such as the
period during which the loan may be converted, that fees may be
charged at conversion, and how the fixed rate will be determined.
The creditor should identify any index or other measure or formula
used to determine the fixed rate and state any margin to be added.
In disclosing the period during which the loan may be converted and
the margin, the creditor may use information applicable to the
conversion feature during the six months preceding preparation of
the disclosures and state that the information is representative of
conversion features recently offered by the creditor. The
information may be used until the program disclosures are otherwise
revised. Although the rules relating to the conversion option must
be disclosed, the effect of exercising the option should not be
reflected elsewhere in the disclosures, such as in the historical
example or in the calculation of the initial and maximum interest
rate and payments.
4. Preferred-rate loans. Section 1026.19(b) applies to
preferred-rate loans, where the rate will increase upon the
occurrence of some event, such as an employee leaving the creditor's
employ, whether or not the underlying rate is fixed or variable. In
these transactions, the creditor must disclose the event that would
allow the creditor to increase the rate such as that the rate may
increase if the employee leaves the creditor's employ. The creditor
must also disclose the rules relating to termination of the
preferred rate, such as that fees may be charged when the rate is
changed and how the new rate will be determined.
Paragraph 19(b)(2)(viii)
1. Historical example and initial and maximum interest rates and
payments. A creditor may disclose both the historical example and
the initial and maximum interest rates and payments.
Paragraph 19(b)(2)(viii)(A)
1. Index movement. This section requires a creditor to provide
an historical example, based on a $10,000 loan amount originating in
1977, showing how interest rate changes implemented according to the
terms of the loan program would have affected payments and the loan
balance at the end of each year during a 15-year period. (In all
cases, the creditor need only calculate the payments and loan
balance for the term of the loan. For example, in a five-year loan,
a creditor would show the payments and loan balance for the five-
year term, from 1977 to 1981, with a zero loan balance reflected for
1981. For the remaining ten years, 1982-1991, the creditor need only
show the remaining index values, margin and interest rate and must
continue to reflect all significant loan program terms such as rate
limitations affecting them.) Pursuant to this section, the creditor
must provide a history of index values for the preceding 15 years.
Initially, the disclosures would give the index values from 1977 to
the present. Each year thereafter, the revised program disclosures
should include an additional year's index value until 15 years of
values are shown. If the values for an index have not been available
for 15 years, a creditor need only go back as far as the values are
available in giving a history and payment example. In all cases,
only one index value per year need be shown. Thus, in transactions
where interest rate adjustments are implemented more frequently than
once per year, a creditor may assume that the interest rate and
payment resulting from the index value chosen will stay in effect
for the entire year for purposes of calculating the loan balance as
of the end of the year and for reflecting other loan program terms.
In cases where interest rate changes are at the creditor's
discretion (see the commentary to Sec. 1026.19(b)(2)(ii)), the
creditor must provide a history of the rates imposed for the
preceding 15 years, beginning with the rates in 1977. In giving this
history, the creditor need only go back as far as the creditor's
rates can reasonably be determined.
2. Selection of index values. The historical example must
reflect the method by which index values are determined under the
program. If a creditor uses an average of index values or any other
index formula, the history given should reflect those values. The
creditor should select one date or, when an average of single values
is used as an index, one period and should base the example on index
values measured as of that same date or period for each year shown
in the history. A date or period at any time during the year may be
selected, but the same date or period must be used for each year in
the historical example. For example, a creditor could use values for
the first business day in July or for the first week ending in July
for each of the 15 years shown in the example.
3. Selection of margin. For purposes of the disclosure required
under Sec. 1026.19(b)(2)(viii)(A), a creditor may select a
representative margin that has been used during the six months
preceding preparation of the disclosures, and should disclose that
the margin is one that the creditor has used recently. The margin
selected may be used until a creditor revises the disclosure form.
4. Amount of discount or premium. For purposes of the disclosure
required under Sec. 1026.19(b)(2)(viii)(A), a creditor may select a
discount or premium (amount and term) that has been used during the
six months preceding preparation of the disclosures, and should
disclose that the discount or premium is one that the creditor has
used recently. The discount or premium should be reflected in the
historical example for as long as the discount or premium is in
effect. A creditor may assume that a discount that would have been
in effect for any part of a year was in effect for the full year for
purposes of reflecting it in the historical example. For example, a
3-month discount may be treated as being in effect for the entire
first year of
[[Page 79991]]
the example; a 15-month discount may be treated as being in effect
for the first two years of the example. In illustrating the effect
of the discount or premium, creditors should adjust the value of the
interest rate in the historical example, and should not adjust the
margin or index values. For example, if during the six months
preceding preparation of the disclosures the fully indexed rate
would have been 10% but the first year's rate under the program was
8%, the creditor would discount the first interest rate in the
historical example by 2 percentage points.
5. Term of the loan. In calculating the payments and loan
balances in the historical example, a creditor need not base the
disclosures on each term to maturity or payment amortization that it
offers. Instead, disclosures for ARMs may be based upon terms to
maturity or payment amortizations of 5, 15 and 30 years, as follows:
ARMs with terms or amortizations from over 1 year to 10 years may be
based on a 5-year term or amortization; ARMs with terms or
amortizations from over 10 years to 20 years may be based on a 15-
year term or amortization; and ARMs with terms or amortizations over
20 years may be based on a 30-year term or amortization. Thus,
disclosures for ARMs offered with any term from over 1 year to 40
years may be based solely on terms of 5, 15 and 30 years. Of course,
a creditor may always base the disclosures on the actual terms or
amortizations offered. If the creditor bases the disclosures on 5-,
15- or 30-year terms or payment amortization as provided above, the
term or payment amortization used in making the disclosure must be
stated.
6. Rate caps. A creditor using the alternative rule described in
comment 19(b)(2)(vii)-1 for disclosure of rate limitations must base
the historical example upon the highest periodic and overall rate
limitations disclosed under Sec. 1026.19(b)(2)(vii). In addition,
the creditor must state the limitations used in the historical
example. (See comment 19(b)(2)(viii)(B)-3 for an explanation of the
use of the highest rate limitation in other disclosures.)
7. Frequency of adjustments. In certain transactions, creditors
may use the alternative rule described in comment 19(b)(2)(vi)-1 for
disclosure of the frequency of rate and payment adjustments. In such
cases, the creditor may assume for purposes of the historical
example that the first adjustment occurred at the end of the first
full year in which the adjustment could occur. For example, in an
ARM in which the first adjustment may occur between 6 and 18 months
after closing and annually thereafter, the creditor may assume that
the first adjustment occurred at the end of the first year in the
historical example. (See comment 19(b)(2)(viii)(B)-4 for an
explanation of how to compute the maximum interest rate and payment
when the initial adjustment period is not known.)
Paragraph 19(b)(2)(viii)(B)
1. Initial and maximum interest rates and payments. The
disclosure form must state the initial and maximum interest rates
and payments for a $10,000 loan originated at an initial interest
rate (index value plus margin adjusted by the amount of any discount
or premium) in effect as of an identified month and year for the
loan program disclosure. (See comment 19(b)(2)-5 on revisions to the
loan program disclosure.) In calculating the maximum payment under
this paragraph, a creditor should assume that the interest rate
increases as rapidly as possible under the loan program, and the
maximum payment disclosed should reflect the amortization of the
loan during this period. Thus, in a loan with 2 percentage point
annual (and 5 percentage point overall) interest rate limitations or
``caps,'' the maximum interest rate would be 5 percentage points
higher than the initial interest rate disclosed. Moreover, the loan
would not reach the maximum interest rate until the fourth year
because of the 2 percentage point annual rate limitations, and the
maximum payment disclosed would reflect the amortization of the loan
during this period. If the loan program includes a discounted or
premium initial interest rate, the initial interest rate should be
adjusted by the amount of the discount or premium.
2. Term of the loan. In calculating the initial and maximum
payments, the creditor need not base the disclosures on each term to
maturity or payment amortization offered under the program. Instead,
the creditor may follow the rules set out in comment
19(b)(2)(viii)(A)-5. If a historical example is provided under Sec.
1026.19(b)(2)(viii)(A), the terms to maturity or payment
amortization used in the historical example must be used in
calculating the initial and maximum payment. In addition, creditors
must state the term or payment amortization used in making the
disclosures under this section.
3. Rate caps. A creditor using the alternative rule for
disclosure of interest rate limitations described in comment
19(b)(2)(vii)-1 must calculate the maximum interest rate and payment
based upon the highest periodic and overall rate limitations
disclosed under Sec. 1026.19(b)(2)(vii). In addition, the creditor
must state the rate limitations used in calculating the maximum
interest rate and payment. (See comment 19(b)(2)(viii)(A)-6 for an
explanation of the use of the highest rate limitation in other
disclosures.)
4. Frequency of adjustments. In certain transactions, a creditor
may use the alternative rule for disclosure of the frequency of rate
and payment adjustments described in comment 19(b)(2)(vi)-1. In such
cases, the creditor must base the calculations of the initial and
maximum rates and payments upon the earliest possible first
adjustment disclosed under Sec. 1026.19(b)(2)(vi). (See comment
19(b)(2)(viii)(A)-7 for an explanation of how to disclose the
historical example when the initial adjustment period is not known.)
5. Periodic payment statement. The statement that the periodic
payment may increase or decrease substantially may be satisfied by
the disclosure in paragraph 19(b)(2)(vi) if it states for example,
``your monthly payment can increase or decrease substantially based
on annual changes in the interest rate.''
Paragraph 19(b)(2)(ix)
1. Calculation of payments. A creditor is required to include a
statement on the disclosure form that explains how a consumer may
calculate his or her actual monthly payments for a loan amount other
than $10,000. The example should be based upon the most recent
payment shown in the historical example or upon the initial interest
rate reflected in the maximum rate and payment disclosure. In
transactions in which the latest payment shown in the historical
example is not for the latest year of index values shown (such as in
a five-year loan), a creditor may provide additional examples based
on the initial and maximum payments disclosed under Sec.
1026.19(b)(2)(viii)(B). The creditor, however, is not required to
calculate the consumer's payments. (See the model clauses in
Appendix H-4(C).)
Paragraph 19(b)(2)(x)
1. Demand feature. If a variable-rate loan subject to Sec.
1026.19(b) requirements contains a demand feature as discussed in
the commentary to Sec. 1026.18(i), this fact must be disclosed.
(Pursuant to Sec. 1026.18(i), creditors would also disclose the
demand feature in the standard disclosures given later.)
Paragraph 19(b)(2)(xi)
1. Adjustment notices. A creditor must disclose to the consumer
the type of information that will be contained in subsequent notices
of adjustments and when such notices will be provided. (See the
commentary to Sec. 1026.20(c) regarding notices of adjustments.)
For example, the disclosure might state, ``You will be notified at
least 25, but no more than 120 days before the due date of a payment
at a new level. This notice will contain information about the index
and interest rates, payment amount, and loan balance.'' In
transactions where there may be interest rate adjustments without
accompanying payment adjustments in a year, the disclosure might
read, ``You will be notified once each year during which interest
rate adjustments, but no payment adjustments, have been made to your
loan. This notice will contain information about the index and
interest rates, payment amount, and loan balance.''
Paragraph 19(b)(2)(xii)
1. Multiple loan programs. A creditor that offers multiple
variable-rate loan programs is required to have disclosures for each
variable-rate loan program subject to Sec. 1026.19(b)(2). Unless
disclosures for all of its variable-rate programs are provided
initially, the creditor must inform the consumer that other closed-
end variable-rate programs exist, and that disclosure forms are
available for these additional loan programs. For example, the
disclosure form might state, ``Information on other adjustable rate
mortgage programs is available upon request.''
19(c) Electronic Disclosures
1. Form of disclosures. Whether disclosures must be in
electronic form depends upon the following:
i. If a consumer accesses an ARM loan application electronically
(other than as described under ii. below), such as online at
[[Page 79992]]
a home computer, the creditor must provide the disclosures in
electronic form (such as with the application form on its Web site)
in order to meet the requirement to provide disclosures in a timely
manner on or with the application. If the creditor instead mailed
paper disclosures to the consumer, this requirement would not be
met.
ii. In contrast, if a consumer is physically present in the
creditor's office, and accesses an ARM loan application
electronically, such as via a terminal or kiosk (or if the consumer
uses a terminal or kiosk located on the premises of an affiliate or
third party that has arranged with the creditor to provide
applications to consumers), the creditor may provide disclosures in
either electronic or paper form, provided the creditor complies with
the timing, delivery, and retainability requirements of the
regulation.
Section 1026.20 Subsequent Disclosure Requirements
20(a) Refinancings
1. Definition. A refinancing is a new transaction requiring a
complete new set of disclosures. Whether a refinancing has occurred
is determined by reference to whether the original obligation has
been satisfied or extinguished and replaced by a new obligation,
based on the parties' contract and applicable law. The refinancing
may involve the consolidation of several existing obligations,
disbursement of new money to the consumer or on the consumer's
behalf, or the rescheduling of payments under an existing
obligation. In any form, the new obligation must completely replace
the prior one.
i. Changes in the terms of an existing obligation, such as the
deferral of individual installments, will not constitute a
refinancing unless accomplished by the cancellation of that
obligation and the substitution of a new obligation.
ii. A substitution of agreements that meets the refinancing
definition will require new disclosures, even if the substitution
does not substantially alter the prior credit terms.
2. Exceptions. A transaction is subject to Sec. 1026.20(a) only
if it meets the general definition of a refinancing. Section
1026.20(a)(1) through (5) lists 5 events that are not treated as
refinancings, even if they are accomplished by cancellation of the
old obligation and substitution of a new one.
3. Variable-rate. i. If a variable-rate feature was properly
disclosed under the regulation, a rate change in accord with those
disclosures is not a refinancing. For example, no new disclosures
are required when the variable-rate feature is invoked on a
renewable balloon-payment mortgage that was previously disclosed as
a variable-rate transaction.
ii. Even if it is not accomplished by the cancellation of the
old obligation and substitution of a new one, a new transaction
subject to new disclosures results if the creditor either:
A. Increases the rate based on a variable-rate feature that was
not previously disclosed; or
B. Adds a variable-rate feature to the obligation. A creditor
does not add a variable-rate feature by changing the index of a
variable-rate transaction to a comparable index, whether the change
replaces the existing index or substitutes an index for one that no
longer exists.
iii. If either of the events in paragraph 20(a)-3.ii.A or ii.B
occurs in a transaction secured by a principal dwelling with a term
longer than one year, the disclosures required under Sec.
1026.19(b) also must be given at that time.
4. Unearned finance charge. In a transaction involving
precomputed finance charges, the creditor must include in the
finance charge on the refinanced obligation any unearned portion of
the original finance charge that is not rebated to the consumer or
credited against the underlying obligation. For example, in a
transaction with an add-on finance charge, a creditor advances new
money to a consumer in a fashion that extinguishes the original
obligation and replaces it with a new one. The creditor neither
refunds the unearned finance charge on the original obligation to
the consumer nor credits it to the remaining balance on the old
obligation. Under these circumstances, the unearned finance charge
must be included in the finance charge on the new obligation and
reflected in the annual percentage rate disclosed on refinancing.
Accrued but unpaid finance charges are included in the amount
financed in the new obligation.
5. Coverage. Section 1026.20(a) applies only to refinancings
undertaken by the original creditor or a holder or servicer of the
original obligation. A ``refinancing'' by any other person is a new
transaction under the regulation, not a refinancing under this
section.
Paragraph 20(a)(1)
1. Renewal. This exception applies both to obligations with a
single payment of principal and interest and to obligations with
periodic payments of interest and a final payment of principal. In
determining whether a new obligation replacing an old one is a
renewal of the original terms or a refinancing, the creditor may
consider it a renewal even if:
i. Accrued unpaid interest is added to the principal balance.
ii. Changes are made in the terms of renewal resulting from the
factors listed in Sec. 1026.17(c)(3).
iii. The principal at renewal is reduced by a curtailment of the
obligation.
Paragraph 20(a)(2)
1. Annual percentage rate reduction. A reduction in the annual
percentage rate with a corresponding change in the payment schedule
is not a refinancing. If the annual percentage rate is subsequently
increased (even though it remains below its original level) and the
increase is effected in such a way that the old obligation is
satisfied and replaced, new disclosures must then be made.
2. Corresponding change. A corresponding change in the payment
schedule to implement a lower annual percentage rate would be a
shortening of the maturity, or a reduction in the payment amount or
the number of payments of an obligation. The exception in Sec.
1026.20(a)(2) does not apply if the maturity is lengthened, or if
the payment amount or number of payments is increased beyond that
remaining on the existing transaction.
Paragraph 20(a)(3)
1. Court agreements. This exception includes, for example,
agreements such as reaffirmations of debts discharged in bankruptcy,
settlement agreements, and post-judgment agreements. (See the
commentary to Sec. 1026.2(a)(14) for a discussion of court-approved
agreements that are not considered ``credit.'')
Paragraph 20(a)(4)
1. Workout agreements. A workout agreement is not a refinancing
unless the annual percentage rate is increased or additional credit
is advanced beyond amounts already accrued plus insurance premiums.
Paragraph 20(a)(5)
1. Insurance renewal. The renewal of optional insurance added to
an existing credit transaction is not a refinancing, assuming that
appropriate Truth in Lending disclosures were provided for the
initial purchase of the insurance.
20(b) Assumptions
1. General definition. i. An assumption as defined in Sec.
1026.20(b) is a new transaction and new disclosures must be made to
the subsequent consumer. An assumption under the regulation requires
the following three elements:
A. A residential mortgage transaction.
B. An express acceptance of the subsequent consumer by the
creditor.
C. A written agreement.
ii. The assumption of a nonexempt consumer credit obligation
requires no disclosures unless all three elements are present. For
example, an automobile dealer need not provide Truth in Lending
disclosures to a customer who assumes an existing obligation secured
by an automobile. However, a residential mortgage transaction with
the elements described in Sec. 1026.20(b) is an assumption that
calls for new disclosures; the disclosures must be given whether or
not the assumption is accompanied by changes in the terms of the
obligation. (See comment 2(a)(24)-5 for a discussion of assumptions
that are not considered residential mortgage transactions.)
2. Existing residential mortgage transaction. A transaction may
be a residential mortgage transaction as to one consumer and not to
the other consumer. In that case, the creditor must look to the
assuming consumer in determining whether a residential mortgage
transaction exists. To illustrate: The original consumer obtained a
mortgage to purchase a home for vacation purposes. The loan was not
a residential mortgage transaction as to that consumer. The mortgage
is assumed by a consumer who will use the home as a principal
dwelling. As to that consumer, the loan is a residential mortgage
transaction. For purposes of Sec. 1026.20(b), the assumed loan is
an ``existing residential mortgage transaction'' requiring
disclosures, if the other criteria for an assumption are met.
[[Page 79993]]
3. Express agreement. Expressly agrees means that the creditor's
agreement must relate specifically to the new debtor and must
unequivocally accept that debtor as a primary obligor. The following
events are not construed to be express agreements between the
creditor and the subsequent consumer:
i. Approval of creditworthiness.
ii. Notification of a change in records.
iii. Mailing of a coupon book to the subsequent consumer.
iv. Acceptance of payments from the new consumer.
4. Retention of original consumer. The retention of the original
consumer as an obligor in some capacity does not prevent the change
from being an assumption, provided the new consumer becomes a
primary obligor. But the mere addition of a guarantor to an
obligation for which the original consumer remains primarily liable
does not give rise to an assumption. However, if neither party is
designated as the primary obligor but the creditor accepts payment
from the subsequent consumer, an assumption exists for purposes of
Sec. 1026.20(b).
5. Status of parties. Section 1026.20(b) applies only if the
previous debtor was a consumer and the obligation is assumed by
another consumer. It does not apply, for example, when an individual
takes over the obligation of a corporation.
6. Disclosures. For transactions that are assumptions within
this provision, the creditor must make disclosures based on the
``remaining obligation.'' For example:
i. The amount financed is the remaining principal balance plus
any arrearages or other accrued charges from the original
transaction.
ii. If the finance charge is computed from time to time by
application of a percentage rate to an unpaid balance, in
determining the amount of the finance charge and the annual
percentage rate to be disclosed, the creditor should disregard any
prepaid finance charges paid by the original obligor, but must
include in the finance charge any prepaid finance charge imposed in
connection with the assumption.
iii. If the creditor requires the assuming consumer to pay any
charges as a condition of the assumption, those sums are prepaid
finance charges as to that consumer, unless exempt from the finance
charge under Sec. 1026.4. If a transaction involves add-on or
discount finance charges, the creditor may make abbreviated
disclosures, as outlined in Sec. 1026.20(b)(1) through (5).
Creditors providing disclosures pursuant to this section for
assumptions of variable-rate transactions secured by the consumer's
principal dwelling with a term longer than one year need not provide
new disclosures under Sec. 1026.18(f)(2)(ii) or Sec. 1026.19(b).
In such transactions, a creditor may disclose the variable-rate
feature solely in accordance with Sec. 1026.18(f)(1).
7. Abbreviated disclosures. The abbreviated disclosures
permitted for assumptions of transactions involving add-on or
discount finance charges must be made clearly and conspicuously in
writing in a form that the consumer may keep. However, the creditor
need not comply with the segregation requirement of Sec.
1026.17(a)(1). The terms annual percentage rate and total of
payments, when disclosed according to Sec. 1026.20(b)(4) and (5),
are not subject to the description requirements of Sec. 1026.18(e)
and (h). The term annual percentage rate disclosed under Sec.
1026.20(b)(4) need not be more conspicuous than other disclosures.
20(c) Variable-Rate Adjustments
1. Timing of adjustment notices. This section requires a
creditor (or a subsequent holder) to provide certain disclosures in
cases where an adjustment to the interest rate is made in a
variable-rate transaction subject to Sec. 1026.19(b). There are two
timing rules, depending on whether payment changes accompany
interest rate changes. A creditor is required to provide at least
one notice each year during which interest rate adjustments have
occurred without accompanying payment adjustments. For payment
adjustments, a creditor must deliver or place in the mail notices to
borrowers at least 25, but not more than 120, calendar days before a
payment at a new level is due. The timing rules also apply to the
notice required to be given in connection with the adjustment to the
rate and payment that follows conversion of a transaction subject to
Sec. 1026.19(b) to a fixed-rate transaction. (In cases where an
open-end account is converted to a closed-end transaction subject to
Sec. 1026.19(b), the requirements of this section do not apply
until adjustments are made following conversion.)
2. Exceptions. Section 1026.20(c) does not apply to ``shared-
equity,'' ``shared-appreciation,'' or ``price level adjusted'' or
similar mortgages.
3. Basis of disclosures. The disclosures required under this
section shall reflect the terms of the parties' legal obligation, as
required under Sec. 1026.17(c)(1).
Paragraph 20(c)(1)
1. Current and prior interest rates. The requirements under this
paragraph are satisfied by disclosing the interest rate used to
compute the new adjusted payment amount (``current rate'') and the
adjusted interest rate that was disclosed in the last adjustment
notice, as well as all other interest rates applied to the
transaction in the period since the last notice (``prior rates'').
(If there has been no prior adjustment notice, the prior rates are
the interest rate applicable to the transaction at consummation, as
well as all other interest rates applied to the transaction in the
period since consummation.) If no payment adjustment has been made
in a year, the current rate is the new adjusted interest rate for
the transaction, and the prior rates are the adjusted interest rate
applicable to the loan at the time of the last adjustment notice,
and all other rates applied to the transaction in the period between
the current and last adjustment notices. In disclosing all other
rates applied to the transaction during the period between notices,
a creditor may disclose a range of the highest and lowest rates
applied during that period.
Paragraph 20(c)(2)
1. Current and prior index values. This section requires
disclosure of the index or formula values used to compute the
current and prior interest rates disclosed in Sec. 1026.20(c)(1).
The creditor need not disclose the margin used in computing the
rates. If the prior interest rate was not based on an index or
formula value, the creditor also need not disclose the value of the
index that would otherwise have been used to compute the prior
interest rate.
Paragraph 20(c)(3)
1. Unapplied index increases. The requirement that the consumer
receive information about the extent to which the creditor has
foregone any increase in the interest rate is applicable only to
those transactions permitting interest rate carryover. The amount of
increase that is foregone at an adjustment is the amount that,
subject to rate caps, can be applied to future adjustments
independently to increase, or offset decreases in, the rate that is
determined according to the index or formula.
Paragraph 20(c)(4)
1. Contractual effects of the adjustment. The contractual
effects of an interest rate adjustment must be disclosed including
the payment due after the adjustment is made whether or not the
payment has been adjusted. A contractual effect of a rate adjustment
would include, for example, disclosure of any change in the term or
maturity of the loan if the change resulted from the rate
adjustment. In transactions where paying the periodic payments will
not fully amortize the outstanding balance at the end of the loan
term and where the final payment will equal the periodic payment
plus the remaining unpaid balance, the amount of the adjusted
payment must be disclosed if such payment has changed as a result of
the rate adjustment. A statement of the loan balance also is
required. The balance required to be disclosed is the balance on
which the new adjusted payment is based. If no payment adjustment is
disclosed in the notice, the balance disclosed should be the loan
balance on which the payment disclosed under Sec. 1026.20(c)(5) is
based, if applicable, or the balance at the time the disclosure is
prepared.
Paragraph 20(c)(5)
1. Fully-amortizing payment. This paragraph requires a
disclosure only when negative amortization occurs as a result of the
adjustment. A disclosure is not required simply because a loan calls
for non-amortizing or partially amortizing payments. For example, in
a transaction with a five-year term and payments based on a longer
amortization schedule, and where the final payment will equal the
periodic payment plus the remaining unpaid balance, the creditor
would not have to disclose the payment necessary to fully amortize
the loan in the remainder of the five-year term. A disclosure is
required, however, if the payment disclosed under Sec.
1026.20(c)(4) is not sufficient to prevent negative amortization in
the loan. The adjustment notice must state the payment required to
prevent negative amortization. (This paragraph does not apply if the
payment disclosed in Sec. 1026.20(c)(4) is sufficient to prevent
negative amortization in the loan but the final payment will be a
different amount due to rounding.)
[[Page 79994]]
Section 1026.21--Treatment of Credit Balances
Paragraph 21(a)
1. Credit balance. A credit balance arises whenever the creditor
receives or holds funds in an account in excess of the total balance
due from the consumer on that account. A balance might result, for
example, from the debtor's paying off a loan by transmitting funds
in excess of the total balance owed on the account, or from the
early payoff of a loan entitling the consumer to a rebate of
insurance premiums and finance charges. However, Sec. 1026.21 does
not determine whether the creditor in fact owes or holds sums for
the consumer. For example, if a creditor has no obligation to rebate
any portion of precomputed finance charges on prepayment, the
consumer's early payoff would not create a credit balance with
respect to those charges. Similarly, nothing in this provision
interferes with any rights the creditor may have under the contract
or under state law with respect to set-off, cross collateralization,
or similar provisions.
2. Total balance due. The phrase total balance due refers to the
total outstanding balance. Thus, this provision does not apply where
the consumer has simply paid an amount in excess of the payment due
for a given period.
3. Timing of refund. The creditor may also fulfill its
obligation under this section by:
i. Refunding any credit balance to the consumer immediately.
ii. Refunding any credit balance prior to a written request from
the consumer.
iii. Making a good faith effort to refund any credit balance
before 6 months have passed. If that attempt is unsuccessful, the
creditor need not try again to refund the credit balance at the end
of the 6-month period.
Paragraph 21(b)
1. Written requests--standing orders. The creditor is not
required to honor standing orders requesting refunds of any credit
balance that may be created on the consumer's account.
Paragraph 21(c)
1. Good faith effort to refund. The creditor must take positive
steps to return any credit balance that has remained in the account
for over 6 months. This includes, if necessary, attempts to trace
the consumer through the consumer's last known address or telephone
number, or both.
2. Good faith effort unsuccessful. Section 1026.21 imposes no
further duties on the creditor if a good faith effort to return the
balance is unsuccessful. The ultimate disposition of the credit
balance (or any credit balance of $1 or less) is to be determined
under other applicable law.
Section 1026.22--Determination of Annual Percentage Rate
22(a) Accuracy of Annual Percentage Rate
Paragraph 22(a)(1)
1. Calculation method. The regulation recognizes both the
actuarial method and the United States Rule Method (U.S. Rule) as
measures of an exact annual percentage rate. Both methods yield the
same annual percentage rate when payment intervals are equal. They
differ in their treatment of unpaid accrued interest.
2. Actuarial method. When no payment is made, or when the
payment is insufficient to pay the accumulated finance charge, the
actuarial method requires that the unpaid finance charge be added to
the amount financed and thereby capitalized. Interest is computed on
interest since in succeeding periods the interest rate is applied to
the unpaid balance including the unpaid finance charge. Appendix J
provides instructions and examples for calculating the annual
percentage rate using the actuarial method.
3. U.S. Rule. The U.S. Rule produces no compounding of interest
in that any unpaid accrued interest is accumulated separately and is
not added to principal. In addition, under the U.S. Rule, no
interest calculation is made until a payment is received.
4. Basis for calculations. When a transaction involves ``step
rates'' or ``split rates''--that is, different rates applied at
different times or to different portions of the principal balance--a
single composite annual percentage rate must be calculated and
disclosed for the entire transaction. Assume, for example, a step-
rate transaction in which a $10,000 loan is repayable in 5 years at
10 percent interest for the first 2 years, 12 percent for years 3
and 4, and 14 percent for year 5. The monthly payments are $210.71
during the first 2 years of the term, $220.25 for years 3 and 4, and
$222.59 for year 5. The composite annual percentage rate, using a
calculator with a ``discounted cash flow analysis'' or ``internal
rate of return'' function, is 10.75 percent.
5. Good faith reliance on faulty calculation tools. Section
1026.22(a)(1) absolves a creditor of liability for an error in the
annual percentage rate or finance charge that resulted from a
corresponding error in a calculation tool used in good faith by the
creditor. Whether or not the creditor's use of the tool was in good
faith must be determined on a case-by-case basis, but the creditor
must in any case have taken reasonable steps to verify the accuracy
of the tool, including any instructions, before using it. Generally,
the creditor is not liable only for errors directly attributable to
the calculation tool itself, including software programs; Sec.
1026.22(a)(1) is not intended to absolve a creditor of liability for
its own errors, or for errors arising from improper use of the tool,
from incorrect data entry, or from misapplication of the law.
Paragraph 22(a)(2)
1. Regular transactions. The annual percentage rate for a
regular transaction is considered accurate if it varies in either
direction by not more than \1/8\ of 1 percentage point from the
actual annual percentage rate. For example, when the exact annual
percentage rate is determined to be 101/8%, a disclosed annual
percentage rate from 10% to 10 \1/4\%, or the decimal equivalent, is
deemed to comply with the regulation.
Paragraph 22(a)(3)
1. Irregular transactions. The annual percentage rate for an
irregular transaction is considered accurate if it varies in either
direction by not more than \1/4\ of 1 percentage point from the
actual annual percentage rate. This tolerance is intended for more
complex transactions that do not call for a single advance and a
regular series of equal payments at equal intervals. The \1/4\ of 1
percentage point tolerance may be used, for example, in a
construction loan where advances are made as construction
progresses, or in a transaction where payments vary to reflect the
consumer's seasonal income. It may also be used in transactions with
graduated payment schedules where the contract commits the consumer
to several series of payments in different amounts. It does not
apply, however, to loans with variable rate features where the
initial disclosures are based on a regular amortization schedule
over the life of the loan, even though payments may later change
because of the variable rate feature.
22(a)(4) Mortgage Loans
1. Example. If a creditor improperly omits a $75 fee from the
finance charge on a regular transaction, the understated finance
charge is considered accurate under Sec. 1026.18(d)(1), and the
annual percentage rate corresponding to that understated finance
charge also is considered accurate even if it falls outside the
tolerance of \1/8\ of 1 percentage point provided under Sec.
1026.22(a)(2). Because a $75 error was made, an annual percentage
rate corresponding to a $100 understatement of the finance charge
would not be considered accurate.
22(a)(5) Additional Tolerance for Mortgage Loans
1. Example. This paragraph contains an additional tolerance for
a disclosed annual percentage rate that is incorrect but is closer
to the actual annual percentage rate than the rate that would be
considered accurate under the tolerance in Sec. 1026.22(a)(4). To
illustrate: in an irregular transaction subject to a \1/4\ of 1
percentage point tolerance, if the actual annual percentage rate is
9.00 percent and a $75 omission from the finance charge corresponds
to a rate of 8.50 percent that is considered accurate under Sec.
1026.22(a)(4), a disclosed APR of 8.65 percent is within the
tolerance in Sec. 1026.22(a)(5). In this example of an understated
finance charge, a disclosed annual percentage rate below 8.50 or
above 9.25 percent will not be considered accurate.
22(b) Computation Tools
Paragraph 22(b)(1)
1. Bureau tables. Volumes I and II of the Bureau's Annual
Percentage Rate Tables provide a means of calculating annual
percentage rates for regular and irregular transactions,
respectively. An annual percentage rate computed in accordance with
the instructions in the tables is deemed to comply with the
regulation, even where use of the tables produces a rate that falls
outside the general standard of accuracy. To illustrate:Volume I may
be used for single advance transactions with completely regular
payment schedules or with payment schedules that are regular except
for an odd first payment, odd first period or odd final payment.
When used for a transaction with a large final balloon payment,
Volume I may produce a rate that is considerably higher than the
exact rate produced using a
[[Page 79995]]
computer program based directly on Appendix J. However, the Volume I
rate--produced using certain adjustments in that volume--is
considered to be in compliance.
Paragraph 22(b)(2)
1. Other calculation tools. Creditors need not use the Bureau
tables in calculating the annual percentage rates. Any computation
tools may be used, so long as they produce annual percentage rates
within \1/8\ or \1/4\ of 1 percentage point, as applicable, of the
precise actuarial or U.S. Rule annual percentage rate.
22(c) Single Add-On Rate Transactions
1. General rule. Creditors applying a single add-on rate to all
transactions up to 60 months in length may disclose the same annual
percentage rate for all those transactions, although the actual
annual percentage rate varies according to the length of the
transaction. Creditors utilizing this provision must show the
highest of those rates. For example, an add-on rate of 10 percent
converted to an annual percentage rate produces the following actual
annual percentage rates at various maturities: At 3 months, 14.94
percent; at 21 months, 18.18 percent; and at 60 months, 17.27
percent. The creditor must disclose an annual percentage rate of
18.18 percent (the highest annual percentage rate) for any
transaction up to 5 years, even though that rate is precise only for
a transaction of 21 months.
22(d) Certain Transactions Involving Ranges of Balances
1. General rule. Creditors applying a fixed dollar finance
charge to all balances within a specified range of balances may
understate the annual percentage rate by up to 8 percent of that
rate, by disclosing for all those balances the annual percentage
rate computed on the median balance within that range. For example:
If a finance charge of $9 applies to all balances between $91 and
$100, an annual percentage rate of 10 percent (the rate on the
median balance) may be disclosed as the annual percentage rate for
all balances, even though a $9 finance charge applied to the lowest
balance ($91) would actually produce an annual percentage rate of
10.7 percent.
Section 1026.23--Right of Rescission
1. Transactions not covered. Credit extensions that are not
subject to the regulation are not covered by Sec. 1026.23 even if a
customer's principal dwelling is the collateral securing the credit.
For example, the right of rescission does not apply to a business
purpose loan, even though the loan is secured by the customer's
principal dwelling.
23(a) Consumer's Right to Rescind
Paragraph 23(a)(1)
1. Security interest arising from transaction. i. In order for
the right of rescission to apply, the security interest must be
retained as part of the credit transaction. For example:
A. A security interest that is acquired by a contractor who is
also extending the credit in the transaction.
B. A mechanic's or materialman's lien that is retained by a
subcontractor or supplier of the contractor-creditor, even when the
latter has waived its own security interest in the consumer's home.
ii. The security interest is not part of the credit transaction
and therefore the transaction is not subject to the right of
rescission when, for example:
A. A mechanic's or materialman's lien is obtained by a
contractor who is not a party to the credit transaction but is
merely paid with the proceeds of the consumer's unsecured bank loan.
B. All security interests that may arise in connection with the
credit transaction are validly waived.
C. The creditor obtains a lien and completion bond that in
effect satisfies all liens against the consumer's principal dwelling
as a result of the credit transaction.
iii. Although liens arising by operation of law are not
considered security interests for purposes of disclosure under Sec.
1026.2, that section specifically includes them in the definition
for purposes of the right of rescission. Thus, even though an
interest in the consumer's principal dwelling is not a required
disclosure under Sec. 1026.18(m), it may still give rise to the
right of rescission.
2. Consumer. To be a consumer within the meaning of Sec.
1026.2, that person must at least have an ownership interest in the
dwelling that is encumbered by the creditor's security interest,
although that person need not be a signatory to the credit
agreement. For example, if only one spouse signs a credit contract,
the other spouse is a consumer if the ownership interest of that
spouse is subject to the security interest.
3. Principal dwelling. A consumer can only have one principal
dwelling at a time. (But see comment 23(a)(1)-4.) A vacation or
other second home would not be a principal dwelling. A transaction
secured by a second home (such as a vacation home) that is not
currently being used as the consumer's principal dwelling is not
rescindable, even if the consumer intends to reside there in the
future. When a consumer buys or builds a new dwelling that will
become the consumer's principal dwelling within one year or upon
completion of construction, the new dwelling is considered the
principal dwelling if it secures the acquisition or construction
loan. In that case, the transaction secured by the new dwelling is a
residential mortgage transaction and is not rescindable. For
example, if a consumer whose principal dwelling is currently A
builds B, to be occupied by the consumer upon completion of
construction, a construction loan to finance B and secured by B is a
residential mortgage transaction. Dwelling, as defined in Sec.
1026.2, includes structures that are classified as personalty under
state law. For example, a transaction secured by a mobile home,
trailer, or houseboat used as the consumer's principal dwelling may
be rescindable.
4. Special rule for principal dwelling. Notwithstanding the
general rule that consumers may have only one principal dwelling,
when the consumer is acquiring or constructing a new principal
dwelling, any loan subject to Regulation Z and secured by the equity
in the consumer's current principal dwelling (for example, a bridge
loan) is subject to the right of rescission regardless of the
purpose of that loan. For example, if a consumer whose principal
dwelling is currently A builds B, to be occupied by the consumer
upon completion of construction, a construction loan to finance B
and secured by A is subject to the right of rescission. A loan
secured by both A and B is, likewise, rescindable.
5. Addition of a security interest. Under Sec. 1026.23(a), the
addition of a security interest in a consumer's principal dwelling
to an existing obligation is rescindable even if the existing
obligation is not satisfied and replaced by a new obligation, and
even if the existing obligation was previously exempt under Sec.
1026.3(b). The right of rescission applies only to the added
security interest, however, and not to the original obligation. In
those situations, only the Sec. 1026.23(b) notice need be
delivered, not new material disclosures; the rescission period will
begin to run from the delivery of the notice.
Paragraph 23(a)(2)
1. Consumer's exercise of right. The consumer must exercise the
right of rescission in writing but not necessarily on the notice
supplied under Sec. 1026.23(b). Whatever the means of sending the
notification of rescission--mail, telegram or other written means--
the time period for the creditor's performance under Sec.
1026.23(d)(2) does not begin to run until the notification has been
received. The creditor may designate an agent to receive the
notification so long as the agent's name and address appear on the
notice provided to the consumer under Sec. 1026.23(b). Where the
creditor fails to provide the consumer with a designated address for
sending the notification of rescission, delivering notification to
the person or address to which the consumer has been directed to
send, payments constitutes delivery to the creditor or assignee.
State law determines whether delivery of the notification to a third
party other than the person to whom payments are made is delivery to
the creditor or assignee, in the case where the creditor fails to
designate an address for sending the notification of rescission.
Paragraph 23(a)(3)
1. Rescission period. i. The period within which the consumer
may exercise the right to rescind runs for 3 business days from the
last of 3 events:
A. Consummation of the transaction.
B. Delivery of all material disclosures.
C. Delivery to the consumer of the required rescission notice.
ii. For example:
A. If a transaction is consummated on Friday, June 1, and the
disclosures and notice of the right to rescind were given on
Thursday, May 31, the rescission period will expire at midnight of
the third business day after June 1--that is, Tuesday, June 5.
B. If the disclosures are given and the transaction consummated
on Friday, June 1, and the rescission notice is given on Monday,
June 4, the rescission period expires at midnight of the third
business day after June 4--that is, Thursday, June 7. The consumer
must place the rescission notice in the mail, file it for
telegraphic transmission, or deliver
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it to the creditor's place of business within that period in order
to exercise the right.
2. Material disclosures. Section 1026.23(a)(3)(ii) sets forth
the material disclosures that must be provided before the rescission
period can begin to run. Failure to provide information regarding
the annual percentage rate also includes failure to inform the
consumer of the existence of a variable rate feature. Failure to
give the other required disclosures does not prevent the running of
the rescission period, although that failure may result in civil
liability or administrative sanctions.
3. Unexpired right of rescission. i. When the creditor has
failed to take the action necessary to start the three-business day
rescission period running, the right to rescind automatically lapses
on the occurrence of the earliest of the following three events:
A. The expiration of three years after consummation of the
transaction.
B. Transfer of all the consumer's interest in the property.
C. Sale of the consumer's interest in the property, including a
transaction in which the consumer sells the dwelling and takes back
a purchase money note and mortgage or retains legal title through a
device such as an installment sale contract.
ii. Transfer of all the consumers' interest includes such
transfers as bequests and gifts. A sale or transfer of the property
need not be voluntary to terminate the right to rescind. For
example, a foreclosure sale would terminate an unexpired right to
rescind. As provided in Section 125 of the Act, the three-year limit
may be extended by an administrative proceeding to enforce the
provisions of this section. A partial transfer of the consumer's
interest, such as a transfer bestowing co-ownership on a spouse,
does not terminate the right of rescission.
Paragraph 23(a)(4)
1. Joint owners. When more than one consumer has the right to
rescind a transaction, any of them may exercise that right and
cancel the transaction on behalf of all. For example, if both
husband and wife have the right to rescind a transaction, either
spouse acting alone may exercise the right and both are bound by the
rescission.
Paragraph 23(b)
23(b)(1) Notice of Right To Rescind
1. Who receives notice. Each consumer entitled to rescind must
be given two copies of the rescission notice and the material
disclosures. In a transaction involving joint owners, both of whom
are entitled to rescind, both must receive the notice of the right
to rescind and disclosures. For example, if both spouses are
entitled to rescind a transaction, each must receive two copies of
the rescission notice (one copy to each if the notice is provided in
electronic form in accordance with the consumer consent and other
applicable provisions of the E-Sign Act) and one copy of the
disclosures.
2. Format. The notice must be on a separate piece of paper, but
may appear with other information such as the itemization of the
amount financed. The material must be clear and conspicuous, but no
minimum type size or other technical requirements are imposed. The
notices in Appendix H provide models that creditors may use in
giving the notice.
3. Content. The notice must include all of the information
outlined in Section 1026.23(b)(1)(i) through (v). The requirement in
Sec. 1026.23(b) that the transaction be identified may be met by
providing the date of the transaction. The creditor may provide a
separate form that the consumer may use to exercise the right of
rescission, or that form may be combined with the other rescission
disclosures, as illustrated in Appendix H. The notice may include
additional information related to the required information, such as:
i. A description of the property subject to the security
interest.
ii. A statement that joint owners may have the right to rescind
and that a rescission by one is effective for all.
iii. The name and address of an agent of the creditor to receive
notice of rescission.
4. Time of providing notice. The notice required by Sec.
1026.23(b) need not be given before consummation of the transaction.
The creditor may deliver the notice after the transaction is
consummated, but the rescission period will not begin to run until
the notice is given. For example, if the creditor provides the
notice on May 15, but disclosures were given and the transaction was
consummated on May 10, the 3-business day rescission period will run
from May 15.
23(c) Delay of Creditor's Performance
1. General rule. Until the rescission period has expired and the
creditor is reasonably satisfied that the consumer has not
rescinded, the creditor must not, either directly or through a third
party:
i. Disburse loan proceeds to the consumer.
ii. Begin performing services for the consumer.
iii. Deliver materials to the consumer.
2. Escrow. The creditor may disburse loan proceeds during the
rescission period in a valid escrow arrangement. The creditor may
not, however, appoint the consumer as ``trustee'' or ``escrow
agent'' and distribute funds to the consumer in that capacity during
the delay period.
3. Actions during the delay period. Section 1026.23(c) does not
prevent the creditor from taking other steps during the delay, short
of beginning actual performance. Unless otherwise prohibited, such
as by state law, the creditor may, for example:
i. Prepare the loan check.
ii. Perfect the security interest.
iii. Prepare to discount or assign the contract to a third
party.
iv. Accrue finance charges during the delay period.
4. Delay beyond rescission period. i. The creditor must wait
until it is reasonably satisfied that the consumer has not
rescinded. For example, the creditor may satisfy itself by doing one
of the following:
A. Waiting a reasonable time after expiration of the rescission
period to allow for delivery of a mailed notice.
B. Obtaining a written statement from the consumer that the
right has not been exercised.
ii. When more than one consumer has the right to rescind, the
creditor cannot reasonably rely on the assurance of only one
consumer, because other consumers may exercise the right.
23(d) Effects of Rescission
Paragraph 23(d)(1)
1. Termination of security interest. Any security interest
giving rise to the right of rescission becomes void when the
consumer exercises the right of rescission. The security interest is
automatically negated regardless of its status and whether or not it
was recorded or perfected. Under Sec. 1026.23(d)(2), however, the
creditor must take any action necessary to reflect the fact that the
security interest no longer exists.
Paragraph 23(d)(2)
1. Refunds to consumer. The consumer cannot be required to pay
any amount in the form of money or property either to the creditor
or to a third party as part of the credit transaction. Any amounts
of this nature already paid by the consumer must be refunded. ``Any
amount'' includes finance charges already accrued, as well as other
charges, such as broker fees, application and commitment fees, or
fees for a title search or appraisal, whether paid to the creditor,
paid directly to a third party, or passed on from the creditor to
the third party. It is irrelevant that these amounts may not
represent profit to the creditor.
2. Amounts not refundable to consumer. Creditors need not return
any money given by the consumer to a third party outside of the
credit transaction, such as costs incurred for a building permit or
for a zoning variance. Similarly, the term any amount does not apply
to any money or property given by the creditor to the consumer;
those amounts must be tendered by the consumer to the creditor under
Sec. 1026.23(d)(3).
3. Reflection of security interest termination. The creditor
must take whatever steps are necessary to indicate that the security
interest is terminated. Those steps include the cancellation of
documents creating the security interest, and the filing of release
or termination statements in the public record. In a transaction
involving subcontractors or suppliers that also hold security
interests related to the credit transaction, the creditor must
insure that the termination of their security interests is also
reflected. The 20-day period for the creditor's action refers to the
time within which the creditor must begin the process. It does not
require all necessary steps to have been completed within that time,
but the creditor is responsible for seeing the process through to
completion.
Paragraph 23(d)(3)
1. Property exchange. Once the creditor has fulfilled its
obligations under Sec. 1026.23(d)(2), the consumer must tender to
the creditor any property or money the creditor has already
delivered to the consumer. At the consumer's option, property may be
tendered at the location of the property. For example, if lumber or
fixtures have been delivered to the consumer's home, the consumer
may tender them to the creditor by making them available for pick-up
at the home, rather than
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physically returning them to the creditor's premises. Money already
given to the consumer must be tendered at the creditor's place of
business.
2. Reasonable value. If returning the property would be
extremely burdensome to the consumer, the consumer may offer the
creditor its reasonable value rather than returning the property
itself. For example, if building materials have already been
incorporated into the consumer's dwelling, the consumer may pay
their reasonable value.
Paragraph 23(d)(4)
1. Modifications. The procedures outlined in Sec. 1026.23(d)(2)
and (3) may be modified by a court. For example, when a consumer is
in bankruptcy proceedings and prohibited from returning anything to
the creditor, or when the equities dictate, a modification might be
made. The sequence of procedures under Sec. 1026.23(d)(2) and (3),
or a court's modification of those procedures under Sec.
1026.23(d)(4), does not affect a consumer's substantive right to
rescind and to have the loan amount adjusted accordingly. Where the
consumer's right to rescind is contested by the creditor, a court
would normally determine whether the consumer has a right to rescind
and determine the amounts owed before establishing the procedures
for the parties to tender any money or property.
23(e) Consumer's Waiver of Right to Rescind
1. Need for waiver. To waive the right to rescind, the consumer
must have a bona fide personal financial emergency that must be met
before the end of the rescission period. The existence of the
consumer's waiver will not, of itself, automatically insulate the
creditor from liability for failing to provide the right of
rescission.
2. Procedure. To waive or modify the right to rescind, the
consumer must give a written statement that specifically waives or
modifies the right, and also includes a brief description of the
emergency. Each consumer entitled to rescind must sign the waiver
statement. In a transaction involving multiple consumers, such as a
husband and wife using their home as collateral, the waiver must
bear the signatures of both spouses.
23(f) Exempt Transactions
1. Residential mortgage transaction. Any transaction to
construct or acquire a principal dwelling, whether considered real
or personal property, is exempt. (See the commentary to Sec.
1026.23(a).) For example, a credit transaction to acquire a mobile
home or houseboat to be used as the consumer's principal dwelling
would not be rescindable.
2. Lien status. The lien status of the mortgage is irrelevant
for purposes of the exemption in Sec. 1026.23(f)(1); the fact that
a loan has junior lien status does not by itself preclude
application of this exemption. For example, a home buyer may assume
the existing first mortgage and create a second mortgage to finance
the balance of the purchase price. Such a transaction would not be
rescindable.
3. Combined-purpose transaction. A loan to acquire a principal
dwelling and make improvements to that dwelling is exempt if treated
as one transaction. If, on the other hand, the loan for the
acquisition of the principal dwelling and the subsequent advances
for improvements are treated as more than one transaction, then only
the transaction that finances the acquisition of that dwelling is
exempt.
4. New advances. The exemption in Sec. 1026.23(f)(2) applies
only to refinancings (including consolidations) by the original
creditor. The original creditor is the creditor to whom the written
agreement was initially made payable. In a merger, consolidation or
acquisition, the successor institution is considered the original
creditor for purposes of the exemption in Sec. 1026.23(f)(2). If
the refinancing involves a new advance of money, the amount of the
new advance is rescindable. In determining whether there is a new
advance, a creditor may rely on the amount financed, refinancing
costs, and other figures stated in the latest Truth in Lending
disclosures provided to the consumer and is not required to use, for
example, more precise information that may only become available
when the loan is closed. For purposes of the right of rescission, a
new advance does not include amounts attributed solely to the costs
of the refinancing. These amounts would include Sec. 1026.4(c)(7)
charges (such as attorneys fees and title examination and insurance
fees, if bona fide and reasonable in amount), as well as insurance
premiums and other charges that are not finance charges. (Finance
charges on the new transaction--points, for example--would not be
considered in determining whether there is a new advance of money in
a refinancing since finance charges are not part of the amount
financed.) To illustrate, if the sum of the outstanding principal
balance plus the earned unpaid finance charge is $50,000 and the new
amount financed is $51,000, then the refinancing would be exempt if
the extra $1,000 is attributed solely to costs financed in
connection with the refinancing that are not finance charges. Of
course, if new advances of money are made (for example, to pay for
home improvements) and the consumer exercises the right of
rescission, the consumer must be placed in the same position as he
or she was in prior to entering into the new credit transaction.
Thus, all amounts of money (which would include all the costs of the
refinancing) already paid by the consumer to the creditor or to a
third party as part of the refinancing would have to be refunded to
the consumer. (See the commentary to Sec. 1026.23(d)(2) for a
discussion of refunds to consumers.) A model rescission notice
applicable to transactions involving new advances appears in
Appendix H. The general rescission notice (model form H-8) is the
appropriate form for use by creditors not considered original
creditors in refinancing transactions.
5. State creditors. Cities and other political subdivisions of
states acting as creditors are not exempted from this section.
6. Multiple advances. Just as new disclosures need not be made
for subsequent advances when treated as one transaction, no new
rescission rights arise so long as the appropriate notice and
disclosures are given at the outset of the transaction. For example,
the creditor extends credit for home improvements secured by the
consumer's principal dwelling, with advances made as repairs
progress. As permitted by Sec. 1026.17(c)(6), the creditor makes a
single set of disclosures at the beginning of the construction
period, rather than separate disclosures for each advance. The right
of rescission does not arise with each advance. However, if the
advances are treated as separate transactions, the right of
rescission applies to each advance.
7. Spreader clauses. When the creditor holds a mortgage or deed
of trust on the consumer's principal dwelling and that mortgage or
deed of trust contains a ``spreader clause,'' subsequent loans made
are separate transactions and are subject to the right of
rescission. Those loans are rescindable unless the creditor
effectively waives its security interest under the spreader clause
with respect to the subsequent transactions.
8. Converting open-end to closed-end credit. Under certain state
laws, consummation of a closed-end credit transaction may occur at
the time a consumer enters into the initial open-end credit
agreement. As provided in the commentary to Sec. 1026.17(b),
closed-end credit disclosures may be delayed under these
circumstances until the conversion of the open-end account to a
closed-end transaction. In accounts secured by the consumer's
principal dwelling, no new right of rescission arises at the time of
conversion. Rescission rights under Sec. 1026.15 are unaffected.
23(g) Tolerances for Accuracy
23(g)(2) One Percent Tolerance
1. New advance. The phrase ``new advance'' has the same meaning
as in comment 23(f)-4.
23(h) Special Rules for Foreclosures
1. Rescission. Section 1026.23(h) applies only to transactions
that are subject to rescission under Sec. 1026.23(a)(1).
Paragraph 23(h)(1)(i)
1. Mortgage broker fees. A consumer may rescind a loan in
foreclosure if a mortgage broker fee that should have been included
in the finance charge was omitted, without regard to the dollar
amount involved. If the amount of the mortgage broker fee is
included but misstated the rule in Sec. 1026.23(h)(2) applies.
23(h)(2) Tolerance for Disclosures
1. General. This section is based on the accuracy of the total
finance charge rather than its component charges.
Section 1026.24--Advertising
24(a) Actually Available Terms
1. General rule. To the extent that an advertisement mentions
specific credit terms, it may state only those terms that the
creditor is actually prepared to offer. For example, a creditor may
not advertise a very low annual percentage rate that will not in
fact be available at any time. This provision is not intended to
inhibit the promotion of new credit programs, but to bar the
advertising of terms that are not and will not be available. For
example, a creditor may advertise terms that will be offered for
only a limited period,
[[Page 79998]]
or terms that will become available at a future date.
24(b) Clear and Conspicuous Standard
1. Clear and conspicuous standard--general. This section is
subject to the general ``clear and conspicuous'' standard for this
subpart, see Sec. 1026.17(a)(1), but prescribes no specific rules
for the format of the necessary disclosures, other than the format
requirements related to the advertisement of rates and payments as
described in comment 24(b)-2 below. The credit terms need not be
printed in a certain type size nor need they appear in any
particular place in the advertisement. For example, a merchandise
tag that is an advertisement under the regulation complies with this
section if the necessary credit terms are on both sides of the tag,
so long as each side is accessible.
2. Clear and conspicuous standard--rates and payments in
advertisements for credit secured by a dwelling. For purposes of
Sec. 1026.24(f), a clear and conspicuous disclosure means that the
required information in Sec. Sec. 1026.24(f)(2)(i) and
1026.24(f)(3)(i)(A) and (B) is disclosed with equal prominence and
in close proximity to the advertised rates or payments triggering
the required disclosures, and that the required information in Sec.
1026.24(f)(3)(i)(C) is disclosed prominently and in close proximity
to the advertised rates or payments triggering the required
disclosures. If the required information in Sec. Sec.
1026.24(f)(2)(i) and 1026.24(f)(3)(i)(A) and (B) is the same type
size as the advertised rates or payments triggering the required
disclosures, the disclosures are deemed to be equally prominent. The
information in Sec. 1026.24(f)(3)(i)(C) must be disclosed
prominently, but need not be disclosed with equal prominence or be
the same type size as the payments triggering the required
disclosures. If the required information in Sec. Sec.
1026.24(f)(2)(i) and 1026.24(f)(3)(i) is located immediately next to
or directly above or below the advertised rates or payments
triggering the required disclosures, without any intervening text or
graphical displays, the disclosures are deemed to be in close
proximity. Notwithstanding the above, for electronic advertisements
that disclose rates or payments, compliance with the requirements of
Sec. 1026.24(e) is deemed to satisfy the clear and conspicuous
standard.
3. Clear and conspicuous standard--Internet advertisements for
credit secured by a dwelling. For purposes of this section, a clear
and conspicuous disclosure for visual text advertisements on the
Internet for credit secured by a dwelling means that the required
disclosures are not obscured by techniques such as graphical
displays, shading, coloration, or other devices and comply with all
other requirements for clear and conspicuous disclosures under Sec.
1026.24. See also comment 24(e)-4.
4. Clear and conspicuous standard--televised advertisements for
credit secured by a dwelling. For purposes of this section,
including alternative disclosures as provided for by Sec.
1026.24(g), a clear and conspicuous disclosure in the context of
visual text advertisements on television for credit secured by a
dwelling means that the required disclosures are not obscured by
techniques such as graphical displays, shading, coloration, or other
devices, are displayed in a manner that allows a consumer to read
the information required to be disclosed, and comply with all other
requirements for clear and conspicuous disclosures under Sec.
1026.24. For example, very fine print in a television advertisement
would not meet the clear and conspicuous standard if consumers
cannot see and read the information required to be disclosed.
5. Clear and conspicuous standard--oral advertisements for
credit secured by a dwelling. For purposes of this section,
including alternative disclosures as provided for by Sec.
1026.24(g), a clear and conspicuous disclosure in the context of an
oral advertisement for credit secured by a dwelling, whether by
radio, television, or other medium, means that the required
disclosures are given at a speed and volume sufficient for a
consumer to hear and comprehend them. For example, information
stated very rapidly at a low volume in a radio or television
advertisement would not meet the clear and conspicuous standard if
consumers cannot hear and comprehend the information required to be
disclosed.
24(c) Advertisement of Rate of Finance Charge
1. Annual percentage rate. Advertised rates must be stated in
terms of an annual percentage rate, as defined in Sec. 1026.22.
Even though state or local law permits the use of add-on, discount,
time-price differential, or other methods of stating rates,
advertisements must state them as annual percentage rates. Unlike
the transactional disclosure of an annual percentage rate under
Sec. 1026.18(e), the advertised annual percentage rate need not
include a descriptive explanation of the term and may be expressed
using the abbreviation APR. The advertisement must state that the
rate is subject to increase after consummation if that is the case,
but the advertisement need not describe the rate increase, its
limits, or how it would affect the payment schedule. As under Sec.
1026.18(f), relating to disclosure of a variable rate, the rate
increase disclosure requirement in this provision does not apply to
any rate increase due to delinquency (including late payment),
default, acceleration, assumption, or transfer of collateral.
2. Simple or periodic rates. The advertisement may not
simultaneously state any other rate, except that a simple annual
rate or periodic rate applicable to an unpaid balance may appear
along with (but not more conspicuously than) the annual percentage
rate. An advertisement for credit secured by a dwelling may not
state a periodic rate, other than a simple annual rate, that is
applied to an unpaid balance. For example, in an advertisement for
credit secured by a dwelling, a simple annual interest rate may be
shown in the same type size as the annual percentage rate for the
advertised credit, subject to the requirements of Sec. 1026.24(f).
A simple annual rate or periodic rate that is applied to an unpaid
balance is the rate at which interest is accruing; those terms do
not include a rate lower than the rate at which interest is
accruing, such as an effective rate, payment rate, or qualifying
rate.
3. Buydowns. When a third party (such as a seller) or a creditor
wishes to promote the availability of reduced interest rates
(consumer or seller buydowns), the advertised annual percentage rate
must be determined in accordance with the commentary to Sec.
1026.17(c) regarding the basis of transactional disclosures for
buydowns. The seller or creditor may advertise the reduced simple
interest rate, provided the advertisement shows the limited term to
which the reduced rate applies and states the simple interest rate
applicable to the balance of the term. The advertisement may also
show the effect of the buydown agreement on the payment schedule for
the buydown period, but this will trigger the additional disclosures
under Sec. 1026.24(d)(2).
4. Discounted variable-rate transactions. The advertised annual
percentage rate for discounted variable-rate transactions must be
determined in accordance with comment 17(c)(1)-10 regarding the
basis of transactional disclosures for such financing.
i. A creditor or seller may promote the availability of the
initial rate reduction in such transactions by advertising the
reduced simple annual rate, provided the advertisement shows with
equal prominence and in close proximity the limited term to which
the reduced rate applies and the annual percentage rate that will
apply after the term of the initial rate reduction expires. See
Sec. 1026.24(f).
ii. Limits or caps on periodic rate or payment adjustments need
not be stated. To illustrate using the second example in comment
17(c)(1)-10, the fact that the rate is presumed to be 11 percent in
the second year and 12 percent for the remaining 28 years need not
be included in the advertisement.
iii. The advertisement may also show the effect of the discount
on the payment schedule for the discount period, but this will
trigger the additional disclosures under Sec. 1026.24(d).
24(d) Advertisement of Terms That Require Additional Disclosures
1. General rule. Under Sec. 1026.24(d)(1), whenever certain
triggering terms appear in credit advertisements, the additional
credit terms enumerated in Sec. 1026.24(d)(2) must also appear.
These provisions apply even if the triggering term is not stated
explicitly but may be readily determined from the advertisement. For
example, an advertisement may state ``80 percent financing
available,'' which is in fact indicating that a 20 percent
downpayment is required.
24(d)(1) Triggering Terms
1. Downpayment. i. The dollar amount of a downpayment or a
statement of the downpayment as a percentage of the price requires
further information. By virtue of the definition of downpayment in
Sec. 1026.2, this triggering term is limited to credit sale
transactions. It includes such statements as:
A. Only 5% down.
B. As low as $100 down.
C. Total move-in costs of $800.
ii. This provision applies only if a downpayment is actually
required; statements such as no downpayment or no
[[Page 79999]]
trade-in required do not trigger the additional disclosures under
this paragraph.
2. Payment period. i. The number of payments required or the
total period of repayment includes such statements as:
A. 48-month payment terms.
B. 30-year mortgage.
C. Repayment in as many as 36 monthly installments.
ii. But it does not include such statements as ``pay weekly,''
``monthly payment terms arranged,'' or ``take years to repay,''
since these statements do not indicate a time period over which a
loan may be financed.
3. Payment amount. i. The dollar amount of any payment includes
statements such as:
A. ``Payable in installments of $103.''
B. ``$25 weekly.''
C. ``$500,000 loan for just $1,650 per month.''
D. ``$1,200 balance payable in 10 equal installments.''
ii. In the last example, the amount of each payment is readily
determinable, even though not explicitly stated. But statements such
as ``monthly payments to suit your needs'' or ``regular monthly
payments'' are not deemed to be statements of the amount of any
payment.
4. Finance charge. i. The dollar amount of the finance charge or
any portion of it includes statements such as:
A. ``$500 total cost of credit.''
B. ``$2 monthly carrying charge.''
C. ``$50,000 mortgages, 2 points to the borrower.''
ii. In the last example, the $1,000 prepaid finance charge can
be readily determined from the information given. Statements of the
annual percentage rate or statements that there is no particular
charge for credit (such as ``no closing costs'') are not triggering
terms under this paragraph.
24(d)(2) Additional Terms
1. Disclosure of downpayment. The total downpayment as a dollar
amount or percentage must be shown, but the word ``downpayment''
need not be used in making this disclosure. For example, ``10% cash
required from buyer'' or ``credit terms require minimum $100 trade-
in'' would suffice.
2. Disclosure of repayment terms. The phrase ``terms of
repayment'' generally has the same meaning as the ``payment
schedule'' required to be disclosed under Sec. 1026.18(g). Section
1026.24(d)(2)(ii) provides flexibility to creditors in making this
disclosure for advertising purposes. Repayment terms may be
expressed in a variety of ways in addition to an exact repayment
schedule; this is particularly true for advertisements that do not
contemplate a single specific transaction. Repayment terms, however,
must reflect the consumer's repayment obligations over the full term
of the loan, including any balloon payment, see comment 24(d)(2)-3,
not just the repayment terms that will apply for a limited period of
time. For example:
i. A creditor may use a unit-cost approach in making the
required disclosure, such as ``48 monthly payments of $27.83 per
$1,000 borrowed.''
ii. In an advertisement for credit secured by a dwelling, when
any series of payments varies because of the inclusion of mortgage
insurance premiums, a creditor may state the number and timing of
payments, the fact that payments do not include amounts for mortgage
insurance premiums, and that the actual payment obligation will be
higher.
iii. In an advertisement for credit secured by a dwelling, when
one series of monthly payments will apply for a limited period of
time followed by a series of higher monthly payments for the
remaining term of the loan, the advertisement must state the number
and time period of each series of payments, and the amounts of each
of those payments. For this purpose, the creditor must assume that
the consumer makes the lower series of payments for the maximum
allowable period of time.
3. Balloon payment; disclosure of repayment terms. In some
transactions, a balloon payment will occur when the consumer only
makes the minimum payments specified in an advertisement. A balloon
payment results if paying the minimum payments does not fully
amortize the outstanding balance by a specified date or time,
usually the end of the term of the loan, and the consumer must repay
the entire outstanding balance at such time. If a balloon payment
will occur when the consumer only makes the minimum payments
specified in an advertisement, the advertisement must state with
equal prominence and in close proximity to the minimum payment
statement the amount and timing of the balloon payment that will
result if the consumer makes only the minimum payments for the
maximum period of time that the consumer is permitted to make such
payments.
4. Annual percentage rate. The advertised annual percentage rate
may be expressed using the abbreviation ``APR.'' The advertisement
must also state, if applicable, that the annual percentage rate is
subject to increase after consummation.
5. Use of examples. A creditor may use illustrative credit
transactions to make the necessary disclosures under Sec.
1026.24(d)(2). That is, where a range of possible combinations of
credit terms is offered, the advertisement may use examples of
typical transactions, so long as each example contains all of the
applicable terms required by Sec. 1026.24(d). The examples must be
labeled as such and must reflect representative credit terms made
available by the creditor to present and prospective customers.
24(e) Catalogs or Other Multiple-Page Advertisements; Electronic
Advertisements
1. Definition. The multiple-page advertisements to which this
section refers are advertisements consisting of a series of
sequentially numbered pages--for example, a supplement to a
newspaper. A mailing consisting of several separate flyers or pieces
of promotional material in a single envelope does not constitute a
single multiple-page advertisement for purposes of Sec. 1026.24(e).
2. General. Section 1026.24(e) permits creditors to put credit
information together in one place in a catalog or other multiple-
page advertisement or in an electronic advertisement (such as an
advertisement appearing on an Internet Web site). The rule applies
only if the advertisement contains one or more of the triggering
terms from Sec. 1026.24(d)(1). A list of different annual
percentage rates applicable to different balances, for example, does
not trigger further disclosures under Sec. 1026.24(d)(2) and so is
not covered by Sec. 1026.24(e).
3. Representative examples. The table or schedule must state all
the necessary information for a representative sampling of amounts
of credit. This must reflect amounts of credit the creditor actually
offers, up to and including the higher-priced items. This does not
mean that the chart must make the disclosures for the single most
expensive item the seller offers, but only that the chart cannot be
limited to information about less expensive sales when the seller
commonly offers a distinct level of more expensive goods or
services. The range of transactions shown in the table or schedule
in a particular catalog or multiple-page advertisement need not
exceed the range of transactions actually offered in that
advertisement.
4. Electronic advertisement. If an electronic advertisement
(such as an advertisement appearing on an Internet Web site)
contains the table or schedule permitted under Sec. 1026.24(e)(1),
any statement of terms set forth in Sec. 1026.24(d)(1) appearing
anywhere else in the advertisement must clearly direct the consumer
to the location where the table or schedule begins. For example, a
term triggering additional disclosures may be accompanied by a link
that directly takes the consumer to the additional information.
24(f) Disclosure of Rates and Payments in Advertisements for Credit
Secured by a Dwelling
1. Applicability. The requirements of Sec. 1026.24(f)(2) apply
to advertisements for loans where more than one simple annual rate
of interest will apply. The requirements of Sec.
1026.24(f)(3)(i)(A) require a clear and conspicuous disclosure of
each payment that will apply over the term of the loan. In
determining whether a payment will apply when the consumer may
choose to make a series of lower monthly payments that will apply
for a limited period of time, the creditor must assume that the
consumer makes the series of lower payments for the maximum
allowable period of time. See comment 24(d)(2)-2.iii. However, for
purposes of Sec. 1026.24(f), the creditor may, but need not, assume
that specific events which trigger changes to the simple annual rate
of interest or to the applicable payments will occur. For example:
i. Fixed-rate conversion loans. If a loan program permits
consumers to convert their variable-rate loans to fixed rate loans,
the creditor need not assume that the fixed-rate conversion option,
by itself, means that more than one simple annual rate of interest
will apply to the loan under Sec. 1026.24(f)(2) and need not
disclose as a separate payment under Sec. 1026.24(f)(3)(i)(A) the
payment that would apply if the consumer exercised the fixed-rate
conversion option.
ii. Preferred-rate loans. Some loans contain a preferred-rate
provision, where the rate will increase upon the occurrence of some
event, such as the consumer-employee leaving the creditor's employ
or the consumer closing an existing deposit account with the
creditor or the consumer revoking an election to make automated
payments. A creditor need not
[[Page 80000]]
assume that the preferred-rate provision, by itself, means that more
than one simple annual rate of interest will apply to the loan under
Sec. 1026.24(f)(2) and the payments that would apply upon
occurrence of the event that triggers the rate increase need not be
disclosed as a separate payment under Sec. 1026.24(f)(3)(i)(A).
iii. Rate reductions. Some loans contain a provision where the
rate will decrease upon the occurrence of some event, such as if the
consumer makes a series of payments on time. A creditor need not
assume that the rate reduction provision, by itself, means that more
than one simple annual rate of interest will apply to the loan under
Sec. 1026.24(f)(2) and need not disclose the payments that would
apply upon occurrence of the event that triggers the rate reduction
as a separate payment under Sec. 1026.24(f)(3)(i)(A).
2. Equal prominence, close proximity. Information required to be
disclosed under Sec. Sec. 1026.24(f)(2)(i) and 1026.24(f)(3)(i)
that is immediately next to or directly above or below the simple
annual rate or payment amount (but not in a footnote) is deemed to
be closely proximate to the listing. Information required to be
disclosed under Sec. Sec. 1026.24(f)(2)(i) and 1026.24(f)(3)(i)(A)
and (B) that is in the same type size as the simple annual rate or
payment amount is deemed to be equally prominent.
3. Clear and conspicuous standard. For more information about
the applicable clear and conspicuous standard, see comment 24(b)-2.
4. Comparisons in advertisements. When making any comparison in
an advertisement between actual or hypothetical credit payments or
rates and the payments or rates available under the advertised
product, the advertisement must state all applicable payments or
rates for the advertised product and the time periods for which
those payments or rates will apply, as required by this section.
5. Application to variable-rate transactions--disclosure of
rates. In advertisements for variable-rate transactions, if a simple
annual rate that applies at consummation is not based on the index
and margin that will be used to make subsequent rate adjustments
over the term of the loan, the requirements of Sec.
1026.24(f)(2)(i) apply.
6. Reasonably current index and margin. For the purposes of this
section, an index and margin is considered reasonably current if:
i. For direct mail advertisements, it was in effect within 60
days before mailing;
ii. For advertisements in electronic form it was in effect
within 30 days before the advertisement is sent to a consumer's
email address, or in the case of an advertisement made on an
Internet Web site, when viewed by the public; or
iii. For printed advertisements made available to the general
public, including ones contained in a catalog, magazine, or other
generally available publication, it was in effect within 30 days
before printing.
24(f)(3) Disclosure of Payments
1. Amounts and time periods of payments. Section
1026.24(f)(3)(i) requires disclosure of the amounts and time periods
of all payments that will apply over the term of the loan. This
section may require disclosure of several payment amounts, including
any balloon payment. For example, if an advertisement for credit
secured by a dwelling offers $300,000 of credit with a 30-year loan
term for a payment of $600 per month for the first six months,
increasing to $1,500 per month after month six, followed by a
balloon payment of $30,000 at the end of the loan term, the
advertisement must disclose the amount and time periods of each of
the two monthly payment streams, as well as the amount and timing of
the balloon payment, with equal prominence and in close proximity to
each other. However, if the final scheduled payment of a fully
amortizing loan is not greater than two times the amount of any
other regularly scheduled payment, the final payment need not be
disclosed.
2. Application to variable-rate transactions--disclosure of
payments. In advertisements for variable-rate transactions, if the
payment that applies at consummation is not based on the index and
margin that will be used to make subsequent payment adjustments over
the term of the loan, the requirements of Sec. 1026.24(f)(3)(i)
apply.
24(g) Alternative Disclosures--Television or Radio Advertisements
1. Multi-purpose telephone number. When an advertised telephone
number provides a recording, disclosures should be provided early in
the sequence to ensure that the consumer receives the required
disclosures. For example, in providing several options--such as
providing directions to the advertiser's place of business--the
option allowing the consumer to request disclosures should be
provided early in the telephone message to ensure that the option to
request disclosures is not obscured by other information.
2. Statement accompanying telephone number. Language must
accompany a telephone number indicating that disclosures are
available by calling the telephone number, such as ``call 1-(800)
000-0000 for details about credit costs and terms.''
24(i) Prohibited Acts or Practices in Advertisements for Credit Secured
by a Dwelling
1. Comparisons in advertisements. The requirements of Sec.
1026.24(i)(2) apply to all advertisements for credit secured by a
dwelling, including radio and television advertisements. A
comparison includes a claim about the amount a consumer may save
under the advertised product. For example, a statement such as
``save $300 per month on a $300,000 loan'' constitutes an implied
comparison between the advertised product's payment and a consumer's
current payment.
2. Misrepresentations about government endorsement. A statement
that the Federal Community Reinvestment Act entitles the consumer to
refinance his or her mortgage at the low rate offered in the
advertisement is prohibited because it conveys a misleading
impression that the advertised product is endorsed or sponsored by
the Federal government.
3. Misleading claims of debt elimination. The prohibition
against misleading claims of debt elimination or waiver or
forgiveness does not apply to legitimate statements that the
advertised product may reduce debt payments, consolidate debts, or
shorten the term of the debt. Examples of misleading claims of debt
elimination or waiver or forgiveness of loan terms with, or
obligations to, another creditor of debt include: ``Wipe-Out
Personal Debts!'', ``New DEBT-FREE Payment'', ``Set yourself free;
get out of debt today'', ``Refinance today and wipe your debt
clean!'', ``Get yourself out of debt * * * Forever!'', and ``Pre-
payment Penalty Waiver.''
Subpart D--Miscellaneous
Section 1026.25--Record Retention
25(a) General Rule
1. Evidence of required actions. The creditor must retain
evidence that it performed the required actions as well as made the
required disclosures. This includes, for example, evidence that the
creditor properly handled adverse credit reports in connection with
amounts subject to a billing dispute under Sec. 1026.13, and
properly handled the refunding of credit balances under Sec. Sec.
1026.11 and 1026.21.
2. Methods of retaining evidence. Adequate evidence of
compliance does not necessarily mean actual paper copies of
disclosure statements or other business records. The evidence may be
retained on microfilm, microfiche, or by any other method that
reproduces records accurately (including computer programs). The
creditor need retain only enough information to reconstruct the
required disclosures or other records. Thus, for example, the
creditor need not retain each open-end periodic statement, so long
as the specific information on each statement can be retrieved.
3. Certain variable-rate transactions. In variable-rate
transactions that are subject to the disclosure requirements of
Sec. 1026.19(b), written procedures for compliance with those
requirements as well as a sample disclosure form for each loan
program represent adequate evidence of compliance. (See comment
25(a)-2 pertaining to permissible methods of retaining the required
disclosures.)
4. Home equity plans. In home equity plans that are subject to
the requirements of Sec. 1026.40, written procedures for compliance
with those requirements as well as a sample disclosure form and
contract for each home equity program represent adequate evidence of
compliance. (See comment 25(a)-2 pertaining to permissible methods
of retaining the required disclosures.)
5. Prohibited payments to loan originators. For each transaction
subject to the loan originator compensation provisions in Sec.
1026.36(d)(1), a creditor should maintain records of the
compensation it provided to the loan originator for the transaction
as well as the compensation agreement in effect on the date the
interest rate was set for the transaction. See Sec. 1026.35(a) and
comment 35(a)(2)(iii)-3 for additional guidance on when a
transaction's rate is set. For example, where a loan originator is a
mortgage broker, a disclosure of compensation or other broker
agreement required by applicable state law that complies with Sec.
1026.25 would be presumed to be a record of the amount actually paid
to the loan originator in connection with the transaction.
[[Page 80001]]
Section 1026.26--Use of Annual Percentage Rate in Oral Disclosures
1. Application of rules. The restrictions of Sec. 1026.26 apply
only if the creditor chooses to respond orally to the consumer's
request for credit cost information. Nothing in the regulation
requires the creditor to supply rate information orally. If the
creditor volunteers information (including rate information) through
oral solicitations directed generally to prospective customers, as
through a telephone solicitation, those communications may be
advertisements subject to the rules in Sec. Sec. 1026.16 and
1026.24.
26(a) Open-End Credit
1. Information that may be given. The creditor may state
periodic rates in addition to the required annual percentage rate,
but it need not do so. If the annual percentage rate is unknown
because transaction charges, loan fees, or similar finance charges
may be imposed, the creditor must give the corresponding annual
percentage rate (that is, the periodic rate multiplied by the number
of periods in a year, as described in Sec. Sec. 1026.6(a)(1)(ii)
and (b)(4)(i)(A) and 1026.7(a)(4) and (b)(4)). In such cases, the
creditor may, but need not, also give the consumer information about
other finance charges and other charges.
26(b) Closed-End Credit
1. Information that may be given. The creditor may state other
annual or periodic rates that are applied to an unpaid balance,
along with the required annual percentage rate. This rule permits
disclosure of a simple interest rate, for example, but not an add-
on, discount, or similar rate. If the creditor cannot give a precise
annual percentage rate in its oral response because of variables in
the transaction, it must give the annual percentage rate for a
comparable sample transaction; in this case, other cost information
may, but need not, be given. For example, the creditor may be unable
to state a precise annual percentage rate for a mortgage loan
without knowing the exact amount to be financed, the amount of loan
fees or mortgage insurance premiums, or similar factors. In this
situation, the creditor should state an annual percentage rate for a
sample transaction; it may also provide information about the
consumer's specific case, such as the contract interest rate,
points, other finance charges, and other charges.
Section 1026.27--Language of Disclosures
1. Subsequent disclosures. If a creditor provides account-
opening disclosures in a language other than English, subsequent
disclosures need not be in that other language. For example, if the
creditor gave Spanish-language account-opening disclosures, periodic
statements and change-in-terms notices may be made in English.
Section 1026.28--Effect on State Laws
28(a) Inconsistent Disclosure Requirements
1. General. There are 3 sets of preemption criteria: 1 applies
to the general disclosure and advertising rules of the regulation,
and 2 apply to the credit billing provisions. Section 1026.28 also
provides for Bureau determinations of preemption.
2. Rules for chapters 1, 2, and 3. The standard for judging
whether state laws that cover the types of requirements in chapters
1 (General provisions), 2 (Credit transactions), and 3 (Credit
advertising) of the Act are inconsistent and therefore preempted, is
contradiction of the Federal law. Examples of laws that would be
preempted include:
i. A state law that requires use of the term finance charge, but
defines the term to include fees that the Federal law excludes, or
to exclude fees the Federal law includes.
ii. A state law that requires a label such as nominal annual
interest rate to be used for what the Federal law calls the annual
percentage rate.
3. Laws not contradictory to chapters 1, 2, and 3. i. Generally,
state law requirements that call for the disclosure of items of
information not covered by the Federal law, or that require more
detailed disclosures, do not contradict the Federal requirements.
Examples of laws that are not preempted include:
A. A state law that requires disclosure of the minimum periodic
payment for open-end credit, even though not required by Sec.
1026.7.
B. A state law that requires contracts to contain warnings such
as: ``Read this contract before you sign. Do not sign if any spaces
are left blank. You are entitled to a copy of this contract.''
ii. Similarly, a state law that requires itemization of the
amount financed does not automatically contradict the permissive
itemization under Sec. 1026.18(c). However, a state law requirement
that the itemization appear with the disclosure of the amount
financed in the segregated closed-end credit disclosures is
inconsistent, and this location requirement would be preempted.
4. Creditor's options. Before the Bureau makes a determination
about a specific state law, the creditor has certain options.
i. Since the prohibition against giving the state disclosures
does not apply until the Bureau makes its determination, the
creditor may choose to give state disclosures until the Bureau
formally determines that the state law is inconsistent. (The Bureau
will provide sufficient time for creditors to revise forms and
procedures as necessary to conform to its determinations.) Under
this first approach, as in all cases, the Federal disclosures must
be clear and conspicuous, and the closed-end disclosures must be
properly segregated in accordance with Sec. 1026.17(a)(1). This
ability to give state disclosures relieves any uncertainty that the
creditor might have prior to Bureau determinations of inconsistency.
ii. As a second option, the creditor may apply the preemption
standards to a state law, conclude that it is inconsistent, and
choose not to give the state-required disclosures. However, nothing
in Sec. 1026.28(a) provides the creditor with immunity for
violations of state law if the creditor chooses not to make state
disclosures and the Bureau later determines that the state law is
not preempted.
5. Rules for correction of billing errors and regulation of
credit reports. The preemption criteria for the fair credit billing
provisions set forth in Sec. 1026.28 have two parts. With respect
to the rules on correction of billing errors and regulation of
credit reports (which are in Sec. 1026.13), Sec. 1026.28(a)(2)(i)
provides that a state law is inconsistent and preempted if its
requirements are different from the Federal law. An exception is
made, however, for state laws that allow the consumer to inquire
about an account and require the creditor to respond to such
inquiries beyond the time limits in the Federal law. Such a state
law is not preempted with respect to the extra time period. For
example, Sec. 1026.13 requires the consumer to submit a written
notice of billing error within 60 days after transmittal of the
periodic statement showing the alleged error. If a state law allows
the consumer 90 days to submit a notice, the state law remains in
effect to provide the extra 30 days. Any state law disclosures
concerning this extended state time limit must reflect the
qualifications and conform to the format specified in Sec.
1026.28(a)(2)(i). Examples of laws that would be preempted include:
i. A state law that has a narrower or broader definition of
billing error.
ii. A state law that requires the creditor to take different
steps to resolve errors.
iii. A state law that provides different timing rules for error
resolution (subject to the exception discussed above).
6. Rules for other fair credit billing provisions. The second
part of the criteria for fair credit billing relates to the other
rules implementing chapter 4 of the Act (addressed in Sec. Sec.
1026.4(c)(8), 1026.5(b)(2)(ii), 1026.6(a)(5) and (b)(5)(iii),
1026.7(a)(9) and (b)(9), 1026.9(a), 1026.10, 1026.11, 1026.12(c)
through (f), 1026.13, and 1026.21). Section 1026.28(a)(2)(ii)
provides that the test of inconsistency is whether the creditor can
comply with state law without violating Federal law. For example:
i. A state law that allows the card issuer to offset the
consumer's credit-card indebtedness against funds held by the card
issuer would be preempted, since Sec. 1026.12(d) prohibits such
action.
ii. A state law that requires periodic statements to be sent
more than 14 days before the end of a free-ride period would not be
preempted.
iii. A state law that permits consumers to assert claims and
defenses against the card issuer without regard to the $50 and 100-
mile limitations of Sec. 1026.12(c)(3)(ii) would not be preempted.
iv. In paragraphs ii. and iii. of this comment, compliance with
state law would involve no violation of the Federal law.
7. Who may receive a chapter 4 determination. Only states
(through their authorized officials) may request and receive
determinations on inconsistency with respect to the fair credit
billing provisions.
8. Preemption determination--Arizona. The Bureau recognizes
state law preemption determinations made by the Board of Governors
of the Federal Reserve System prior to July 21, 2011, until and
unless the Bureau makes and publishes any contrary determination.
Effective October 1, 1983, the Board of Governors determined that
the following provisions in the state law of Arizona are preempted
by the Federal law:
i. Section 44-287 B.5--Disclosure of final cash price balance.
This provision is
[[Page 80002]]
preempted in those transactions in which the amount of the final
cash price balance is the same as the Federal amount financed, since
in such transactions the state law requires the use of a term
different from the Federal term to represent the same amount.
ii. Section 44-287 B.6--Disclosure of finance charge. This
provision is preempted in those transactions in which the amount of
the finance charge is different from the amount of the Federal
finance charge, since in such transactions the state law requires
the use of the same term as the Federal law to represent a different
amount.
iii. Section 44-287 B.7--Disclosure of the time balance. The
time balance disclosure provision is preempted in those transactions
in which the amount is the same as the amount of the Federal total
of payments, since in such transactions the state law requires the
use of a term different from the Federal term to represent the same
amount.
9. Preemption determination--Florida. The Bureau recognizes
state law preemption determinations made by the Board of Governors
of the Federal Reserve System prior to July 21, 2011, until and
unless the Bureau makes and publishes any contrary determination.
Effective October 1, 1983, the Board of Governors determined that
the following provisions in the state law of Florida are preempted
by the Federal law:
i. Sections 520.07(2)(f) and 520.34(2)(f)--Disclosure of amount
financed. This disclosure is preempted in those transactions in
which the amount is different from the Federal amount financed,
since in such transactions the state law requires the use of the
same term as the Federal law to represent a different amount.
ii. Sections 520.07(2)(g), 520.34(2)(g), and 520.35(2)(d)--
Disclosure of finance charge and a description of its components.
The finance charge disclosure is preempted in those transactions in
which the amount of the finance charge is different from the Federal
amount, since in such transactions the state law requires the use of
the same term as the Federal law to represent a different amount.
The requirement to describe or itemize the components of the finance
charge, which is also included in these provisions, is not
preempted.
iii. Sections 520.07(2)(h) and 520.34(2)(h)--Disclosure of total
of payments. The total of payments disclosure is preempted in those
transactions in which the amount differs from the amount of the
Federal total of payments, since in such transactions the state law
requires the use of the same term as the Federal law to represent a
different amount than the Federal law.
iv. Sections 520.07(2)(i) and 520.34(2)(i)--Disclosure of
deferred payment price. This disclosure is preempted in those
transactions in which the amount is the same as the Federal total
sale price, since in such transactions the state law requires the
use of a different term than the Federal law to represent the same
amount as the Federal law.
10. Preemption determination--Missouri. The Bureau recognizes
state law preemption determinations made by the Board of Governors
of the Federal Reserve System prior to July 21, 2011, until and
unless the Bureau makes and publishes any contrary determination.
Effective October 1, 1983, the Board of Governors determined that
the following provisions in the state law of Missouri are preempted
by the Federal law:
i. Sections 365.070-6(9) and 408.260-5(6)--Disclosure of
principal balance. This disclosure is preempted in those
transactions in which the amount of the principal balance is the
same as the Federal amount financed, since in such transactions the
state law requires the use of a term different from the Federal term
to represent the same amount.
ii. Sections 365.070-6(10) and 408.260-5(7)--Disclosure of time
price differential and time charge, respectively. These disclosures
are preempted in those transactions in which the amount is the same
as the Federal finance charge, since in such transactions the state
law requires the use of a term different from the Federal law to
represent the same amount.
iii. Sections 365.070-2 and 408.260-2--Use of the terms time
price differential and time charge in certain notices to the buyer.
In those transactions in which the state disclosure of the time
price differential or time charge is preempted, the use of the terms
in this notice also is preempted. The notice itself is not
preempted.
iv. Sections 365.070-6(11) and 408.260-5(8)--Disclosure of time
balance. The time balance disclosure is preempted in those
transactions in which the amount is the same as the amount of the
Federal total of payments, since in such transactions the state law
requires the use of a different term than the Federal law to
represent the same amount.
v. Sections 365.070-6(12) and 408.260-5(9)--Disclosure of time
sale price. This disclosure is preempted in those transactions in
which the amount is the same as the Federal total sale price, since
in such transactions the state law requires the use of a different
term from the Federal law to represent the same amount.
11. Preemption determination--Mississippi. The Bureau recognizes
state law preemption determinations made by the Board of Governors
of the Federal Reserve System prior to July 21, 2011, until and
unless the Bureau makes and publishes any contrary determination.
Effective October 1, 1984, the Board of Governors determined that
the following provision in the state law of Mississippi is preempted
by the Federal law:
i. Section 63-19-31(2)(g)--Disclosure of finance charge. This
disclosure is preempted in those cases in which the term finance
charge would be used under state law to describe a different amount
than the finance charge disclosed under Federal law.
12. Preemption determination--South Carolina. The Bureau
recognizes state law preemption determinations made by the Board of
Governors of the Federal Reserve System prior to July 21, 2011,
until and unless the Bureau makes and publishes any contrary
determination. Effective October 1, 1984, the Board of Governors
determined that the following provision in the state law of South
Carolina is preempted by the Federal law.
i. Section 37-10-102(c)--Disclosure of due-on-sale clause. This
provision is preempted, but only to the extent that the creditor is
required to include the disclosure with the segregated Federal
disclosures. If the creditor may comply with the state law by
placing the due-on-sale notice apart from the Federal disclosures,
the state law is not preempted.
13. Preemption determination--Arizona. The Bureau recognizes
state law preemption determinations made by the Board of Governors
of the Federal Reserve System prior to July 21, 2011, until and
unless the Bureau makes and publishes any contrary determination.
i. Effective October 1, 1986, the Board of Governors determined
that the following provision in the state law of Arizona is
preempted by the Federal law:
A. Section 6-621A.2--Use of the term the total sum of $--------
in certain notices provided to borrowers. This term describes the
same item that is disclosed under Federal law as the total of
payments. Since the state law requires the use of a different term
than Federal law to describe the same item, the state-required term
is preempted. The notice itself is not preempted.
ii. Note: The state disclosure notice that incorporated the
above preempted term was amended on May 4, 1987, to provide that
disclosures must now be made pursuant to the Federal disclosure
provisions.
14. Preemption determination--Indiana. The Bureau recognizes
state law preemption determinations made by the Board of Governors
of the Federal Reserve System prior to July 21, 2011, until and
unless the Bureau makes and publishes any contrary determination.
Effective October 1, 1988, the Board of Governors determined that
the following provision in the state law of Indiana is preempted by
the Federal law:
i. Section 23-2-5-8--Inclusion of the loan broker's fees and
charges in the calculation of, among other items, the finance charge
and annual percentage rate disclosed to potential borrowers. This
disclosure is inconsistent with section 106(a) and Sec. 1026.4(a)
of the Federal statute and regulation, respectively, and is
preempted in those instances where the use of the same term would
disclose a different amount than that required to be disclosed under
Federal law.
15. Preemption determination--Wisconsin. The Bureau recognizes
state law preemption determinations made by the Board of Governors
of the Federal Reserve System prior to July 21, 2011, until and
unless the Bureau makes and publishes any contrary determination.
Effective October 1, 1991, the Board of Governors determined that
the following provisions in the state law of Wisconsin are preempted
by the Federal law:
i. Section 422.308(1)--the disclosure of the annual percentage
rate in cases where the amount of the annual percentage rate
disclosed to consumers under the state law differs from the amount
that would be disclosed under Federal law, since in those cases the
state law requires the use of the same term as the Federal law to
represent a different amount than the Federal law.
ii. Section 766.565(5)--the provision permitting a creditor to
include in an open-end home equity agreement authorization to
declare the account balance due and payable
[[Page 80003]]
upon receiving notice of termination from a non-obligor spouse,
since such provision is inconsistent with the purpose of the Federal
law.
28(b) Equivalent Disclosure Requirements
1. General. A state disclosure may be substituted for a Federal
disclosure only after the Bureau has made a finding of substantial
similarity. Thus, the creditor may not unilaterally choose to make a
state disclosure in place of a Federal disclosure, even if it
believes that the state disclosure is substantially similar. Since
the rule stated in Sec. 1026.28(b) does not extend to any
requirement relating to the finance charge or annual percentage
rate, no state provision on computation, description, or disclosure
of these terms may be substituted for the Federal provision.
28(d) Special Rule for Credit and Charge Cards
1. General. The standard that applies to preemption of state
laws as they affect transactions of the type subject to Sec. Sec.
1026.60 and 1026.9(e) differs from the preemption standards
generally applicable under the Truth in Lending Act. The Fair Credit
and Charge Card Disclosure Act fully preempts state laws relating to
the disclosure of credit information in consumer credit or charge
card applications or solicitations. (For purposes of this section, a
single credit or charge card application or solicitation that may be
used to open either an account for consumer purposes or an account
for business purposes is deemed to be a ``consumer credit or charge
card application or solicitation.'') For example, a state law
requiring disclosure of credit terms in direct mail solicitations
for consumer credit card accounts is preempted. A state law
requiring disclosures in telephone applications for consumer credit
card accounts also is preempted, even if it applies to applications
initiated by the consumer rather than the issuer, because the state
law relates to the disclosure of credit information in applications
or solicitations within the general field of preemption, that is,
consumer credit and charge cards.
2. Limitations on field of preemption. Preemption under the Fair
Credit and Charge Card Disclosure Act does not extend to state laws
applying to types of credit other than open-end consumer credit and
charge card accounts. Thus, for example, a state law is not
preempted as it applies to disclosures in credit and charge card
applications and solicitations solely for business-purpose accounts.
On the other hand, state credit disclosure laws will not apply to a
single application or solicitation to open either an account for
consumer purposes or an account for business purposes. Such ``dual
purpose'' applications and solicitations are treated as ``consumer
credit or charge card applications or solicitations'' under this
section and state credit disclosure laws applicable to them are
preempted. Preemption under this statute does not extend to state
laws applicable to home equity plans; preemption determinations in
this area are based on the Home Equity Loan Consumer Protection Act,
as implemented in Sec. 1026.40 of the regulation.
3. Laws not preempted. State laws relating to disclosures
concerning credit and charge cards other than in applications,
solicitations, or renewal notices are not preempted under Sec.
1026.28(d). In addition, state laws regulating the terms of credit
and charge card accounts are not preempted, nor are laws preempted
that regulate the form or content of information unrelated to the
information required to be disclosed under Sec. Sec. 1026.60 and
1026.9(e). Finally, state laws concerning the enforcement of the
requirements of Sec. Sec. 1026.60 and 1026.9(e) and state laws
prohibiting unfair or deceptive acts or practices concerning credit
and charge card applications, solicitations and renewals are not
preempted. Examples of laws that are not preempted include:
i. A state law that requires card issuers to offer a grace
period or that prohibits certain fees in credit and charge card
transactions.
ii. A state retail installment sales law or a state plain
language law, except to the extent that it regulates the disclosure
of credit information in applications, solicitations and renewals of
accounts of the type subject to Sec. Sec. 1026.60 and 1026.9(e).
iii. A state law requiring notice of a consumer's rights under
antidiscrimination or similar laws or a state law requiring notice
about credit information available from state authorities.
Section 1026.29--State Exemptions
29(a) General Rule
1. Classes eligible. The state determines the classes of
transactions for which it will request an exemption, and makes its
application for those classes. Classes might be, for example, all
open-end credit transactions, all open-end and closed-end
transactions, or all transactions in which the creditor is a bank.
2. Substantial similarity. The ``substantially similar''
standard requires that state statutory or regulatory provisions and
state interpretations of those provisions be generally the same as
the Federal Act and Regulation Z. This includes the requirement that
state provisions for reimbursement to consumers for overcharges be
at least equivalent to those required in section 108 of the Act. A
state will be eligible for an exemption even if its law covers
classes of transactions not covered by the Federal law. For example,
if a state's law covers agricultural credit, this will not prevent
the Bureau from granting an exemption for consumer credit, even
though agricultural credit is not covered by the Federal law.
3. Adequate enforcement. The standard requiring adequate
provision for enforcement generally means that appropriate state
officials must be authorized to enforce the state law through
procedures and sanctions comparable to those available to Federal
enforcement agencies. Furthermore, state law must make adequate
provision for enforcement of the reimbursement rules.
4. Exemptions granted. The Bureau recognizes exemptions granted
by the Board of Governors of the Federal Reserve System prior to
July 21, 2011, until and unless the Bureau makes and publishes any
contrary determination. Effective October 1, 1982, the Board of
Governors granted the following exemptions from portions of the
revised Truth in Lending Act:
i. Maine. Credit or lease transactions subject to the Maine
Consumer Credit Code and its implementing regulations are exempt
from chapters 2, 4 and 5 of the Federal Act. (The exemption does not
apply to transactions in which a federally chartered institution is
a creditor or lessor.)
ii. Connecticut. Credit transactions subject to the Connecticut
Truth in Lending Act are exempt from chapters 2 and 4 of the Federal
Act. (The exemption does not apply to transactions in which a
federally chartered institution is a creditor.)
iii. Massachusetts. Credit transactions subject to the
Massachusetts Truth in Lending Act are exempt from chapters 2 and 4
of the Federal Act. (The exemption does not apply to transactions in
which a federally chartered institution is a creditor.)
iv. Oklahoma. Credit or lease transactions subject to the
Oklahoma Consumer Credit Code are exempt from chapters 2 and 5 of
the Federal Act. (The exemption does not apply to sections 132
through 135 of the Federal Act, nor does it apply to transactions in
which a federally chartered institution is a creditor or lessor.)
v. Wyoming. Credit transactions subject to the Wyoming Consumer
Credit Code are exempt from chapter 2 of the Federal Act. (The
exemption does not apply to transactions in which a federally
chartered institution is a creditor.)
29(b) Civil Liability
1. Not eligible for exemption. The provision that an exemption
may not extend to sections 130 and 131 of the Act assures that
consumers retain access to both Federal and state courts in seeking
damages or civil penalties for violations, while creditors retain
the defenses specified in those sections.
Section 1026.30--Limitation on Rates
1. Scope of coverage. i. The requirement of this section applies
to consumer credit obligations secured by a dwelling (as dwelling is
defined in Sec. 1026.2(a)(19)) in which the annual percentage rate
may increase after consummation (or during the term of the plan, in
the case of open-end credit) as a result of an increase in the
interest rate component of the finance charge--whether those
increases are tied to an index or formula or are within a creditor's
discretion. The section applies to credit sales as well as loans.
Examples of credit obligations subject to this section include:
A. Dwelling-secured credit obligations that require variable-
rate disclosures under the regulation because the interest rate may
increase during the term of the obligation.
B. Dwelling-secured open-end credit plans entered into before
November 7, 1989 (the effective date of the home equity rules) that
are not considered variable-rate obligations for purposes of
disclosure under the regulation but where the creditor reserves the
contractual right to increase the interest rate--periodic rate and
corresponding annual percentage rate--during the term of the plan.
ii. In contrast, credit obligations in which there is no
contractual right to increase the interest rate during the term of
the obligation
[[Page 80004]]
are not subject to this section. Examples include:
A. ``Shared-equity'' or ``shared-appreciation'' mortgage loans
that have a fixed rate of interest and a shared-appreciation feature
based on the consumer's equity in the mortgaged property. (The
appreciation share is payable in a lump sum at a specified time.)
B. Dwelling-secured fixed-rate closed-end balloon-payment
mortgage loans and dwelling-secured fixed-rate open-end plans with a
stated term that the creditor may renew at maturity. (Contrast with
the renewable balloon-payment mortgage instrument described in
comment 17(c)(1)-11.)
C. Dwelling-secured fixed-rate closed-end multiple advance
transactions in which each advance is disclosed as a separate
transaction.
D. ``Price level adjusted mortgages'' or other indexed mortgages
that have a fixed rate of interest but provide for periodic
adjustments to payments and the loan balance to reflect changes in
an index measuring prices or inflation.
iii. The requirement of this section does not apply to credit
obligations entered into prior to December 9, 1987. Consequently,
new advances under open-end credit plans existing prior to December
9, 1987, are not subject to this section.
2. Refinanced obligations. On or after December 9, 1987, when a
credit obligation is refinanced, as defined in Sec. 1026.20(a), the
new obligation is subject to this section if it is dwelling-secured
and allows for increases in the interest rate.
3. Assumptions. On or after December 9, 1987, when a credit
obligation is assumed, as defined in Sec. 1026.20(b), the
obligation becomes subject to this section if it is dwelling-secured
and allows for increases in the interest rate.
4. Modifications of obligations. The modification of an
obligation, regardless of when the obligation was entered into, is
generally not covered by this section. For example, increasing the
credit limit on a dwelling-secured, open-end plan with a variable
interest rate entered into before the effective date of the rule
does not make the obligation subject to this section. If, however, a
security interest in a dwelling is added on or after December 9,
1987, to a credit obligation that allows for interest rate
increases, the obligation becomes subject to this section.
Similarly, if a variable interest rate feature is added to a
dwelling-secured credit obligation, the obligation becomes subject
to this section.
5. Land trusts. In some states, a land trust is used in
residential real estate transactions. (See discussion in comment
3(a)-8.) If a consumer-purpose loan that allows for interest rate
increases is secured by an assignment of a beneficial interest in a
land trust that holds title to a consumer's dwelling, that loan is
subject to this section.
6. Relationship to other sections. Unless otherwise provided for
in the commentary to this section, other provisions of the
regulation such as definitions, exemptions, rules and
interpretations also apply to this section where appropriate. To
illustrate:
i. An adjustable interest rate business-purpose loan is not
subject to this section even if the loan is secured by a dwelling
because such credit extensions are not subject to the regulation.
(See generally Sec. 1026.3(a).)
ii. Creditors subject to this section are only those that fall
within the definition of a creditor in Sec. 1026.2(a)(17).
7. Consumer credit contract. Creditors are required to specify a
lifetime maximum interest rate in their credit contracts--the
instrument that creates personal liability and generally contains
the terms and conditions of the agreement (for example, a promissory
note or home-equity line of credit agreement). In some states, the
signing of a commitment letter may create a binding obligation, for
example, constituting consummation as defined in Sec.
1026.2(a)(13). The maximum interest rate must be included in the
credit contract, but a creditor may include the rate ceiling in the
commitment instrument as well.
8. Manner of stating the maximum interest rate. The maximum
interest rate must be stated in the credit contract either as a
specific amount or in any other manner that would allow the consumer
to easily ascertain, at the time of entering into the obligation,
what the rate ceiling will be over the term of the obligation.
i. For example, the following statements would be sufficiently
specific:
A. The maximum interest rate will not exceed X%.
B. The interest rate will never be higher than X percentage
points above the initial rate of Y%.
C. The interest rate will not exceed X%, or X percentage points
above [a rate to be determined at some future point in time],
whichever is less.
D. The maximum interest rate will not exceed X%, or the state
usury ceiling, whichever is less.
ii. The following statements would not comply with this section:
A. The interest rate will never be higher than X percentage
points over the prevailing market rate.
B. The interest rate will never be higher than X percentage
points above [a rate to be determined at some future point in time].
C. The interest rate will not exceed the state usury ceiling
which is currently X%.
iii. A creditor may state the maximum rate in terms of a maximum
annual percentage rate that may be imposed. Under an open-end credit
plan, this normally would be the corresponding annual percentage
rate. (See generally Sec. 1026.6(a)(1)(ii) and (b)(4)(i)(A).)
9. Multiple interest rate ceilings. Creditors are not prohibited
from setting multiple interest rate ceilings. For example, on loans
with multiple variable-rate features, creditors may establish a
maximum interest rate for each feature. To illustrate, in a
variable-rate loan that has an option to convert to a fixed rate, a
creditor may set one maximum interest rate for the initially imposed
index-based variable-rate feature and another for the conversion
option. Of course, a creditor may establish one maximum interest
rate applicable to all features.
10. Interest rate charged after default. State law may allow an
interest rate after default higher than the contract rate in effect
at the time of default; however, the interest rate after default is
subject to a maximum interest rate set forth in a credit obligation
that is otherwise subject to this section. This rule applies only in
situations in which a post-default agreement is still considered
part of the original obligation.
11. Increasing the maximum interest rate--general rule.
Generally, a creditor may not increase the maximum interest rate
originally set on a credit obligation subject to this section unless
the consumer and the creditor enter into a new obligation.
Therefore, under an open-end plan, a creditor may not increase the
rate ceiling imposed merely because there is an increase in the
credit limit. If an open-end plan is closed and another opened, a
new rate ceiling may be imposed. Furthermore, where an open-end plan
has a fixed maturity and a creditor renews the plan at maturity, or
enters into a closed-end credit transaction, a new maximum interest
rate may be set at that time. If the open-end plan provides for a
repayment phase, the maximum interest rate cannot be increased when
the repayment phase begins unless the agreement provided for such an
increase. For a closed-end credit transaction, a new maximum
interest rate may be set only if the transaction is satisfied and
replaced by a new obligation. (The exceptions in Sec.
1026.20(a)(1)-(5) which limit what transactions are considered
refinancings for purposes of disclosure do not apply with respect to
increasing a rate ceiling that has been imposed; if a transaction is
satisfied and replaced, the rate ceiling may be increased.)
12. Increasing the maximum interest rate--assumption of an
obligation. If an obligation subject to this section is assumed by a
new obligor and the original obligor is released from liability, the
maximum interest rate set on the obligation may be increased as part
of the assumption agreement. (This rule applies whether or not the
transaction constitutes an assumption as defined in Sec.
1026.20(b).)
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 1026.31--General Rules
31(c) Timing of Disclosure
1. Furnishing disclosures. Disclosures are considered furnished
when received by the consumer.
31(c)(1) Disclosures for Certain Closed-End Home Mortgages
1. Pre-consummation waiting period. A creditor must furnish
Sec. 1026.32 disclosures at least three business days prior to
consummation. Under Sec. 1026.32, ``business day'' has the same
meaning as the rescission rule in comment 2(a)(6)-2--all calendar
days except Sundays and the Federal legal holidays listed in 5
U.S.C. 6103(a). However, while the disclosure rule under Sec. Sec.
1026.15 and 1026.23 extends to midnight of the third business day,
the rule under Sec. 1026.32 does not. For example, under Sec.
1026.32, if disclosures were provided on a Friday, consummation
could occur any time on Tuesday, the third business day following
receipt of the disclosures. If the timing of the rescission rule
were to be used,
[[Page 80005]]
consummation could not occur until after midnight on Tuesday.
31(c)(1)(i) Change in Terms
1. Redisclosure required. Creditors must provide new disclosures
when a change in terms makes disclosures previously provided under
Sec. 1026.32(c) inaccurate, including disclosures based on and
labeled as an estimate. A change in terms may result from a formal
written agreement or otherwise.
2. Sale of optional products at consummation. If the consumer
finances the purchase of optional products such as credit insurance
and as a result the monthly payment differs from what was previously
disclosed under Sec. 1026.32, redisclosure is required and a new
three-day waiting period applies. (See comment 32(c)(3)-1 on when
optional items may be included in the regular payment disclosure.)
31(c)(1)(ii) Telephone Disclosures
1. Telephone disclosures. Disclosures by telephone must be
furnished at least three business days prior to consummation,
calculated in accord with the timing rules under Sec.
1026.31(c)(1).
31(c)(1)(iii) Consumer's Waiver of Waiting Period Before Consummation
1. Modification or waiver. A consumer may modify or waive the
right to the three-day waiting period only after receiving the
disclosures required by Sec. 1026.32 and only if the circumstances
meet the criteria for establishing a bona fide personal financial
emergency under Sec. 1026.23(e). Whether these criteria are met is
determined by the facts surrounding individual situations. The
imminent sale of the consumer's home at foreclosure during the
three-day period is one example of a bona fide personal financial
emergency. Each consumer entitled to the three-day waiting period
must sign the handwritten statement for the waiver to be effective.
31(c)(2) Disclosures for Reverse Mortgages
1. Business days. For purposes of providing reverse mortgage
disclosures, ``business day'' has the same meaning as in comment
31(c)(1)-1--all calendar days except Sundays and the Federal legal
holidays listed in 5 U.S.C. 6103(a). This means if disclosures are
provided on a Friday, consummation could occur any time on Tuesday,
the third business day following receipt of the disclosures.
2. Open-end plans. Disclosures for open-end reverse mortgages
must be provided at least three business days before the first
transaction under the plan (see Sec. 1026.5(b)(1)).
31(d) Basis of Disclosures and Use of Estimates
1. Redisclosure. Section 1026.31(d) allows the use of estimates
when information necessary for an accurate disclosure is unknown to
the creditor, provided that the disclosure is clearly identified as
an estimate. For purposes of Subpart E, the rule in Sec.
1026.31(c)(1)(i) requiring new disclosures when the creditor changes
terms also applies to disclosures labeled as estimates.
31(d)(3) Per-Diem Interest
1. Per-diem interest. This paragraph applies to the disclosure
of any numerical amount (such as the finance charge, annual
percentage rate, or payment amount) that is affected by the amount
of the per-diem interest charge that will be collected at
consummation. If the amount of per-diem interest used in preparing
the disclosures for consummation is based on the information known
to the creditor at the time the disclosure document is prepared, the
disclosures are considered accurate under this rule, and affected
disclosures are also considered accurate, even if the disclosures
were not labeled as estimates. (See comment 17(c)(2)(ii)-1
generally.)
Section 1026.32--Requirements for Certain Closed-End Home Mortgages
32(a) Coverage
Paragraph 32(a)(1)(i)
1. Application date. An application is deemed received when it
reaches the creditor in any of the ways applications are normally
transmitted. (See Sec. 1026.19(a).) For example, if a borrower
applies for a 10-year loan on September 30 and the creditor
counteroffers with a 7-year loan on October 10, the application is
deemed received in September and the creditor must measure the
annual percentage rate against the appropriate Treasury security
yield as of August 15. An application transmitted through an
intermediary agent or broker is received when it reaches the
creditor, rather than when it reaches the agent or broker. (See
comment 19(b)-3 to determine whether a transaction involves an
intermediary agent or broker.)
2. When fifteenth is not a business day. If the 15th day of the
month immediately preceding the application date is not a business
day, the creditor must use the yield as of the business day
immediately preceding the 15th.
3. Calculating annual percentage rates for variable-rate loans
and discount loans. Creditors must use the rules set out in the
commentary to Sec. 1026.17(c)(1) in calculating the annual
percentage rate for variable-rate loans (assume the rate in effect
at the time of disclosure remains unchanged) and for discount,
premium, and stepped-rate transactions (which must reflect composite
annual percentage rates).
4. Treasury securities. To determine the yield on comparable
Treasury securities for the annual percentage rate test, creditors
may use the yield on actively traded issues adjusted to constant
maturities published in the Federal Reserve Board's ``Selected
Interest Rates'' (statistical release H-15). Creditors must use the
yield corresponding to the constant maturity that is closest to the
loan's maturity. If the loan's maturity is exactly halfway between
security maturities, the annual percentage rate on the loan should
be compared with the yield for Treasury securities having the lower
yield. In determining the loan's maturity, creditors may rely on the
rules in Sec. 1026.17(c)(4) regarding irregular first payment
periods. For example:
i. If the H-15 contains a yield for Treasury securities with
constant maturities of 7 years and 10 years and no maturity in
between, the annual percentage rate for an 8-year mortgage loan is
compared with the yield of securities having a 7-year maturity, and
the annual percentage rate for a 9-year mortgage loan is compared
with the yield of securities having a 10-year maturity.
ii. If a mortgage loan has a term of 15 years, and the H-15
contains a yield of 5.21 percent for constant maturities of 10
years, and also contains a yield of 6.33 percent for constant
maturities of 20 years, then the creditor compares the annual
percentage rate for a 15-year mortgage loan with the yield for
constant maturities of 10 years.
iii. If a mortgage loan has a term of 30 years, and the H-15
does not contain a yield for 30-year constant maturities, but
contains a yield for 20-year constant maturities, and an average
yield for securities with remaining terms to maturity of 25 years
and over, then the annual percentage rate on the loan is compared
with the yield for 20-year constant maturities.
Paragraph 32(a)(1)(ii)
1. Total loan amount. For purposes of the ``points and fees''
test, the total loan amount is calculated by taking the amount
financed, as determined according to Sec. 1026.18(b), and deducting
any cost listed in Sec. 1026.32(b)(1)(iii) and Sec.
1026.32(b)(1)(iv) that is both included as points and fees under
Sec. 1026.32(b)(1) and financed by the creditor. Some examples
follow, each using a $10,000 amount borrowed, a $300 appraisal fee,
and $400 in points. A $500 premium for optional credit life
insurance is used in one example.
i. If the consumer finances a $300 fee for a creditor-conducted
appraisal and pays $400 in points at closing, the amount financed
under Sec. 1026.18(b) is $9,900 ($10,000 plus the $300 appraisal
fee that is paid to and financed by the creditor, less $400 in
prepaid finance charges). The $300 appraisal fee paid to the
creditor is added to other points and fees under Sec.
1026.32(b)(1)(iii). It is deducted from the amount financed ($9,900)
to derive a total loan amount of $9,600.
ii. If the consumer pays the $300 fee for the creditor-conducted
appraisal in cash at closing, the $300 is included in the points and
fees calculation because it is paid to the creditor. However,
because the $300 is not financed by the creditor, the fee is not
part of the amount financed under Sec. 1026.18(b). In this case,
the amount financed is the same as the total loan amount: $9,600
($10,000, less $400 in prepaid finance charges).
iii. If the consumer finances a $300 fee for an appraisal
conducted by someone other than the creditor or an affiliate, the
$300 fee is not included with other points and fees under Sec.
1026.32(b)(1)(iii). The amount financed under Sec. 1026.18(b) is
$9,900 ($10,000 plus the $300 fee for an independently-conducted
appraisal that is financed by the creditor, less the $400 paid in
cash and deducted as prepaid finance charges).
iv. If the consumer finances a $300 fee for a creditor-conducted
appraisal and a $500 single premium for optional credit life
insurance, and pays $400 in points at closing, the amount financed
under Sec. 1026.18(b) is $10,400 ($10,000, plus the $300 appraisal
fee that is paid to and financed by the creditor,
[[Page 80006]]
plus the $500 insurance premium that is financed by the creditor,
less $400 in prepaid finance charges). The $300 appraisal fee paid
to the creditor is added to other points and fees under Sec.
1026.32(b)(1)(iii), and the $500 insurance premium is added under
1026.32(b)(1)(iv). The $300 and $500 costs are deducted from the
amount financed ($10,400) to derive a total loan amount of $9,600.
2. Annual adjustment of $400 amount. A mortgage loan is covered
by Sec. 1026.32 if the total points and fees payable by the
consumer at or before loan consummation exceed the greater of $400
or 8 percent of the total loan amount. The $400 figure is adjusted
annually on January 1 by the annual percentage change in the CPI
that was in effect on the preceding June 1. The Bureau will publish
adjustments after the June figures become available each year. The
adjustment for the upcoming year will be included in any proposed
commentary published in the fall, and incorporated into the
commentary the following spring. The adjusted figures are:
i. For 1996, $412, reflecting a 3.00 percent increase in the
CPI-U from June 1994 to June 1995, rounded to the nearest whole
dollar.
ii. For 1997, $424, reflecting a 2.9 percent increase in the
CPI-U from June 1995 to June 1996, rounded to the nearest whole
dollar.
iii. For 1998, $435, reflecting a 2.5 percent increase in the
CPI-U from June 1996 to June 1997, rounded to the nearest whole
dollar.
iv. For 1999, $441, reflecting a 1.4 percent increase in the
CPI-U from June 1997 to June 1998, rounded to the nearest whole
dollar.
v. For 2000, $451, reflecting a 2.3 percent increase in the CPI-
U from June 1998 to June 1999, rounded to the nearest whole dollar.
vi. For 2001, $465, reflecting a 3.1 percent increase in the
CPI-U from June 1999 to June 2000, rounded to the nearest whole
dollar.
vii. For 2002, $480, reflecting a 3.27 percent increase in the
CPI-U from June 2000 to June 2001, rounded to the nearest whole
dollar.
viii. For 2003, $488, reflecting a 1.64 percent increase in the
CPI-U from June 2001 to June 2002, rounded to the nearest whole
dollar.
ix. For 2004, $499, reflecting a 2.22 percent increase in the
CPI-U from June 2002 to June 2003, rounded to the nearest whole
dollar.
x. For 2005, $510, reflecting a 2.29 percent increase in the
CPI-U from June 2003 to June 2004, rounded to the nearest whole
dollar.
xi. For 2006, $528, reflecting a 3.51 percent increase in the
CPI-U from June 2004 to June 2005, rounded to the nearest whole
dollar.
xii. For 2007, $547, reflecting a 3.55 percent increase in the
CPI-U from June 2005 to June 2006, rounded to the nearest whole
dollar.
xiii. For 2008, $561, reflecting a 2.56 percent increase in the
CPI-U from June 2006 to June 2007, rounded to the nearest whole
dollar.
xiv. For 2009, $583, reflecting a 3.94 percent increase in the
CPI-U from June 2007 to June 2008, rounded to the nearest whole
dollar.
xv. For 2010, $579, reflecting a 0.74 percent decrease in the
CPI-U from June 2008 to June 2009, rounded to the nearest whole
dollar.
xvi. For 2011, $592, reflecting a 2.2 percent increase in the
CPI-U from June 2009 to June 2010, rounded to the nearest whole
dollar.
xvii. For 2012, $611, reflecting a 3.2 percent increase in the
CPI-U from June 2010 to June 2011, rounded to the nearest whole
dollar.
Paragraph 32(a)(2)
1. Exemption limited. Section 1026.32(a)(2) lists certain
transactions exempt from the provisions of Sec. 1026.32.
Nevertheless, those transactions may be subject to the provisions of
Sec. 1026.35, including any provisions of Sec. 1026.32 to which
Sec. 1026.35 refers. See Sec. 1026.35(a).
32(b) Definitions
Paragraph 32(b)(1)(i)
1. General. Section 1026.32(b)(1)(i) includes in the total
``points and fees'' items defined as finance charges under
Sec. Sec. 1026.4(a) and 1026.(4)(b). Items excluded from the
finance charge under other provisions of Sec. 1026.4 are not
included in the total ``points and fees'' under paragraph
32(b)(1)(i), but may be included in ``points and fees'' under
paragraphs 32(b)(1)(ii) and 32(b)(1)(iii). Interest, including per-
diem interest, is excluded from ``points and fees'' under Sec.
1026.32(b)(1).
Paragraph 32(b)(1)(ii)
1. Mortgage broker fees. In determining ``points and fees'' for
purposes of this section, compensation paid by a consumer to a
mortgage broker (directly or through the creditor for delivery to
the broker) is included in the calculation whether or not the amount
is disclosed as a finance charge. Mortgage broker fees that are not
paid by the consumer are not included. Mortgage broker fees already
included in the calculation as finance charges under Sec.
1026.32(b)(1)(i) need not be counted again under Sec.
1026.32(b)(1)(ii).
2. Example. Section 1026.32(b)(1)(iii) defines ``points and
fees'' to include all items listed in Sec. 1026.4(c)(7), other than
amounts held for the future payment of taxes. An item listed in
Sec. 1026.4(c)(7) may be excluded from the ``points and fees''
calculation, however, if the charge is reasonable, the creditor
receives no direct or indirect compensation from the charge, and the
charge is not paid to an affiliate of the creditor. For example, a
reasonable fee paid by the consumer to an independent, third-party
appraiser may be excluded from the ``points and fees'' calculation
(assuming no compensation is paid to the creditor). A fee paid by
the consumer for an appraisal performed by the creditor must be
included in the calculation, even though the fee may be excluded
from the finance charge if it is bona fide and reasonable in amount.
Paragraph 32(b)(1)(iv)
1. Premium amount. In determining ``points and fees'' for
purposes of this section, premiums paid at or before closing for
credit insurance are included whether they are paid in cash or
financed, and whether the amount represents the entire premium for
the coverage or an initial payment.
32(c) Disclosures
1. Format. The disclosures must be clear and conspicuous but
need not be in any particular type size or typeface, nor presented
in any particular manner. The disclosures need not be a part of the
note or mortgage document.
32(c)(3) Regular Payment; Balloon Payment
1. General. The regular payment is the amount due from the
borrower at regular intervals, such as monthly, bimonthly,
quarterly, or annually. There must be at least two payments, and the
payments must be in an amount and at such intervals that they fully
amortize the amount owed. In disclosing the regular payment,
creditors may rely on the rules set forth in Sec. 1026.18(g);
however, the amounts for voluntary items, such as credit life
insurance, may be included in the regular payment disclosure only if
the consumer has previously agreed to the amounts.
i. If the loan has more than one payment level, the regular
payment for each level must be disclosed. For example:
A. In a 30-year graduated payment mortgage where there will be
payments of $300 for the first 120 months, $400 for the next 120
months, and $500 for the last 120 months, each payment amount must
be disclosed, along with the length of time that the payment will be
in effect.
B. If interest and principal are paid at different times, the
regular amount for each must be disclosed.
C. In discounted or premium variable-rate transactions where the
creditor sets the initial interest rate and later rate adjustments
are determined by an index or formula, the creditor must disclose
both the initial payment based on the discount or premium and the
payment that will be in effect thereafter. Additional explanatory
material which does not detract from the required disclosures may
accompany the disclosed amounts. For example, if a monthly payment
is $250 for the first six months and then increases based on an
index and margin, the creditor could use language such as the
following: ``Your regular monthly payment will be $250 for six
months. After six months your regular monthly payment will be based
on an index and margin, which currently would make your payment
$350. Your actual payment at that time may be higher or lower.''
32(c)(4) Variable-Rate
1. Calculating ``worst-case'' payment example. Creditors may
rely on instructions in Sec. 1026.19(b)(2)(viii)(B) for calculating
the maximum possible increases in rates in the shortest possible
timeframe, based on the face amount of the note (not the
hypothetical loan amount of $10,000 required by Sec.
1026.19(b)(2)(viii)(B)). The creditor must provide a maximum payment
for each payment level, where a payment schedule provides for more
than one payment level and more than one maximum payment amount is
possible.
32(c)(5) Amount Borrowed
1. Optional insurance; debt-cancellation coverage. This
disclosure is required when the amount borrowed in a refinancing
[[Page 80007]]
includes premiums or other charges for credit life, accident,
health, or loss-of-income insurance, or debt-cancellation coverage
(whether or not the debt-cancellation coverage is insurance under
applicable law) that provides for cancellation of all or part of the
consumer's liability in the event of the loss of life, health, or
income or in the case of accident. See comment 4(d)(3)-2 and comment
app. G and H-2 regarding terminology for debt-cancellation coverage.
32(d) Limitations
1. Additional prohibitions applicable under other sections.
Section 1026.34 sets forth certain prohibitions in connection with
mortgage credit subject to Sec. 1026.32, in addition to the
limitations in Sec. 1026.32(d). Further, Sec. 1026.35(b) prohibits
certain practices in connection with transactions that meet the
coverage test in Sec. 1026.35(a). Because the coverage test in
Sec. 1026.35(a) is generally broader than the coverage test in
Sec. 1026.32(a), most Sec. 1026.32 mortgage loans are also subject
to the prohibitions set forth in Sec. 1026.35(b) (such as escrows),
in addition to the limitations in Sec. 1026.32(d).
32(d)(1)(i) Balloon Payment
1. Regular periodic payments. The repayment schedule for a Sec.
1026.32 mortgage loan with a term of less than five years must fully
amortize the outstanding principal balance through ``regular
periodic payments.'' A payment is a ``regular periodic payment'' if
it is not more than twice the amount of other payments.
32(d)(2) Negative Amortization
1. Negative amortization. The prohibition against negative
amortization in a mortgage covered by Sec. 1026.32 does not
preclude reasonable increases in the principal balance that result
from events permitted by the legal obligation unrelated to the
payment schedule. For example, when a consumer fails to obtain
property insurance and the creditor purchases insurance, the
creditor may add a reasonable premium to the consumer's principal
balance, to the extent permitted by the legal obligation.
32(d)(4) Increased Interest Rate
1. Variable-rate transactions. The limitation on interest rate
increases does not apply to rate increases resulting from changes in
accordance with the legal obligation in a variable-rate transaction,
even if the increase occurs after default by the consumer.
32(d)(5) Rebates
1. Calculation of refunds. The limitation applies only to
refunds of precomputed (such as add-on) interest and not to any
other charges that are considered finance charges under Sec. 1026.4
(for example, points and fees paid at closing). The calculation of
the refund of interest includes odd-days interest, whether paid at
or after consummation.
32(d)(6) Prepayment Penalties
1. State law. For purposes of computing a refund of unearned
interest, if using the actuarial method defined by applicable state
law results in a refund that is greater than the refund calculated
by using the method described in section 933(d) of the Housing and
Community Development Act of 1992, creditors should use the state
law definition in determining if a refund is a prepayment penalty.
32(d)(7) Prepayment Penalty Exception
Paragraph 32(d)(7)(iii)
1. Calculating debt-to-income ratio. ``Debt'' does not include
amounts paid by the borrower in cash at closing or amounts from the
loan proceeds that directly repay an existing debt. Creditors may
consider combined debt-to-income ratios for transactions involving
joint applicants. For more information about obligations and inflows
that may constitute ``debt'' or ``income'' for purposes of Sec.
1026.32(d)(7)(iii), see comment 34(a)(4)-6 and comment
34(a)(4)(iii)(C)-1.
2. Verification. Creditors shall verify income in the manner
described in Sec. 1026.34(a)(4)(ii) and the related comments.
Creditors may verify debt with a credit report. However, a credit
report may not reflect certain obligations undertaken just before or
at consummation of the transaction and secured by the same dwelling
that secures the transaction. Section 1026.34(a)(4) may require
creditors to consider such obligations; see comment 34(a)(4)-3 and
comment 34(a)(4)(ii)(C)-1.
3. Interaction with Regulation B. Section 1026.32(d)(7)(iii)
does not require or permit the creditor to make inquiries or
verifications that would be prohibited by Regulation B, 12 CFR part
1002.
Paragraph 32(d)(7)(iv)
1. Payment change. Section 1026.32(d)(7) sets forth the
conditions under which a mortgage transaction subject to this
section may have a prepayment penalty. Section 1026.32(d)(7)(iv)
lists as a condition that the amount of the periodic payment of
principal or interest or both may not change during the four-year
period following consummation. The following examples show whether
prepayment penalties are permitted or prohibited under Sec.
1026.32(d)(7)(iv) in particular circumstances.
i. Initial payments for a variable-rate transaction consummated
on January 1, 2010 are $1,000 per month. Under the loan agreement,
the first possible date that a payment in a different amount may be
due is January 1, 2014. A prepayment penalty is permitted with this
mortgage transaction provided that the other Sec. 1026.32(d)(7)
conditions are met, that is: provided that the prepayment penalty is
permitted by other applicable law, the penalty expires on or before
December 31, 2011, the penalty will not apply if the source of the
prepayment funds is a refinancing by the creditor or its affiliate,
and at consummation the consumer's total monthly debts do not exceed
50 percent of the consumer's monthly gross income, as verified.
ii. Initial payments for a variable-rate transaction consummated
on January 1, 2010 are $1,000 per month. Under the loan agreement,
the first possible date that a payment in a different amount may be
due is December 31, 2013. A prepayment penalty is prohibited with
this mortgage transaction because the payment may change within the
four-year period following consummation.
iii. Initial payments for a graduated-payment transaction
consummated on January 1, 2010 are $1,000 per month. Under the loan
agreement, the first possible date that a payment in a different
amount may be due is January 1, 2014. A prepayment penalty is
permitted with this mortgage transaction provided that the other
Sec. 1026.32(d)(7) conditions are met, that is: provided that the
prepayment penalty is permitted by other applicable law, the penalty
expires on or before December 31, 2011, the penalty will not apply
if the source of the prepayment funds is a refinancing by the
creditor or its affiliate, and at consummation the consumer's total
monthly debts do not exceed 50 percent of the consumer's monthly
gross income, as verified.
iv. Initial payments for a step-rate transaction consummated on
January 1, 2010 are $1,000 per month. Under the loan agreement, the
first possible date that a payment in a different amount may be due
is December 31, 2013. A prepayment penalty is prohibited with this
mortgage transaction because the payment may change within the four-
year period following consummation.
2. Payment changes excluded. Payment changes due to the
following circumstances are not considered payment changes for
purposes of this section:
i. A change in the amount of a periodic payment that is
allocated to principal or interest that does not change the total
amount of the periodic payment.
ii. The borrower's actual unanticipated late payment,
delinquency, or default; and
iii. The borrower's voluntary payment of additional amounts (for
example when a consumer chooses to make a payment of interest and
principal on a loan that only requires the consumer to pay
interest).
32(d)(8) Due-on-Demand Clause
Paragraph 32(d)(8)(ii)
1. Failure to meet repayment terms. A creditor may terminate a
loan and accelerate the balance when the consumer fails to meet the
repayment terms provided for in the agreement; a creditor may do so,
however, only if the consumer actually fails to make payments. For
example, a creditor may not terminate and accelerate if the
consumer, in error, sends a payment to the wrong location, such as a
branch rather than the main office of the creditor. If a consumer
files for or is placed in bankruptcy, the creditor may terminate and
accelerate under this provision if the consumer fails to meet the
repayment terms of the agreement. Section 1026.32(d)(8)(ii) does not
override any state or other law that requires a creditor to notify a
borrower of a right to cure, or otherwise places a duty on the
creditor before it can terminate a loan and accelerate the balance.
Paragraph 32(d)(8)(iii)
1. Impairment of security. A creditor may terminate a loan and
accelerate the balance if the consumer's action or inaction
adversely affects the creditor's security for the loan, or any right
of the creditor in that security. Action or inaction by third
parties does not, in itself, permit the creditor to terminate and
accelerate.
2. Examples. i. A creditor may terminate and accelerate, for
example, if:
[[Page 80008]]
A. The consumer transfers title to the property or sells the
property without the permission of the creditor.
B. The consumer fails to maintain required insurance on the
dwelling.
C. The consumer fails to pay taxes on the property.
D. The consumer permits the filing of a lien senior to that held
by the creditor.
E. The sole consumer obligated on the credit dies.
F. The property is taken through eminent domain.
G. A prior lienholder forecloses.
ii. By contrast, the filing of a judgment against the consumer
would permit termination and acceleration only if the amount of the
judgment and collateral subject to the judgment is such that the
creditor's security is adversely affected. If the consumer commits
waste or otherwise destructively uses or fails to maintain the
property such that the action adversely affects the security, the
loan may be terminated and the balance accelerated. Illegal use of
the property by the consumer would permit termination and
acceleration if it subjects the property to seizure. If one of two
consumers obligated on a loan dies, the creditor may terminate the
loan and accelerate the balance if the security is adversely
affected. If the consumer moves out of the dwelling that secures the
loan and that action adversely affects the security, the creditor
may terminate a loan and accelerate the balance.
Section 1026.33--Requirements for Reverse Mortgages
33(a) Definition
1. Nonrecourse transaction. A nonrecourse reverse mortgage
transaction limits the homeowner's liability to the proceeds of the
sale of the home (or any lesser amount specified in the credit
obligation). If a transaction structured as a closed-end reverse
mortgage transaction allows recourse against the consumer, and the
annual percentage rate or the points and fees exceed those specified
under Sec. 1026.32(a)(1), the transaction is subject to all the
requirements of Sec. 1026.32, including the limitations concerning
balloon payments and negative amortization.
Paragraph 33(a)(2)
1. Default. Default is not defined by the statute or regulation,
but rather by the legal obligation between the parties and state or
other law.
2. Definite term or maturity date. To meet the definition of a
reverse mortgage transaction, a creditor cannot require any
principal, interest, or shared appreciation or equity to be due and
payable (other than in the case of default) until after the
consumer's death, transfer of the dwelling, or the consumer ceases
to occupy the dwelling as a principal dwelling. Some state laws
require legal obligations secured by a mortgage to specify a
definite maturity date or term of repayment in the instrument. An
obligation may state a definite maturity date or term of repayment
and still meet the definition of a reverse-mortgage transaction if
the maturity date or term of repayment used would not operate to
cause maturity prior to the occurrence of any of the maturity events
recognized in the regulation. For example, some reverse mortgage
programs specify that the final maturity date is the borrower's
150th birthday; other programs include a shorter term but provide
that the term is automatically extended for consecutive periods if
none of the other maturity events has yet occurred. These programs
would be permissible.
33(c) Projected Total Cost of Credit
33(c)(1) Costs to Consumer
1. Costs and charges to consumer--relation to finance charge.
All costs and charges to the consumer that are incurred in a reverse
mortgage transaction are included in the projected total cost of
credit, and thus in the total annual loan cost rates, whether or not
the cost or charge is a finance charge under Sec. 1026.4.
2. Annuity costs. As part of the credit transaction, some
creditors require or permit a consumer to purchase an annuity that
immediately--or at some future time--supplements or replaces the
creditor's payments. The amount paid by the consumer for the annuity
is a cost to the consumer under this section, regardless of whether
the annuity is purchased through the creditor or a third party, or
whether the purchase is mandatory or voluntary. For example, this
includes the costs of an annuity that a creditor offers, arranges,
assists the consumer in purchasing, or that the creditor is aware
the consumer is purchasing as a part of the transaction.
3. Disposition costs excluded. Disposition costs incurred in
connection with the sale or transfer of the property subject to the
reverse mortgage are not included in the costs to the consumer under
this paragraph. (However, see the definition of Valnin
Appendix K to the regulation to determine the effect certain
disposition costs may have on the total annual loan cost rates.)
Paragraph 33(c)(2) Payments to Consumer
1. Payments upon a specified event. The projected total cost of
credit should not reflect contingent payments in which a credit to
the outstanding loan balance or a payment to the consumer's estate
is made upon the occurrence of an event (for example, a ``death
benefit'' payable if the consumer's death occurs within a certain
period of time). Thus, the table of total annual loan cost rates
required under Sec. 1026.33(b)(2) would not reflect such payments.
At its option, however, a creditor may put an asterisk, footnote, or
similar type of notation in the table next to the applicable total
annual loan cost rate, and state in the body of the note, apart from
the table, the assumption upon which the total annual loan cost is
made and any different rate that would apply if the contingent
benefit were paid.
33(c)(3) Additional Creditor Compensation
1. Shared appreciation or equity. Any shared appreciation or
equity that the creditor is entitled to receive pursuant to the
legal obligation must be included in the total cost of a reverse
mortgage loan. For example, if a creditor agrees to a reduced
interest rate on the transaction in exchange for a portion of the
appreciation or equity that may be realized when the dwelling is
sold, that portion is included in the projected total cost of
credit.
33(c)(4) Limitations on Consumer Liability
1. In general. Creditors must include any limitation on the
consumer's liability (such as a nonrecourse limit or an equity
conservation agreement) in the projected total cost of credit. These
limits and agreements protect a portion of the equity in the
dwelling for the consumer or the consumer's estate. For example, the
following are limitations on the consumer's liability that must be
included in the projected total cost of credit:
i. A limit on the consumer's liability to a certain percentage
of the projected value of the home.
ii. A limit on the consumer's liability to the net proceeds from
the sale of the property subject to the reverse mortgage.
2. Uniform assumption for ``net proceeds'' recourse limitations.
If the legal obligation between the parties does not specify a
percentage for the ``net proceeds'' liability of the consumer, for
purposes of the disclosures required by Sec. 1026.33, a creditor
must assume that the costs associated with selling the property will
equal 7 percent of the projected sale price (see the definition of
the Valn symbol under Appendix K(b)(6)).
Section 1026.34--Prohibited Acts or Practices in Connection With
High-Cost Mortgages
34(a) Prohibited Acts or Practices for High-Cost Mortgages
34(a)(1) Home-Improvement Contracts
Paragraph 34(a)(1)(i)
1. Joint payees. If a creditor pays a contractor with an
instrument jointly payable to the contractor and the consumer, the
instrument must name as payee each consumer who is primarily
obligated on the note.
34(a)(2) Notice to Assignee
1. Subsequent sellers or assignors. Any person, whether or not
the original creditor, that sells or assigns a mortgage subject to
Sec. 1026.32 must furnish the notice of potential liability to the
purchaser or assignee.
2. Format. While the notice of potential liability need not be
in any particular format, the notice must be prominent. Placing it
on the face of the note, such as with a stamp, is one means of
satisfying the prominence requirement.
3. Assignee liability. Pursuant to section 131(d) of the Act,
the Act's general holder-in-due course protections do not apply to
purchasers and assignees of loans covered by Sec. 1026.32. For such
loans, a purchaser's or other assignee's liability for all claims
and defenses that the consumer could assert against the creditor is
not limited to violations of the Act.
34(a)(3) Refinancings Within One-Year Period
1. In the borrower's interest. The determination of whether or
not a refinancing covered by Sec. 1026.34(a)(3) is in the
borrower's interest is based on the totality of the circumstances,
at the time the credit is
[[Page 80009]]
extended. A written statement by the borrower that ``this loan is in
my interest'' alone does not meet this standard.
i. A refinancing would be in the borrower's interest if needed
to meet the borrower's ``bona fide personal financial emergency''
(see generally Sec. 1026.23(e) and Sec. 1026.31(c)(1)(iii)).
ii. In connection with a refinancing that provides additional
funds to the borrower, in determining whether a loan is in the
borrower's interest consideration should be given to whether the
loan fees and charges are commensurate with the amount of new funds
advanced, and whether the real estate-related charges are bona fide
and reasonable in amount (see generally Sec. 1026.4(c)(7)).
2. Application of the one-year refinancing prohibition to
creditors and assignees. The prohibition in Sec. 1026.34(a)(3)
applies where an extension of credit subject to Sec. 1026.32 is
refinanced into another loan subject to Sec. 1026.32. The
prohibition is illustrated by the following examples. Assume that
Creditor A makes a loan subject to Sec. 1026.32 on January 15,
2003, secured by a first lien; this loan is assigned to Creditor B
on February 15, 2003:
i. Creditor A is prohibited from refinancing the January 2003
loan (or any other loan subject to Sec. 1026.32 to the same
borrower) into a loan subject to Sec. 1026.32, until January 15,
2004. Creditor B is restricted until January 15, 2004, or such date
prior to January 15, 2004 that Creditor B ceases to hold or service
the loan. During the prohibition period, Creditors A and B may make
a subordinate lien loan that does not refinance a loan subject to
Sec. 1026.32. Assume that on April 1, 2003, Creditor A makes but
does not assign a second-lien loan subject to Sec. 1026.32. In that
case, Creditor A would be prohibited from refinancing either the
first-lien or second-lien loans (or any other loans to that borrower
subject to Sec. 1026.32) into another loan subject to Sec. 1026.32
until April 1, 2004.
ii. The loan made by Creditor A on January 15, 2003 (and
assigned to Creditor B) may be refinanced by Creditor C at any time.
If Creditor C refinances this loan on March 1, 2003 into a new loan
subject to Sec. 1026.32, Creditor A is prohibited from refinancing
the loan made by Creditor C (or any other loan subject to Sec.
1026.32 to the same borrower) into another loan subject to Sec.
1026.32 until January 15, 2004. Creditor C is similarly prohibited
from refinancing any loan subject to Sec. 1026.32 to that borrower
into another until March 1, 2004. (The limitations of Sec.
1026.34(a)(3) no longer apply to Creditor B after Creditor C
refinanced the January 2003 loan and Creditor B ceased to hold or
service the loan.)
34(a)(4) Repayment Ability
1. Application of repayment ability rule. The Sec.
1026.34(a)(4) prohibition against making loans without regard to
consumers' repayment ability applies to mortgage loans described in
Sec. 1026.32(a). In addition, the Sec. 1026.34(a)(4) prohibition
applies to higher-priced mortgage loans described in Sec.
1026.35(a). See Sec. 1026.35(b)(1).
2. General prohibition. Section 1026.34(a)(4) prohibits a
creditor from extending credit subject to Sec. 1026.32 to a
consumer based on the value of the consumer's collateral without
regard to the consumer's repayment ability as of consummation,
including the consumer's current and reasonably expected income,
employment, assets other than the collateral, current obligations,
and property tax and insurance obligations. A creditor may base its
determination of repayment ability on current or reasonably expected
income from employment or other sources, on assets other than the
collateral, or both.
3. Other dwelling-secured obligations. For purposes of Sec.
1026.34(a)(4), current obligations include another credit obligation
of which the creditor has knowledge undertaken prior to or at
consummation of the transaction and secured by the same dwelling
that secures the transaction subject to Sec. 1026.32 or Sec.
1026.35. For example, where a transaction subject to Sec. 1026.35
is a first-lien transaction for the purchase of a home, a creditor
must consider a ``piggyback'' second-lien transaction of which it
has knowledge that is used to finance part of the down payment on
the house.
4. Discounted introductory rates and non-amortizing or
negatively-amortizing payments. A credit agreement may determine a
consumer's initial payments using a temporarily discounted interest
rate or permit the consumer to make initial payments that are non-
amortizing or negatively amortizing. (Negative amortization is
permissible for loans covered by Sec. 1026.35(a), but not Sec.
1026.32). In such cases the creditor may determine repayment ability
using the assumptions provided in Sec. 1026.34(a)(4)(iv).
5. Repayment ability as of consummation. Section 1026.34(a)(4)
prohibits a creditor from disregarding repayment ability based on
the facts and circumstances known to the creditor as of
consummation. In general, a creditor does not violate this provision
if a consumer defaults because of a significant reduction in income
(for example, a job loss) or a significant obligation (for example,
an obligation arising from a major medical expense) that occurs
after consummation. However, if a creditor has knowledge as of
consummation of reductions in income, for example, if a consumer's
written application states that the consumer plans to retire within
twelve months without obtaining new employment, or states that the
consumer will transition from full-time to part-time employment, the
creditor must consider that information.
6. Income, assets, and employment. Any current or reasonably
expected assets or income may be considered by the creditor, except
the collateral itself. For example, a creditor may use information
about current or expected salary, wages, bonus pay, tips, and
commissions. Employment may be full-time, part-time, seasonal,
irregular, military, or self-employment. Other sources of income
could include interest or dividends; retirement benefits; public
assistance; and alimony, child support, or separate maintenance
payments. A creditor may also take into account assets such as
savings accounts or investments that the consumer can or will be
able to use.
7. Interaction with Regulation B. Section 1026.34(a)(4) does not
require or permit the creditor to make inquiries or verifications
that would be prohibited by Regulation B, 12 CFR part 1002.
34(a)(4)(i) Mortgage-Related Obligations
1. Mortgage-related obligations. A creditor must include in its
repayment ability analysis the expected property taxes and premiums
for mortgage-related insurance required by the creditor as set forth
in Sec. 1026.35(b)(3)(i), as well as similar mortgage-related
expenses. Similar mortgage-related expenses include homeowners'
association dues and condominium or cooperative fees.
34(a)(4)(ii) Verification of Repayment Ability
1. Income and assets relied on. A creditor must verify the
income and assets the creditor relies on to evaluate the consumer's
repayment ability. For example, if a consumer earns a salary and
also states that he or she is paid an annual bonus, but the creditor
only relies on the applicant's salary to evaluate repayment ability,
the creditor need only verify the salary.
2. Income and assets--co-applicant. If two persons jointly apply
for credit and both list income or assets on the application, the
creditor must verify repayment ability with respect to both
applicants unless the creditor relies only on the income or assets
of one of the applicants in determining repayment ability.
3. Expected income. If a creditor relies on expected income, the
expectation must be reasonable and it must be verified with third-
party documents that provide reasonably reliable evidence of the
consumer's expected income. For example, if the creditor relies on
an expectation that a consumer will receive an annual bonus, the
creditor may verify the basis for that expectation with documents
that show the consumer's past annual bonuses and the expected bonus
must bear a reasonable relationship to past bonuses. Similarly, if
the creditor relies on a consumer's expected salary following the
consumer's receipt of an educational degree, the creditor may verify
that expectation with a written statement from an employer
indicating that the consumer will be employed upon graduation at a
specified salary.
Paragraph 34(a)(4)(ii)(A)
1. Internal Revenue Service (IRS) Form W-2. A creditor may
verify a consumer's income using a consumer's IRS Form W-2 (or any
subsequent revisions or similar IRS Forms used for reporting wages
and tax withholding). The creditor may also use an electronic
retrieval service for obtaining the consumer's W-2 information.
2. Tax returns. A creditor may verify a consumer's income or
assets using the consumer's tax return. A creditor may also use IRS
Form 4506 ``Request for Copy of Tax Return,'' Form 4506-T ``Request
for Transcript of Tax Return,'' or Form 8821 ``Tax Information
Authorization'' (or any subsequent revisions or similar IRS Forms
appropriate for obtaining tax return information directly from the
IRS) to verify the consumer's income or assets. The creditor may
also use an electronic retrieval service for obtaining tax return
information.
[[Page 80010]]
3. Other third-party documents that provide reasonably reliable
evidence of consumer's income or assets. Creditors may verify income
and assets using documents produced by third parties. Creditors may
not rely on information provided orally by third parties, but may
rely on correspondence from the third party, such as by letter or
email. The creditor may rely on any third-party document that
provides reasonably reliable evidence of the consumer's income or
assets. For example, creditors may verify the consumer's income
using receipts from a check-cashing or remittance service, or by
obtaining a written statement from the consumer's employer that
states the consumer's income.
4. Information specific to the consumer. Creditors must verify a
consumer's income or assets using information that is specific to
the individual consumer. Creditors may use third-party databases
that contain individual-specific data about a consumer's income or
assets, such as a third-party database service used by the
consumer's employer for the purpose of centralizing income
verification requests, so long as the information is reasonably
current and accurate. Information about average incomes for the
consumer's occupation in the consumer's geographic location or
information about average incomes paid by the consumer's employer,
however, would not be specific to the individual consumer.
5. Duplicative collection of documentation. A creditor that has
made a loan to a consumer and is refinancing or extending new credit
to the same consumer need not collect from the consumer a document
the creditor previously obtained if the creditor has no information
that would reasonably lead the creditor to believe that document has
changed since it was initially collected. For example, if the
creditor has obtained the consumer's 2006 tax return to make a home
purchase loan in May 2007, the creditor may rely on the 2006 tax
return if the creditor makes a home equity loan to the same consumer
in August 2007. Similarly, if the creditor has obtained the
consumer's bank statement for May 2007 in making the first loan, the
creditor may rely on that bank statement for that month in making
the subsequent loan in August 2007.
Paragraph 34(a)(4)(ii)(B)
1. No violation if income or assets relied on not materially
greater than verifiable amounts. A creditor that does not verify
income or assets used to determine repayment ability with reasonably
reliable third-party documents does not violate Sec.
1026.34(a)(4)(ii) if the creditor demonstrates that the income or
assets it relied upon were not materially greater than the amounts
that the creditor would have been able to verify pursuant to Sec.
1026.34(a)(4)(ii). For example, if a creditor determines a
consumer's repayment ability by relying on the consumer's annual
income of $40,000 but fails to obtain documentation of that amount
before extending the credit, the creditor will not have violated
this section if the creditor later obtains evidence that would
satisfy Sec. 1026.34(a)(4)(ii)(A), such as tax return information,
showing that the creditor could have documented, at the time the
loan was consummated, that the consumer had an annual income not
materially less than $40,000.
2. Materially greater than. Amounts of income or assets relied
on are not materially greater than amounts that could have been
verified at consummation if relying on the verifiable amounts would
not have altered a reasonable creditor's decision to extend credit
or the terms of the credit.
Paragraph 34(a)(4)(ii)(C)
1. In general. A credit report may be used to verify current
obligations. A credit report, however, might not reflect an
obligation that a consumer has listed on an application. The
creditor is responsible for considering such an obligation, but the
creditor is not required to independently verify the obligation.
Similarly, a creditor is responsible for considering certain
obligations undertaken just before or at consummation of the
transaction and secured by the same dwelling that secures the
transaction (for example, a ``piggy back'' loan), of which the
creditor knows, even if not reflected on a credit report. See
comment 34(a)(4)-3.
34(a)(4)(iii) Presumption of Compliance
1. In general. A creditor is presumed to have complied with
Sec. 1026.34(a)(4) if the creditor follows the three underwriting
procedures specified in paragraph 34(a)(4)(iii) for verifying
repayment ability, determining the payment obligation, and measuring
the relationship of obligations to income. The procedures for
verifying repayment ability are required under paragraph
34(a)(4)(ii); the other procedures are not required but, if followed
along with the required procedures, create a presumption that the
creditor has complied with Sec. 1026.34(a)(4). The consumer may
rebut the presumption with evidence that the creditor nonetheless
disregarded repayment ability despite following these procedures.
For example, evidence of a very high debt-to-income ratio and a very
limited residual income could be sufficient to rebut the
presumption, depending on all of the facts and circumstances. If a
creditor fails to follow one of the non-required procedures set
forth in paragraph 34(a)(4)(iii), then the creditor's compliance is
determined based on all of the facts and circumstances without there
being a presumption of either compliance or violation.
Paragraph 34(a)(4)(iii)(B)
1. Determination of payment schedule. To retain a presumption of
compliance under Sec. 1026.34(a)(4)(iii), a creditor must determine
the consumer's ability to pay the principal and interest obligation
based on the maximum scheduled payment in the first seven years
following consummation. In general, a creditor should determine a
payment schedule for purposes of Sec. 1026.34(a)(4)(iii)(B) based
on the guidance in the commentary to Sec. 1026.17(c)(1). Examples
of how to determine the maximum scheduled payment in the first seven
years are provided as follows (all payment amounts are rounded):
i. Balloon-payment loan; fixed interest rate. A loan in an
amount of $100,000 with a fixed interest rate of 8.0 percent (no
points) has a 7-year term but is amortized over 30 years. The
monthly payment scheduled for 7 years is $733 with a balloon payment
of remaining principal due at the end of 7 years. The creditor will
retain the presumption of compliance if it assesses repayment
ability based on the payment of $733.
ii. Fixed-rate loan with interest-only payment for five years. A
loan in an amount of $100,000 with a fixed interest rate of 8.0
percent (no points) has a 30-year term. The monthly payment of $667
scheduled for the first 5 years would cover only the interest due.
After the fifth year, the scheduled payment would increase to $772,
an amount that fully amortizes the principal balance over the
remaining 25 years. The creditor will retain the presumption of
compliance if it assesses repayment ability based on the payment of
$772.
iii. Fixed-rate loan with interest-only payment for seven years.
A loan in an amount of $100,000 with a fixed interest rate of 8.0
percent (no points) has a 30-year term. The monthly payment of $667
scheduled for the first 7 years would cover only the interest due.
After the seventh year, the scheduled payment would increase to
$793, an amount that fully amortizes the principal balance over the
remaining 23 years. The creditor will retain the presumption of
compliance if it assesses repayment ability based on the interest-
only payment of $667.
iv. Variable-rate loan with discount for five years. A loan in
an amount of $100,000 has a 30-year term. The loan agreement
provides for a fixed interest rate of 7.0 percent for an initial
period of 5 years. Accordingly, the payment scheduled for the first
5 years is $665. The agreement provides that, after 5 years, the
interest rate will adjust each year based on a specified index and
margin. As of consummation, the sum of the index value and margin
(the fully-indexed rate) is 8.0 percent. Accordingly, the payment
scheduled for the remaining 25 years is $727. The creditor will
retain the presumption of compliance if it assesses repayment
ability based on the payment of $727.
v. Variable-rate loan with discount for seven years. A loan in
an amount of $100,000 has a 30-year term. The loan agreement
provides for a fixed interest rate of 7.125 percent for an initial
period of 7 years. Accordingly, the payment scheduled for the first
7 years is $674. After 7 years, the agreement provides that the
interest rate will adjust each year based on a specified index and
margin. As of consummation, the sum of the index value and margin
(the fully-indexed rate) is 8.0 percent. Accordingly, the payment
scheduled for the remaining years is $725. The creditor will retain
the presumption of compliance if it assesses repayment ability based
on the payment of $674.
vi. Step-rate loan. A loan in an amount of $100,000 has a 30-
year term. The agreement provides that the interest rate will be 5
percent for two years, 6 percent for three years, and 7 percent
thereafter. Accordingly, the payment amounts are $537 for two years,
$597 for three years, and $654 thereafter. To retain the presumption
of compliance, the creditor must assess repayment ability based on
the payment of $654.
[[Page 80011]]
Paragraph 34(a)(4)(iii)(C)
1. ``Income'' and ``debt''. To determine whether to classify
particular inflows or obligations as ``income'' or ``debt,''
creditors may look to widely accepted governmental and non-
governmental underwriting standards, including, for example, those
set forth in the Federal Housing Administration's handbook on
Mortgage Credit Analysis for Mortgage Insurance.
34(a)(4)(iv) Exclusions From Presumption of Compliance
1. In general. The exclusions from the presumption of compliance
should be interpreted consistent with comments 32(d)(1)(i)-1 and
32(d)(2)-1.
2. Renewable balloon loan. If a creditor is unconditionally
obligated to renew a balloon-payment loan at the consumer's option
(or is obligated to renew subject to conditions within the
consumer's control), the full term resulting from such renewal is
the relevant term for purposes of the exclusion of certain balloon-
payment loans. See comment 17(c)(1)-11 for a discussion of
conditions within a consumer's control in connection with renewable
balloon-payment loans.
34(b) Prohibited Acts or Practices for Dwelling-Secured Loans; Open-End
Credit
1. Amount of credit extended. Where a loan is documented as
open-end credit but the features and terms or other circumstances
demonstrate that it does not meet the definition of open-end credit,
the loan is subject to the rules for closed-end credit, including
Sec. 1026.32 if the rate or fee trigger is met. In applying the
triggers under Sec. 1026.32, the ``amount financed,'' including the
``principal loan amount'' must be determined. In making the
determination, the amount of credit that would have been extended if
the loan had been documented as a closed-end loan is a factual
determination to be made in each case. Factors to be considered
include the amount of money the consumer originally requested, the
amount of the first advance or the highest outstanding balance, or
the amount of the credit line. The full amount of the credit line is
considered only to the extent that it is reasonable to expect that
the consumer might use the full amount of credit.
Section 1026.35--Prohibited Acts or Practices in Connection With
Higher-Priced Mortgage Loans
35(a) Higher-Priced Mortgage Loans
Paragraph 35(a)(2)
1. Average prime offer rate. Average prime offer rates are
annual percentage rates derived from average interest rates, points,
and other loan pricing terms currently offered to consumers by a
representative sample of creditors for mortgage transactions that
have low-risk pricing characteristics. Other pricing terms include
commonly used indices, margins, and initial fixed-rate periods for
variable-rate transactions. Relevant pricing characteristics include
a consumer's credit history and transaction characteristics such as
the loan-to-value ratio, owner-occupant status, and purpose of the
transaction. To obtain average prime offer rates, the Bureau uses a
survey of creditors that both meets the criteria of Sec.
1026.35(a)(2) and provides pricing terms for at least two types of
variable-rate transactions and at least two types of non-variable-
rate transactions. An example of such a survey is the Freddie Mac
Primary Mortgage Market Survey[supreg].
2. Comparable transaction. A higher-priced mortgage loan is a
consumer credit transaction secured by the consumer's principal
dwelling with an annual percentage rate that exceeds the average
prime offer rate for a comparable transaction as of the date the
interest rate is set by the specified margin. The table of average
prime offer rates published by the Bureau indicates how to identify
the comparable transaction.
3. Rate set. A transaction's annual percentage rate is compared
to the average prime offer rate as of the date the transaction's
interest rate is set (or ``locked'') before consummation. Sometimes
a creditor sets the interest rate initially and then re-sets it at a
different level before consummation. The creditor should use the
last date the interest rate is set before consummation.
4. Bureau table. The Bureau publishes on the Internet, in table
form, average prime offer rates for a wide variety of transaction
types. The Bureau calculates an annual percentage rate, consistent
with Regulation Z (see Sec. 1026.22 and Appendix J), for each
transaction type for which pricing terms are available from a
survey. The Bureau estimates annual percentage rates for other types
of transactions for which direct survey data are not available based
on the loan pricing terms available in the survey and other
information. The Bureau publishes on the Internet the methodology it
uses to arrive at these estimates.
35(b) Rules for Higher-Priced Mortgage Loans
1. Effective date. For guidance on the applicability of the
rules in Sec. 1026.35(b), see comment 1(d)(5)-1.
Paragraph 35(b)(2)(ii)(C)
1. Payment change. Section 1026.35(b)(2) provides that a loan
subject to this section may not have a penalty described by Sec.
1026.32(d)(6) unless certain conditions are met. Section
1026.35(b)(2)(ii)(C) lists as a condition that the amount of the
periodic payment of principal or interest or both may not change
during the four-year period following consummation. For examples
showing whether a prepayment penalty is permitted or prohibited in
connection with particular payment changes, see comment
32(d)(7)(iv)-1. Those examples, however, include a condition that
Sec. 1026.35(b)(2) does not include: the condition that, at
consummation, the consumer's total monthly debt payments may not
exceed 50 percent of the consumer's monthly gross income. For
guidance about circumstances in which payment changes are not
considered payment changes for purposes of this section, see comment
32(d)(7)(iv)-2.
2. Negative amortization. Section 1026.32(d)(2) provides that a
loan described in Sec. 1026.32(a) may not have a payment schedule
with regular periodic payments that cause the principal balance to
increase. Therefore, the commentary to Sec. 1026.32(d)(7)(iv) does
not include examples of payment changes in connection with negative
amortization. The following examples show whether, under Sec.
1026.35(b)(2), prepayment penalties are permitted or prohibited in
connection with particular payment changes, when a loan agreement
permits negative amortization:
i. Initial payments for a variable-rate transaction consummated
on January 1, 2010 are $1,000 per month and the loan agreement
permits negative amortization to occur. Under the loan agreement,
the first date that a scheduled payment in a different amount may be
due is January 1, 2014 and the creditor does not have the right to
change scheduled payments prior to that date even if negative
amortization occurs. A prepayment penalty is permitted with this
mortgage transaction provided that the other Sec. 1026.35(b)(2)
conditions are met, that is: provided that the prepayment penalty is
permitted by other applicable law, the penalty expires on or before
December 31, 2011, and the penalty will not apply if the source of
the prepayment funds is a refinancing by the creditor or its
affiliate.
ii. Initial payments for a variable-rate transaction consummated
on January 1, 2010 are $1,000 per month and the loan agreement
permits negative amortization to occur. Under the loan agreement,
the first date that a scheduled payment in a different amount may be
due is January 1, 2014, but the creditor has the right to change
scheduled payments prior to that date if negative amortization
occurs. A prepayment penalty is prohibited with this mortgage
transaction because the payment may change within the four-year
period following consummation.
35(b)(3) Escrows
35(b)(3)(i) Failure To Escrow for Property Taxes and Insurance
1. Section 1026.35(b)(3) applies to principal dwellings,
including structures that are classified as personal property under
state law. For example, an escrow account must be established on a
higher-priced mortgage loan secured by a first-lien on a mobile
home, boat or a trailer used as the consumer's principal dwelling.
See the commentary under Sec. Sec. 1026.2(a)(19), 1026.2(a)(24),
1026.15 and 1026.23. Section 1026.35(b)(3) also applies to higher-
priced mortgage loans secured by a first lien on a condominium or a
cooperative unit if it is in fact used as principal residence.
2. Administration of escrow accounts. Section 1026.35(b)(3)
requires creditors to establish before the consummation of a loan
secured by a first lien on a principal dwelling an escrow account
for payment of property taxes and premiums for mortgage-related
insurance required by creditor. Section 6 of RESPA, 12 U.S.C. 2605,
and Regulation X address how escrow accounts must be administered.
3. Optional insurance items. Section 1026.35(b)(3) does not
require that escrow accounts be established for premiums for
mortgage-related insurance that the creditor does not require in
connection with the credit transaction, such as an earthquake
insurance or debt-protection insurance.
Paragraph 35(b)(3)(ii)(B)
1. Limited exception. A creditor is required to escrow for
payment of property taxes for
[[Page 80012]]
all first lien loans secured by condominium units regardless of
whether the creditors escrows insurance premiums for condominium
unit.
35(b)(3)(v) ``Jumbo'' Loans
1. Special threshold for ``jumbo'' loans. For purposes of the
escrow requirement in Sec. 1026.35(b)(3) only, the coverage
threshold stated in Sec. 1026.35(a)(1) for first-lien loans (1.5 or
more percentage points greater than the average prime offer rate)
does not apply to a loan with a principal obligation that exceeds
the limit in effect as of the date the loan's rate is set for the
maximum principal obligation eligible for purchase by Freddie Mac
(``jumbo'' loans). The Federal Housing Finance Agency (FHFA)
establishes and adjusts the maximum principal obligation pursuant to
12 U.S.C. 1454(a)(2) and other provisions of Federal law.
Adjustments to the maximum principal obligation made by FHFA apply
in determining whether a mortgage loan is a ``jumbo'' loan to which
the separate coverage threshold in Sec. 1026.35(b)(3)(v) applies.
2. Escrow requirements only. Under Sec. 1026.35(b)(3)(v), for
``jumbo'' loans, the annual percentage rate threshold is 2.5 or more
percentage points greater than the average prime offer rate. This
threshold applies solely in determining whether a ``jumbo'' loan is
subject to the escrow requirement of Sec. 1026.35(b)(3). The
determination of whether ``jumbo'' first-lien loans are subject to
the other protections in Sec. 1026.35, such as the ability to repay
requirements under Sec. 1026.35(b)(1) and the restrictions on
prepayment penalties under Sec. 1026.35(b)(2), is based on the 1.5
percentage point threshold stated in Sec. 1026.35(a)(1).
Section 1026.36--Prohibited Acts or Practices in Connection With
Credit Secured by a Dwelling
1. Scope of coverage. Sections 1026.36(b) and (c) apply to
closed-end consumer credit transactions secured by a consumer's
principal dwelling. Sections 1026.36(d) and (e) apply to closed-end
consumer credit transactions secured by a dwelling. Sections
1026.36(d) and (e) apply to closed-end loans secured by first or
subordinate liens, and reverse mortgages that are not home-equity
lines of credit under Sec. 1026.40. See Sec. 1026.36(f) for
additional restrictions on the scope of this section, and Sec. Sec.
1026.1(c) and 1026.3(a) and corresponding commentary for further
discussion of extensions of credit subject to Regulation Z.
2. Mandatory compliance date for Sec. Sec. 1026.36(d) and (e).
The final rules on loan originator compensation in Sec. 1026.36
apply to transactions for which the creditor receives an application
on or after the effective date. For example, assume a mortgage
broker takes an application on March 10, 2011, which the creditor
receives on March 25, 2011. This transaction is not covered. If,
however, the creditor does not receive the application until April
8, 2011, the transaction is covered.
36(a) Loan Originator and Mortgage Broker Defined
1. Meaning of loan originator. i. General. Section 1026.36(a)
provides that a loan originator is any person who for compensation
or other monetary gain arranges, negotiates, or otherwise obtains an
extension of consumer credit for another person. Thus, the term
``loan originator'' includes employees of a creditor as well as
employees of a mortgage broker that satisfy this definition. In
addition, the definition of loan originator expressly includes any
creditor that satisfies the definition of loan originator but makes
use of ``table funding'' by a third party. See comment 36(a)-1.ii
below discussing table funding. Although consumers may sometimes
arrange, negotiate, or otherwise obtain extensions of consumer
credit on their own behalf, in such cases they do not do so for
another person or for compensation or other monetary gain, and
therefore are not loan originators under this section. (Under Sec.
1026.2(a)(22), the term ``person'' means a natural person or an
organization.)
ii. Table funding. Table funding occurs when the creditor does
not provide the funds for the transaction at consummation out of the
creditor's own resources, including drawing on a bona fide warehouse
line of credit, or out of deposits held by the creditor.
Accordingly, a table-funded transaction is consummated with the debt
obligation initially payable by its terms to one person, but another
person provides the funds for the transaction at consummation and
receives an immediate assignment of the note, loan contract, or
other evidence of the debt obligation. Although Sec.
1026.2(a)(17)(i)(B) provides that a person to whom a debt obligation
is initially payable on its face generally is a creditor, Sec.
1026.36(a)(1) provides that, solely for the purposes of Sec.
1026.36, such a person is also considered a loan originator. The
creditor is not considered a loan originator unless table funding
occurs. For example, if a person closes a loan in its own name but
does not fund the loan from its own resources or deposits held by it
because it assigns the loan at consummation, it is considered a
creditor for purposes of Regulation Z and also a loan originator for
purposes of Sec. 1026.36. However, if a person closes a loan in its
own name and draws on a bona fide warehouse line of credit to make
the loan at consummation, it is considered a creditor, not a loan
originator, for purposes of Regulation Z, including Sec. 1026.36.
iii. Servicing. The definition of ``loan originator'' does not
apply to a loan servicer when the servicer modifies an existing loan
on behalf of the current owner of the loan. The rule only applies to
extensions of consumer credit and does not apply if a modification
of an existing obligation's terms does not constitute a refinancing
under Sec. 1026.20(a).
2. Meaning of mortgage broker. For purposes of Sec. 1026.36,
with respect to a particular transaction, the term ``mortgage
broker'' refers to a loan originator who is not an employee of the
creditor. Accordingly, the term ``mortgage broker'' includes
companies that engage in the activities described in Sec.
1026.36(a) and also includes employees of such companies that engage
in these activities. Section 1026.36(d) prohibits certain payments
to a loan originator. These prohibitions apply to payments made to
all loan originators, including payments made to mortgage brokers,
and payments made by a company acting as a mortgage broker to its
employees who are loan originators.
3. Meaning of creditor. For purposes of Sec. 1026.36(d) and
(e), a creditor means a creditor that is not deemed to be a loan
originator on the transaction under this section. Thus, a person
that closes a loan in its own name (but another person provides the
funds for the transaction at consummation and receives an immediate
assignment of the note, loan contract, or other evidence of the debt
obligation) is deemed a loan originator, not a creditor, for
purposes of Sec. 1026.36. However, that person is still a creditor
for all other purposes of Regulation Z.
4. Managers and administrative staff. For purposes of Sec.
1026.36, managers, administrative staff, and similar individuals who
are employed by a creditor or loan originator but do not arrange,
negotiate, or otherwise obtain an extension of credit for a
consumer, or whose compensation is not based on whether any
particular loan is originated, are not loan originators.
36(c) Servicing Practices
Paragraph 36(c)(1)(i)
1. Crediting of payments. Under Sec. 1026.36(c)(1)(i), a
mortgage servicer must credit a payment to a consumer's loan account
as of the date of receipt. This does not require that a mortgage
servicer post the payment to the consumer's loan account on a
particular date; the servicer is only required to credit the payment
as of the date of receipt. Accordingly, a servicer that receives a
payment on or before its due date (or within any grace period), and
does not enter the payment on its books or in its system until after
the payment's due date (or expiration of any grace period), does not
violate this rule as long as the entry does not result in the
imposition of a late charge, additional interest, or similar penalty
to the consumer, or in the reporting of negative information to a
consumer reporting agency.
2. Payments to be credited. Payments should be credited based on
the legal obligation between the creditor and consumer. The legal
obligation is determined by applicable state or other law.
3. Date of receipt. The ``date of receipt'' is the date that the
payment instrument or other means of payment reaches the mortgage
servicer. For example, payment by check is received when the
mortgage servicer receives it, not when the funds are collected. If
the consumer elects to have payment made by a third-party payor such
as a financial institution, through a preauthorized payment or
telephone bill-payment arrangement, payment is received when the
mortgage servicer receives the third-party payor's check or other
transfer medium, such as an electronic fund transfer.
Paragraph 36(c)(1)(ii)
1. Pyramiding of late fees. The prohibition on pyramiding of
late fees in this subsection should be construed consistently with
the ``credit practices rule'' of the Federal Trade Commission, 16
CFR 444.4.
[[Page 80013]]
Paragraph 36(c)(1)(iii)
1. Reasonable time. The payoff statement must be provided to the
consumer, or person acting on behalf of the consumer, within a
reasonable time after the request. For example, it would be
reasonable under most circumstances to provide the statement within
five business days of receipt of a consumer's request. This time
frame might be longer, for example, when the servicer is
experiencing an unusually high volume of refinancing requests.
2. Person acting on behalf of the consumer. For purposes of
Sec. 1026.36(c)(1)(iii), a person acting on behalf of the consumer
may include the consumer's representative, such as an attorney
representing the individual, a non-profit consumer counseling or
similar organization, or a creditor with which the consumer is
refinancing and which requires the payoff statement to complete the
refinancing. A servicer may take reasonable measures to verify the
identity of any person acting on behalf of the consumer and to
obtain the consumer's authorization to release information to any
such person before the ``reasonable time'' period begins to run.
3. Payment requirements. The servicer may specify reasonable
requirements for making payoff requests, such as requiring requests
to be in writing and directed to a mailing address, email address or
fax number specified by the servicer or orally to a telephone number
specified by the servicer, or any other reasonable requirement or
method. If the consumer does not follow these requirements, a longer
time frame for responding to the request would be reasonable.
4. Accuracy of payoff statements. Payoff statements must be
accurate when issued.
Paragraph 36(c)(2)
1. Payment requirements. The servicer may specify reasonable
requirements for making payments in writing, such as requiring that
payments be accompanied by the account number or payment coupon;
setting a cut-off hour for payment to be received, or setting
different hours for payment by mail and payments made in person;
specifying that only checks or money orders should be sent by mail;
specifying that payment is to be made in U.S. dollars; or specifying
one particular address for receiving payments, such as a post office
box. The servicer may be prohibited, however, from requiring payment
solely by preauthorized electronic fund transfer. (See Section 913
of the Electronic Fund Transfer Act, 15 U.S.C. 1693k.)
2. Payment requirements--limitations. Requirements for making
payments must be reasonable; it should not be difficult for most
consumers to make conforming payments. For example, it would be
reasonable to require a cut-off time of 5 p.m. for receipt of a
mailed check at the location specified by the servicer for receipt
of such check.
3. Implied guidelines for payments. In the absence of specified
requirements for making payments, payments may be made at any
location where the servicer conducts business; any time during the
servicer's normal business hours; and by cash, money order, draft,
or other similar instrument in properly negotiable form, or by
electronic fund transfer if the servicer and consumer have so
agreed.
36(d) Prohibited Payments to Loan Originators
1. Persons covered. Section 1026.36(d) prohibits any person
(including the creditor) from paying compensation to a loan
originator in connection with a covered credit transaction, if the
amount of the payment is based on any of the transaction's terms or
conditions. For example, a person that purchases a loan from the
creditor may not compensate the loan originator in a manner that
violates Sec. 1026.36(d).
2. Mortgage brokers. The payments made by a company acting as a
mortgage broker to its employees who are loan originators are
subject to the section's prohibitions. For example, a mortgage
broker may not pay its employee more for a transaction with a 7
percent interest rate than for a transaction with a 6 percent
interest rate.
36(d)(1) Payments Based on Transaction Terms and Conditions
1. Compensation. i. General. For purposes of Sec. 1026.36(d)
and (e), the term ``compensation'' includes salaries, commissions,
and any financial or similar incentive provided to a loan originator
that is based on any of the terms or conditions of the loan
originator's transactions. See comment 36(d)(1)-3 for examples of
types of compensation that are not covered by Sec. 1026.36(d) and
(e). For example, the term ``compensation'' includes:
A. An annual or other periodic bonus; or
B. Awards of merchandise, services, trips, or similar prizes.
ii. Name of fee. Compensation includes amounts the loan
originator retains and is not dependent on the label or name of any
fee imposed in connection with the transaction. For example, if a
loan originator imposes a ``processing fee'' in connection with the
transaction and retains such fee, it is deemed compensation for
purposes of Sec. 1026.36(d) and (e), whether the originator expends
the time to process the consumer's application or uses the fee for
other expenses, such as overhead.
iii. Amounts for third-party charges. Compensation includes
amounts the loan originator retains, but does not include amounts
the originator receives as payment for bona fide and reasonable
third-party charges, such as title insurance or appraisals. In some
cases, amounts received for payment for third-party charges may
exceed the actual charge because, for example, the originator cannot
determine with accuracy what the actual charge will be before
consummation. In such a case, the difference retained by the
originator is not deemed compensation if the third-party charge
imposed on the consumer was bona fide and reasonable, and also
complies with state and other applicable law. On the other hand, if
the originator marks up a third-party charge (a practice known as
``upcharging''), and the originator retains the difference between
the actual charge and the marked-up charge, the amount retained is
compensation for purposes of Sec. 1026.36(d) and (e). For example:
A. Assume a loan originator charges the consumer a $400
application fee that includes $50 for a credit report and $350 for
an appraisal. Assume that $50 is the amount the creditor pays for
the credit report. At the time the loan originator imposes the
application fee on the consumer, the loan originator is uncertain of
the cost of the appraisal because the originator may choose from
appraisers that charge between $300 to $350 for appraisals. Later,
the cost for the appraisal is determined to be $300 for this
consumer's transaction. In this case, the $50 difference between the
$400 application fee imposed on the consumer and the actual $350
cost for the credit report and appraisal is not deemed compensation
for purposes of Sec. 1026.36(d) and (e), even though the $50 is
retained by the loan originator.
B. Using the same example in comment 36(d)(1)-1.iii.A above, the
$50 difference would be compensation for purposes of Sec.
1026.36(d) and (e) if the appraisers from whom the originator
chooses charge fees between $250 and $300.
2. Examples of compensation that is based on transaction terms
or conditions. Section 1026.36(d)(1) prohibits loan originator
compensation that is based on the terms or conditions of the loan
originator's transactions. For example, the rule prohibits
compensation to a loan originator for a transaction based on that
transaction's interest rate, annual percentage rate, loan-to-value
ratio, or the existence of a prepayment penalty. The rule also
prohibits compensation based on a factor that is a proxy for a
transaction's terms or conditions. For example, a consumer's credit
score or similar representation of credit risk, such as the
consumer's debt-to-income ratio, is not one of the transaction's
terms or conditions. However, if a loan originator's compensation
varies in whole or in part with a factor that serves as a proxy for
loan terms or conditions, then the originator's compensation is
based on a transaction's terms or conditions. To illustrate, assume
that consumer A and consumer B receive loans from the same loan
originator and the same creditor. Consumer A has a credit score of
650, and consumer B has a credit score of 800. Consumer A's loan has
a 7 percent interest rate, and consumer B's loan has a 6 \1/2\
percent interest rate because of the consumers' different credit
scores. If the creditor pays the loan originator $1,500 in
compensation for consumer A's loan and $1,000 in compensation for
consumer B's loan because the creditor varies compensation payments
in whole or in part with a consumer's credit score, the originator's
compensation would be based on the transactions' terms or
conditions.
3. Examples of compensation not based on transaction terms or
conditions. The following are only illustrative examples of
compensation methods that are permissible (unless otherwise
prohibited by applicable law), and not an exhaustive list.
Compensation is not based on the transaction's terms or conditions
if it is based on, for example:
i. The loan originator's overall loan volume (i.e., total dollar
amount of credit extended or total number of loans originated),
delivered to the creditor.
ii. The long-term performance of the originator's loans.
[[Page 80014]]
iii. An hourly rate of pay to compensate the originator for the
actual number of hours worked.
iv. Whether the consumer is an existing customer of the creditor
or a new customer.
v. A payment that is fixed in advance for every loan the
originator arranges for the creditor (e.g., $600 for every loan
arranged for the creditor, or $1,000 for the first 1,000 loans
arranged and $500 for each additional loan arranged).
vi. The percentage of applications submitted by the loan
originator to the creditor that result in consummated transactions.
vii. The quality of the loan originator's loan files (e.g.,
accuracy and completeness of the loan documentation) submitted to
the creditor.
viii. A legitimate business expense, such as fixed overhead
costs.
ix. Compensation that is based on the amount of credit extended,
as permitted by Sec. 1026.36(d)(1)(ii). See comment 36(d)(1)-9
discussing compensation based on the amount of credit extended.
4. Creditor's flexibility in setting loan terms. Section
1026.36(d)(1) does not limit a creditor's ability to offer a higher
interest rate in a transaction as a means for the consumer to
finance the payment of the loan originator's compensation or other
costs that the consumer would otherwise be required to pay directly
(either in cash or out of the loan proceeds). Thus, a creditor may
charge a higher interest rate to a consumer who will pay fewer of
the costs of the transaction directly, or it may offer the consumer
a lower rate if the consumer pays more of the costs directly. For
example, if the consumer pays half of the transaction costs
directly, a creditor may charge an interest rate of 6 percent but,
if the consumer pays none of the transaction costs directly, the
creditor may charge an interest rate of 6.5 percent. Section
1026.36(d)(1) also does not limit a creditor from offering or
providing different loan terms to the consumer based on the
creditor's assessment of the credit and other transactional risks
involved. A creditor could also offer different consumers varying
interest rates that include a constant interest rate premium to
recoup the loan originator's compensation through increased interest
paid by the consumer (such as by adding a constant 0.25 percent to
the interest rate on each loan).
5. Effect of modification of loan terms. Under Sec.
1026.36(d)(1), a loan originator's compensation may not vary based
on any of a credit transaction's terms or conditions. Thus, a
creditor and originator may not agree to set the originator's
compensation at a certain level and then subsequently lower it in
selective cases (such as where the consumer is able to obtain a
lower rate from another creditor). When the creditor offers to
extend a loan with specified terms and conditions (such as the rate
and points), the amount of the originator's compensation for that
transaction is not subject to change (increase or decrease) based on
whether different loan terms are negotiated. For example, if the
creditor agrees to lower the rate that was initially offered, the
new offer may not be accompanied by a reduction in the loan
originator's compensation.
6. Periodic changes in loan originator compensation and
transactions' terms and conditions. This section does not limit a
creditor or other person from periodically revising the compensation
it agrees to pay a loan originator. However, the revised
compensation arrangement must result in payments to the loan
originator that do not vary based on the terms or conditions of a
credit transaction. A creditor or other person might periodically
review factors such as loan performance, transaction volume, as well
as current market conditions for originator compensation, and
prospectively revise the compensation it agrees to pay to a loan
originator. For example, assume that during the first 6 months of
the year, a creditor pays $3,000 to a particular loan originator for
each loan delivered, regardless of the loan terms or conditions.
After considering the volume of business produced by that
originator, the creditor could decide that as of July 1, it will pay
$3,250 for each loan delivered by that particular originator,
regardless of the loan terms or conditions. No violation occurs even
if the loans made by the creditor after July 1 generally carry a
higher interest rate than loans made before that date, to reflect
the higher compensation.
7. Compensation received directly from the consumer. The
prohibition in Sec. 1026.36(d)(1) does not apply to transactions in
which any loan originator receives compensation directly from the
consumer, in which case no other person may provide any compensation
to a loan originator, directly or indirectly, in connection with
that particular transaction pursuant to Sec. 1026.36(d)(2).
Payments to a loan originator made out of loan proceeds are
considered compensation received directly from the consumer, while
payments derived from an increased interest rate are not considered
compensation received directly from the consumer. However, points
paid on the loan by the consumer to the creditor are not considered
payments received directly from the consumer whether they are paid
in cash or out of the loan proceeds. That is, if the consumer pays
origination points to the creditor and the creditor compensates the
loan originator, the loan originator may not also receive
compensation directly from the consumer. Compensation includes
amounts retained by the loan originator, but does not include
amounts the loan originator receives as payment for bona fide and
reasonable third-party charges, such as title insurance or
appraisals. See comment 36(d)(1)-1.
8. Record retention. See comment 25(a)-5 for guidance on
complying with the record retention requirements of Sec. 1026.25(a)
as they apply to Sec. 1026.36(d)(1).
9. Amount of credit extended. A loan originator's compensation
may be based on the amount of credit extended, subject to certain
conditions. Section 1026.36(d)(1) does not prohibit an arrangement
under which a loan originator is paid compensation based on a
percentage of the amount of credit extended, provided the percentage
is fixed and does not vary with the amount of credit extended.
However, compensation that is based on a fixed percentage of the
amount of credit extended may be subject to a minimum and/or maximum
dollar amount, as long as the minimum and maximum dollar amounts do
not vary with each credit transaction. For example:
i. A creditor may offer a loan originator 1 percent of the
amount of credit extended for all loans the originator arranges for
the creditor, but not less than $1,000 or greater than $5,000 for
each loan.
ii. A creditor may not offer a loan originator 1 percent of the
amount of credit extended for loans of $300,000 or more, 2 percent
of the amount of credit extended for loans between $200,000 and
$300,000, and 3 percent of the amount of credit extended for loans
of $200,000 or less.
36(d)(2) Payments by Persons Other Than Consumer
1. Compensation in connection with a particular transaction.
Under Sec. 1026.36(d)(2), if any loan originator receives
compensation directly from a consumer in a transaction, no other
person may provide any compensation to a loan originator, directly
or indirectly, in connection with that particular credit
transaction. See comment 36(d)(1)-7 discussing compensation received
directly from the consumer. The restrictions imposed under Sec.
1026.36(d)(2) relate only to payments, such as commissions, that are
specific to, and paid solely in connection with, the transaction in
which the consumer has paid compensation directly to a loan
originator. Thus, payments by a mortgage broker company to an
employee in the form of a salary or hourly wage, which is not tied
to a specific transaction, do not violate Sec. 1026.36(d)(2) even
if the consumer directly pays a loan originator a fee in connection
with a specific credit transaction. However, if any loan originator
receives compensation directly from the consumer in connection with
a specific credit transaction, neither the mortgage broker company
nor an employee of the mortgage broker company can receive
compensation from the creditor in connection with that particular
credit transaction.
2. Compensation received directly from a consumer. Under
Regulation X, which implements the Real Estate Settlement Procedures
Act (RESPA), a yield spread premium paid by a creditor to the loan
originator may be characterized on the RESPA disclosures as a
``credit'' that will be applied to reduce the consumer's settlement
charges, including origination fees. A yield spread premium
disclosed in this manner is not considered to be received by the
loan originator directly from the consumer for purposes of Sec.
1026.36(d)(2).
36(d)(3) Affiliates
1. For purposes of Sec. 1026.36(d), affiliates are treated as a
single ``person.'' The term ``affiliate'' is defined in Sec.
1026.32(b)(2). For example, assume a parent company has two mortgage
lending subsidiaries. Under Sec. 1026.36(d)(1), subsidiary ``A''
could not pay a loan originator greater compensation for a loan with
an interest rate of 8 percent than it would pay for a loan with an
interest rate of 7 percent. If the loan originator may deliver loans
to both subsidiaries, they must compensate the loan originator in
the same manner. Accordingly, if the loan originator delivers the
loan to subsidiary ``B'' and the interest rate is 8 percent, the
originator must
[[Page 80015]]
receive the same compensation that would have been paid by
subsidiary A for a loan with a rate of either 7 or 8 percent.
36(e) Prohibition on Steering
1. Compensation. See comment 36(d)(1)-1 for guidance on
compensation that is subject to Sec. 1026.36(e).
36(e)(1) General
1. Steering. For purposes of Sec. 1026.36(e), directing or
``steering'' a consumer to consummate a particular credit
transaction means advising, counseling, or otherwise influencing a
consumer to accept that transaction. For such actions to constitute
steering, the consumer must actually consummate the transaction in
question. Thus, Sec. 1026.36(e)(1) does not address the actions of
a loan originator if the consumer does not actually obtain a loan
through that loan originator.
2. Prohibited conduct. Under Sec. 1026.36(e)(1), a loan
originator may not direct or steer a consumer to consummate a
transaction based on the fact that the loan originator would
increase the amount of compensation that the loan originator would
receive for that transaction compared to other transactions, unless
the consummated transaction is in the consumer's interest.
i. In determining whether a consummated transaction is in the
consumer's interest, that transaction must be compared to other
possible loan offers available through the originator, if any, and
for which the consumer was likely to qualify, at the time that
transaction was offered to the consumer. Possible loan offers are
available through the loan originator if they could be obtained from
a creditor with which the loan originator regularly does business.
Section 1026.36(e)(1) does not require a loan originator to
establish a business relationship with any creditor with which the
loan originator does not already do business. To be considered a
possible loan offer available through the loan originator, an offer
need not be extended by the creditor; it need only be an offer that
the creditor likely would extend upon receiving an application from
the applicant, based on the creditor's current credit standards and
its current rate sheets or other similar means of communicating its
current credit terms to the loan originator. An originator need not
inform the consumer about a potential transaction if the originator
makes a good faith determination that the consumer is not likely to
qualify for it.
ii. Section 1026.36(e)(1) does not require a loan originator to
direct a consumer to the transaction that will result in a creditor
paying the least amount of compensation to the originator. However,
if the loan originator reviews possible loan offers available from a
significant number of the creditors with which the originator
regularly does business, and the originator directs the consumer to
the transaction that will result in the least amount of creditor-
paid compensation for the loan originator, the requirements of Sec.
1026.36(e)(1) are deemed to be satisfied. In the case where a loan
originator directs the consumer to the transaction that will result
in a greater amount of creditor-paid compensation for the loan
originator, Sec. 1026.36(e)(1) is not violated if the terms and
conditions on that transaction compared to the other possible loan
offers available through the originator, and for which the consumer
likely qualifies, are the same. A loan originator who is an employee
of the creditor on a transaction may not obtain compensation that is
based on the transaction's terms or conditions pursuant to Sec.
1026.36(d)(1), and compliance with that provision by such a loan
originator also satisfies the requirements of Sec. 1026.36(e)(1)
for that transaction with the creditor. However, if a creditor's
employee acts as a broker by forwarding a consumer's application to
a creditor other than the loan originator's employer, such as when
the employer does not offer any loan products for which the consumer
would qualify, the loan originator is not an employee of the
creditor in that transaction and is subject to Sec. 1026.36(e)(1)
if the originator is compensated for arranging the loan with the
other creditor.
iii. See the commentary under Sec. 1026.36(e)(3) for additional
guidance on what constitutes a ``significant number of creditors
with which a loan originator regularly does business'' and guidance
on the determination about transactions for which ``the consumer
likely qualifies.''
3. Examples. Assume a loan originator determines that a consumer
likely qualifies for a loan from Creditor A that has a fixed
interest rate of 7 percent, but the loan originator directs the
consumer to a loan from Creditor B having a rate of 7.5 percent. If
the loan originator receives more in compensation from Creditor B
than the amount that would have been paid by Creditor A, the
prohibition in Sec. 1026.36(e) is violated unless the higher-rate
loan is in the consumer's interest. For example, a higher-rate loan
might be in the consumer's interest if the lower-rate loan has a
prepayment penalty, or if the lower-rate loan requires the consumer
to pay more in up-front charges that the consumer is unable or
unwilling to pay or finance as part of the loan amount.
36(e)(2) Permissible Transactions
1. Safe harbors. A loan originator that satisfies Sec.
1026.36(e)(2) is deemed to comply with Sec. 1026.36(e)(1). A loan
originator that does not satisfy Sec. 1026.36(e)(2) is not subject
to any presumption regarding the originator's compliance or
noncompliance with Sec. 1026.36(e)(1).
2. Minimum number of loan options. To obtain the safe harbor,
Sec. 1026.36(e)(2) requires that the loan originator present loan
options that meet the criteria in Sec. 1026.36(e)(3)(i) for each
type of transaction in which the consumer expressed an interest. As
required by Sec. 1026.36(e)(3)(ii), the loan originator must have a
good faith belief that the options presented are loans for which the
consumer likely qualifies. If the loan originator is not able to
form such a good faith belief for loan options that meet the
criteria in Sec. 1026.36(e)(3)(i) for a given type of transaction,
the loan originator may satisfy Sec. 1026.36(e)(2) by presenting
all loans for which the consumer likely qualifies and that meet the
other requirements in Sec. 1026.36(e)(3) for that given type of
transaction. A loan originator may present to the consumer any
number of loan options, but presenting a consumer more than four
loan options for each type of transaction in which the consumer
expressed an interest and for which the consumer likely qualifies
would not likely help the consumer make a meaningful choice.
36(e)(3) Loan Options Presented
1. Significant number of creditors. A significant number of the
creditors with which a loan originator regularly does business is
three or more of those creditors. If the loan originator regularly
does business with fewer than three creditors, the originator is
deemed to comply by obtaining loan options from all the creditors
with which it regularly does business. Under Sec. 1026.36(e)(3)(i),
the loan originator must obtain loan options from a significant
number of creditors with which the loan originator regularly does
business, but the loan originator need not present loan options from
all such creditors to the consumer. For example, if three loans
available from one of the creditors with which the loan originator
regularly does business satisfy the criteria in Sec.
1026.36(e)(3)(i), presenting those and no options from any other
creditor satisfies that section.
2. Creditors with which loan originator regularly does business.
To qualify for the safe harbor in Sec. 1026.36(e)(2), the loan
originator must obtain and review loan options from a significant
number of the creditors with which the loan originator regularly
does business. For this purpose, a loan originator regularly does
business with a creditor if:
i. There is a written agreement between the originator and the
creditor governing the originator's submission of mortgage loan
applications to the creditor;
ii. The creditor has extended credit secured by a dwelling to
one or more consumers during the current or previous calendar month
based on an application submitted by the loan originator; or
iii. The creditor has extended credit secured by a dwelling
twenty-five or more times during the previous twelve calendar months
based on applications submitted by the loan originator. For this
purpose, the previous twelve calendar months begin with the calendar
month that precedes the month in which the loan originator accepted
the consumer's application.
3. Lowest interest rate. To qualify under the safe harbor in
Sec. 1026.36(e)(2), for each type of transaction in which the
consumer has expressed an interest, the loan originator must present
the consumer with loan options that meet the criteria in Sec.
1026.36(e)(3)(i). The criteria are: The loan with the lowest
interest rate; the loan with the lowest total dollar amount for
discount points and origination points or fees; and a loan with the
lowest interest rate without negative amortization, a prepayment
penalty, a balloon payment in the first seven years of the loan
term, shared equity, or shared appreciation, or, in the case of a
reverse mortgage, a loan without a prepayment penalty, shared
equity, or shared appreciation. To identify the loan with the lowest
interest rate, for any loan that has an initial rate that is fixed
for at least five years, the loan originator shall use the initial
rate
[[Page 80016]]
that would be in effect at consummation. For a loan with an initial
rate that is not fixed for at least five years:
i. If the interest rate varies based on changes to an index, the
originator shall use the fully-indexed rate that would be in effect
at consummation without regard to any initial discount or premium.
ii. For a step-rate loan, the originator shall use the highest
rate that would apply during the first five years.
4. Transactions for which the consumer likely qualifies. To
qualify under the safe harbor in Sec. 1026.36(e)(2), the loan
originator must have a good faith belief that the loan options
presented to the consumer pursuant to Sec. 1026.36(e)(3) are
transactions for which the consumer likely qualifies. The loan
originator's belief that the consumer likely qualifies should be
based on information reasonably available to the loan originator at
the time the loan options are presented. In making this
determination, the loan originator may rely on information provided
by the consumer, even if it subsequently is determined to be
inaccurate. For purposes of Sec. 1026.36(e)(3), a loan originator
is not expected to know all aspects of each creditor's underwriting
criteria. But pricing or other information that is routinely
communicated by creditors to loan originators is considered to be
reasonably available to the loan originator, for example, rate
sheets showing creditors' current pricing and the required minimum
credit score or other eligibility criteria.
Section 1026.39--Mortgage Transfer Disclosures
39(a) Scope
Paragraph 39(a)(1)
1. Covered persons. The disclosure requirements of this section
apply to any ``covered person'' that becomes the legal owner of an
existing mortgage loan, whether through a purchase, or other
transfer or assignment, regardless of whether the person also meets
the definition of a ``creditor'' in Regulation Z. The fact that a
person purchases or acquires mortgage loans and provides the
disclosures under this section does not by itself make that person a
``creditor'' as defined in the regulation.
2. Acquisition of legal title. To become a ``covered person''
subject to this section, a person must become the owner of an
existing mortgage loan by acquiring legal title to the debt
obligation.
i. Partial interest. A person may become a covered person by
acquiring a partial interest in the mortgage loan. If the original
creditor transfers a partial interest in the loan to one or more
persons, all such transferees are covered persons under this
section.
ii. Joint acquisitions. All persons that jointly acquire legal
title to the loan are covered persons under this section, and under
Sec. 1026.39(b)(5), a single disclosure must be provided on behalf
of all such covered persons. Multiple persons are deemed to jointly
acquire legal title to the loan if each acquires a partial interest
in the loan pursuant to the same agreement or by otherwise acting in
concert. See comments 39(b)(5)-1 and 39(d)(1)(ii)-1 regarding the
disclosure requirements for multiple persons that jointly acquire a
loan.
iii. Affiliates. An acquiring party that is a separate legal
entity from the transferor must provide the disclosures required by
this section even if the parties are affiliated entities.
3. Exclusions. i. Beneficial interest. Section 1026.39 does not
apply to a party that acquires only a beneficial interest or a
security interest in the loan, or to a party that assumes the credit
risk without acquiring legal title to the loan. For example, an
investor that acquires mortgage-backed securities, pass-through
certificates, or participation interests and does not acquire legal
title in the underlying mortgage loans is not covered by this
section.
ii. Loan servicers. Pursuant to TILA Section 131(f)(2), the
servicer of a mortgage loan is not the owner of the obligation for
purposes of this section if the servicer holds title to the loan as
a result of the assignment of the obligation to the servicer solely
for the administrative convenience of the servicer in servicing the
obligation.
4. Mergers, corporate acquisitions, or reorganizations.
Disclosures are required under this section when, as a result of a
merger, corporate acquisition, or reorganization, the ownership of a
mortgage loan is transferred to a different legal entity.
Paragraph 39(a)(2)
1. Mortgage transactions covered. Section 1026.39 applies to
closed-end or open-end consumer credit transactions secured by the
principal dwelling of a consumer.
39(b) Disclosure Required
1. Generally. A covered person must mail or deliver the
disclosures required by this section on or before the 30th calendar
day following the date of transfer, unless an exception in Sec.
1026.39(c) applies. For example, if a covered person acquires a
mortgage loan on March 15, the disclosure must be mailed or
delivered on or before April 14.
39(b)(1) Form of Disclosures
1. Combining disclosures. The disclosures under this section can
be combined with other materials or disclosures, including the
transfer of servicing notices required by the Real Estate Settlement
Procedure Act (12 U.S.C. 2601 et seq.) so long as the combined
disclosure satisfies the timing and other requirements of this
section.
39(b)(4) Multiple Transfers
1. Single disclosure for multiple transfers. A mortgage loan
might be acquired by a covered person and subsequently transferred
to another entity that is also a covered person required to provide
the disclosures under this section. In such cases, a single
disclosure may be provided on behalf of both covered persons instead
of providing two separate disclosures if the disclosure satisfies
the timing and content requirements applicable to each covered
person. For example, if a covered person acquires a loan on March 15
with the intent to assign the loan to another entity on April 30,
the covered person could mail the disclosure on or before April 14
to provide the required information for both entities and indicate
when the subsequent transfer is expected to occur.
2. Estimating the date. When a covered person provides the
disclosure required by this section that also describes a subsequent
transfer, the date of the subsequent transfer may be estimated when
the exact date is unknown at the time the disclosure is made.
Information is unknown if it is not reasonably available to the
covered person at the time the disclosure is made. The ``reasonably
available'' standard requires that the covered person, acting in
good faith, exercise due diligence in obtaining information. The
covered person normally may rely on the representations of other
parties in obtaining information. The covered person might make the
disclosure using an estimated date even though the covered person
knows that more precise information will be available in the future.
For example, a covered person may provide a disclosure on March 31
stating that it acquired the loan on March 15 and that a transfer to
another entity is expected to occur ``on or around'' April 30, even
if more precise information will be available by April 14.
3. Duty to comply. Even though one covered person provides the
disclosures for another covered person, each has a duty to ensure
that disclosures related to its acquisition are accurate and
provided in a timely manner unless an exception in Sec. 1026.39(c)
applies.
39(b)(5) Multiple Covered Person
1. Single disclosure required. If multiple covered persons
jointly acquire the loan, a single disclosure must be provided on
behalf of all covered persons instead of providing separate
disclosures. See comment 39(a)(1)-2.ii regarding a joint acquisition
of legal title, and comment 39(d)(1)(ii)-1 regarding the disclosure
requirements for multiple persons that jointly acquire a loan. If
multiple covered persons jointly acquire the loan and complete the
acquisition on separate dates, a single disclosure must be provided
on behalf of all persons on or before the 30th day following the
earliest acquisition date. For examples, if covered persons A and B
enter into an agreement with the original creditor to jointly
acquire the loan, and complete the acquisition on March 15 and March
25, respectively, a single disclosure must be provided on behalf of
both persons on or before April 14. If the two acquisition dates are
more than 30 days apart, a single disclosure must be provided on
behalf of both persons on or before the 30th day following the
earlier acquisition date, even though one person has not completed
its acquisition. See comment 39(b)(4)-2 regarding use of an
estimated date of transfer.
2. Single disclosure not required. If multiple covered persons
each acquire a partial interest in the loan pursuant to separate and
unrelated agreements and not jointly, each covered person has a duty
to ensure that disclosures related to its acquisition are accurate
and provided in a timely manner unless an exception in Sec.
1026.39(c) applies. The parties may, but are not required to,
provide a single disclosure that satisfies the timing and content
requirements applicable to each covered person.
[[Page 80017]]
3. Timing requirements. A single disclosure provided on behalf
of multiple covered persons must satisfy the timing and content
requirements applicable to each covered person unless an exception
in Sec. 1026.39(c) applies.
4. Duty to comply. Even though one covered person provides the
disclosures for another covered person, each has a duty to ensure
that disclosures related to its acquisition are accurate and
provided in a timely manner unless an exception in Sec. 1026.39(c)
applies. See comments 39(c)(1)-2, 39(c)(3)-1 and 39(c)(3)-2
regarding transfers of a partial interest in the mortgage loan.
39(c) Exceptions
Paragraph 39(c)(1)
1. Transfer of all interest. A covered person is not required to
provide the disclosures required by this section if it sells,
assigns or otherwise transfers all of its interest in the mortgage
loan on or before the 30th calendar day following the date that it
acquired the loan. For example, if covered person A acquires the
loan on March 15 and subsequently transfers all of its interest in
the loan to covered person B on April 1, person A is not required to
provide the disclosures required by this section. Person B, however,
must provide the disclosures required by this section unless an
exception in Sec. 1026.39(c) applies.
2. Transfer of partial interests. A covered person that
subsequently transfers a partial interest in the loan is required to
provide the disclosures required by this section if the covered
person retains a partial interest in the loan on the 30th calendar
day after it acquired the loan, unless an exception in Sec.
1026.39(c) applies. For example, if covered person A acquires the
loan on March 15 and subsequently transfers fifty percent of its
interest in the loan to covered person B on April 1, person A is
required to provide the disclosures under this section if it retains
a partial interest in the loan on April 14. Person B in this example
must also provide the disclosures required under this section unless
an exception in Sec. 1026.39(c) applies. Either person A or person
B could provide the disclosure on behalf of both of them if the
disclosure satisfies the timing and content requirements applicable
to each of them. In this example, a single disclosure for both
covered persons would have to be provided on or before April 14 to
satisfy the timing requirements for person A's acquisition of the
loan on March 15. See comment 39(b)(4)-1 regarding a single
disclosure for multiple transfers.
Paragraph 39(c)(2)
1. Repurchase agreements. The original creditor or owner of the
mortgage loan might sell, assign or otherwise transfer legal title
to the loan to secure temporary business financing under an
agreement that obligates the original creditor or owner to
repurchase the loan. The covered person that acquires the loan in
connection with such a repurchase agreement is not required to
provide disclosures under this section. However, if the transferor
does not repurchase the mortgage loan, the acquiring party must
provide the disclosures required by this section within 30 days
after the date that the transaction is recognized as an acquisition
on its books and records.
2. Intermediary parties. The exception in Sec. 1026.39(c)(2)
applies regardless of whether the repurchase arrangement involves an
intermediary party. For example, legal title to the loan may
transfer from the original creditor to party A through party B as an
intermediary. If the original creditor is obligated to repurchase
the loan, neither party A nor party B is required to provide the
disclosures under this section. However, if the original creditor
does not repurchase the loan, party A must provide the disclosures
required by this section within 30 days after the date that the
transaction is recognized as an acquisition on its books and records
unless another exception in Sec. 1026.39(c) applies.
Paragraph 39(c)(3)
1. Acquisition of partial interests. This exception applies if
the covered person acquires only a partial interest in the loan, and
there is no change in the agent or person authorized to receive
notice of the right to rescind and resolve issues concerning the
consumer's payments. If, as a result of the transfer of a partial
interest in the loan, a different agent or party is authorized to
receive notice of the right to rescind and resolve issues concerning
the consumer's payments, the disclosures under this section must be
provided.
2. Examples. i. A covered person is not required to provide the
disclosures under this section if it acquires a partial interest in
the loan from the original creditor who remains authorized to
receive the notice of the right to rescind and resolve issues
concerning the consumer's payments after the transfer.
ii. The original creditor transfers fifty percent of its
interest in the loan to covered person A. Person A does not provide
the disclosures under this section because the exception in Sec.
1026.39(c)(3) applies. The creditor then transfers the remaining
fifty percent of its interest in the loan to covered person B and
does not retain any interest in the loan. Person B must provide the
disclosures under this section.
iii. The original creditor transfers fifty percent of its
interest in the loan to covered person A and also authorizes party X
as its agent to receive notice of the right to rescind and resolve
issues concerning the consumer's payments on the loan. Since there
is a change in an agent or party authorized to receive notice of the
right to rescind and resolve issues concerning the consumer's
payments, person A is required to provide the disclosures under this
section. Person A then transfers all of its interest in the loan to
covered person B. Person B is not required to provide the
disclosures under this section if the original creditor retains a
partial interest in the loan and party X retains the same authority.
iv. The original creditor transfers all of its interest in the
loan to covered person A. Person A provides the disclosures under
this section and notifies the consumer that party X is authorized to
receive notice of the right to rescind and resolve issues concerning
the consumer's payments on the loan. Person A then transfers fifty
percent of its interest in the loan to covered person B. Person B is
not required to provide the disclosures under this section if person
A retains a partial interest in the loan and party X retains the
same authority.
39(d) Content of Required Disclosures
1. Identifying the loan. The disclosures required by this
section must identify the loan that was acquired or transferred. The
covered person has flexibility in determining what information to
provide for this purpose and may use any information that would
reasonably inform a consumer which loan was acquired or transferred.
For example, the covered person may identify the loan by stating:
i. The address of the mortgaged property along with the account
number or loan number previously disclosed to the consumer, which
may appear in a truncated format;
ii. The account number alone, or other identifying number, if
that number has been previously provided to the consumer, such as on
a statement that the consumer receives monthly; or
iii. The date on which the credit was extended and the original
amount of the loan or credit line.
Paragraph 39(d)(1)
1. Identification of covered person. Section 1026.39(d)(1)
requires a covered person to provide its name, address, and
telephone number. The party identified must be the covered person
who owns the mortgage loan, regardless of whether another party
services the loan or is the covered person's agent. In addition to
providing its name, address and telephone number, the covered person
may, at its option, provide an address for receiving electronic mail
or an Internet Web site address, but is not required to do so.
Paragraph 39(d)(1)(i)
1. Multiple transfers, single disclosure. If a mortgage loan is
acquired by a covered person and subsequently transferred to another
covered person, a single disclosure may be provided on behalf of
both covered persons instead of providing two separate disclosures
as long as the disclosure satisfies the timing and content
requirements applicable to each covered person. See comment
39(b)(4)-1 regarding multiple transfers. A single disclosure for
multiple transfers must state the name, address, and telephone
number of each covered person unless Sec. 1026.39(d)(1)(ii)
applies.
Paragraph 39(d)(1)(ii)
1. Multiple covered persons, single disclosure. If multiple
covered persons jointly acquire the loan, a single disclosure must
be provided on behalf of all covered persons instead of providing
separate disclosures. The single disclosure must provide the name,
address, and telephone number of each covered person unless Sec.
1026.39(d)(1)(ii) applies and one of the covered persons has been
authorized in accordance with Sec. 1026.39(d)(3) of this section to
receive the consumer's notice of the right to rescind and resolve
issues concerning the consumer's payments on the
[[Page 80018]]
loan. In such cases, the information required by Sec. 1026.39(d)(1)
may be provided only for that covered person.
2. Multiple covered persons, multiple disclosures. If multiple
covered persons each acquire a partial interest in the loan in
separate transactions and not jointly, each covered person must
comply with the disclosure requirements of this section unless an
exception in Sec. 1026.39(c) applies. See comment 39(a)(1)-2.ii
regarding a joint acquisition of legal title, and comment 39(b)(5)-2
regarding the disclosure requirements for multiple covered persons.
Paragraph 39(d)(3)
1. Identifying agents. Under Sec. 1026.39(d)(3), the covered
person must provide the name, address and telephone number for the
agent or other party having authority to receive the notice of the
right to rescind and resolve issues concerning the consumer's
payments on the loan. If multiple persons are identified under this
paragraph, the disclosure shall provide the name, address and
telephone number for each and indicate the extent to which the
authority of each person differs. Section 1026.39(d)(3) does not
require that a covered person designate an agent or other party, but
if the consumer cannot contact the covered person for these
purposes, the disclosure must provide the name, address and
telephone number for an agent or other party that can address these
matters. If an agent or other party is authorized to receive the
notice of the right to rescind and resolve issues concerning the
consumer's payments on the loan, the disclosure can state that the
consumer may contact that agent regarding any questions concerning
the consumer's account without specifically mentioning rescission or
payment issues. However, if multiple agents are listed on the
disclosure, the disclosure shall state the extent to which the
authority of each agent differs by indicating if only one of the
agents is authorized to receive notice of the right to rescind, or
only one of the agents is authorized to resolve issues concerning
payments.
2. Other contact information. The covered person may also
provide an agent's electronic mail address or Internet Web site
address, but is not required to do so.
Paragraph 39(d)(4)
1. Where recorded. Section 1026.39(d)(4) requires the covered
person to disclose where transfer of ownership of the debt to the
covered person is recorded if it has been recorded in public
records. Alternatively, the disclosure can state that the transfer
of ownership of the debt has not been recorded in public records at
the time the disclosure is provided, if that is the case, or the
disclosure can state where the transfer may later be recorded. An
exact address is not required and it would be sufficient, for
example, to state that the transfer of ownership is recorded in the
office of public land records or the recorder of deeds office for
the county or local jurisdiction where the property is located.
39(e) Optional Disclosures
1. Generally. Section 1026.39(e) provides that covered persons
may, at their option, include additional information about the
mortgage transaction that they consider relevant or helpful to
consumers. For example, the covered person may choose to inform
consumers that the location where they should send mortgage payments
has not changed. See comment 39(b)(1)-1 regarding combined
disclosures.
Section 1026.40--Requirements for Home-Equity Plans
1. Coverage. This section applies to all open-end credit plans
secured by the consumer's dwelling, as defined in Sec.
1026.2(a)(19), and is not limited to plans secured by the consumer's
principal dwelling. (See the commentary to Sec. 1026.3(a), which
discusses whether transactions are consumer or business-purpose
credit, for guidance on whether a home equity plan is subject to
Regulation Z.)
2. Changes to home equity plans entered into on or after
November 7, 1989. Section 1026.9(c) applies if, by written agreement
under Sec. 1026.40(f)(3)(iii), a creditor changes the terms of a
home equity plan--entered into on or after November 7, 1989--at or
before its scheduled expiration, for example, by renewing a plan on
different terms. A new plan results, however, if the plan is renewed
(with or without changes to the terms) after the scheduled
expiration. The new plan is subject to all open-end credit rules,
including Sec. Sec. 1026.6, 1026.15, and 1026.40.
3. Transition rules and renewals of preexisting plans. The
requirements of this section do not apply to home equity plans
entered into before November 7, 1989. The requirements of this
section also do not apply if the original consumer, on or after
November 7, 1989, renews a plan entered into prior to that date
(with or without changes to the terms). If, on or after November 7,
1989, a security interest in the consumer's dwelling is added to a
line of credit entered into before that date, the substantive
restrictions of this section apply for the remainder of the plan,
but no new disclosures are required under this section.
4. Disclosure of repayment phase--applicability of requirements.
Some plans provide in the initial agreement for a period during
which no further draws may be taken and repayment of the amount
borrowed is made. All of the applicable disclosures in this section
must be given for the repayment phase. Thus, for example, a creditor
must provide payment information about the repayment phase as well
as about the draw period, as required by Sec. 1026.40(d)(5). If the
rate that will apply during the repayment phase is fixed at a known
amount, the creditor must provide an annual percentage rate under
Sec. 1026.40(d)(6) for that phase. If, however, a creditor uses an
index to determine the rate that will apply at the time of
conversion to the repayment phase--even if the rate will thereafter
be fixed--the creditor must provide the information in Sec.
1026.40(d)(12), as applicable.
5. Payment terms--applicability of closed-end provisions and
substantive rules. All payment terms that are provided for in the
initial agreement are subject to the requirements of subpart B and
not subpart C of the regulation. Payment terms that are subsequently
added to the agreement may be subject to subpart B or to subpart C,
depending on the circumstances. The following examples apply these
general rules to different situations:
i. If the initial agreement provides for a repayment phase or
for other payment terms such as options permitting conversion of
part or all of the balance to a fixed rate during the draw period,
these terms must be disclosed pursuant to Sec. Sec. 1026.6 and
1026.40, and not under subpart C. Furthermore, the creditor must
continue to provide periodic statements under Sec. 1026.7 and
comply with other provisions of subpart B (such as the substantive
requirements of Sec. 1026.40(f)) throughout the plan, including the
repayment phase.
ii. If the consumer and the creditor enter into an agreement
during the draw period to repay all or part of the principal balance
on different terms (for example, with a fixed rate of interest) and
the amount of available credit will be replenished as the principal
balance is repaid, the creditor must continue to comply with subpart
B. For example, the creditor must continue to provide periodic
statements and comply with the substantive requirements of Sec.
1026.40(f) throughout the plan.
iii. If the consumer and creditor enter into an agreement during
the draw period to repay all or part of the principal balance and
the amount of available credit will not be replenished as the
principal balance is repaid, the creditor must give closed-end
credit disclosures pursuant to subpart C for that new agreement. In
such cases, subpart B, including the substantive rules, does not
apply to the closed-end credit transaction, although it will
continue to apply to any remaining open-end credit available under
the plan.
6. Spreader clause. When a creditor holds a mortgage or deed of
trust on the consumer's dwelling and that mortgage or deed of trust
contains a spreader clause (also known as a dragnet or cross-
collateralization clause), subsequent occurrences such as the
opening of an open-end plan are subject to the rules applicable to
home equity plans to the same degree as if a security interest were
taken directly to secure the plan, unless the creditor effectively
waives its security interest under the spreader clause with respect
to the subsequent open-end credit extensions.
7. Appraisals and other valuations. For consumer credit
transactions subject to Sec. 1026.40 and secured by the consumer's
principal dwelling, creditors and other persons must comply with the
requirements for appraisals and other valuations under Sec.
1026.42.
40(a) Form of Disclosures
40(a)(1) General
1. Written disclosures. The disclosures required under this
section must be clear and conspicuous and in writing, but need not
be in a form the consumer can keep. (See the commentary to Sec.
1026.6(a)(3) for special rules when disclosures required under Sec.
1026.40(d) are given in a retainable form.)
2. Disclosure of annual percentage rate--more conspicuous
requirement. As provided
[[Page 80019]]
in Sec. 1026.5(a)(2), when the term annual percentage rate is
required to be disclosed with a number, it must be more conspicuous
than other required disclosures.
3. Segregation of disclosures. i. While most of the disclosures
must be grouped together and segregated from all unrelated
information, the creditor is permitted to include information that
explains or expands on the required disclosures, including, for
example:
A. Any prepayment penalty.
B. How a substitute index may be chosen.
C. Actions the creditor may take short of terminating and
accelerating an outstanding balance.
D. Renewal terms.
E. Rebate of fees.
ii. An example of information that does not explain or expand on
the required disclosures and thus cannot be included is the
creditor's underwriting criteria, although the creditor could
provide such information separately from the required disclosures.
4. Method of providing disclosures. A creditor may provide a
single disclosure form for all of its home equity plans, as long as
the disclosure describes all aspects of the plans. For example, if
the creditor offers several payment options, all such options must
be disclosed. (See, however, the commentary to Sec.
1026.40(d)(5)(iii) and (d)(12) (x) and (xi) for disclosure
requirements relating to these provisions.) If any aspects of a plan
are linked together, the creditor must disclose clearly the
relationship of the terms to each other. For example, if the
consumer can only obtain a particular payment option in conjunction
with a certain variable-rate feature, this fact must be disclosed. A
creditor has the option of providing separate disclosure forms for
multiple options or variations in features. For example, a creditor
that offers different payment options for the draw period may
prepare separate disclosure forms for the two payment options. A
creditor using this alternative, however, must include a statement
on each disclosure form that the consumer should ask about the
creditor's other home equity programs. (This disclosure is required
only for those programs available generally to the public. Thus, if
the only other programs available are employee preferred-rate plans,
for example, the creditor would not have to provide this statement.)
A creditor that receives a request for information about other
available programs must provide the additional disclosures as soon
as reasonably possible.
5. Form of electronic disclosures provided on or with electronic
applications. Creditors must provide the disclosures required by
this section (including the brochure) on or with a blank application
that is made available to the consumer in electronic form, such as
on a creditor's Internet Web site. Creditors have flexibility in
satisfying this requirement. Methods creditors could use to satisfy
the requirement include, but are not limited to, the following
examples (whatever method is used, a creditor need not confirm that
the consumer has read the disclosures):
i. The disclosures could automatically appear on the screen when
the application appears;
ii. The disclosures could be located on the same Web page as the
application (whether or not they appear on the initial screen), if
the application contains a clear and conspicuous reference to the
location of the disclosures and indicates that the disclosures
contain rate, fee, and other cost information, as applicable;
iii. Creditors could provide a link to the electronic
disclosures on or with the application as long as consumers cannot
bypass the disclosures before submitting the application. The link
would take the consumer to the disclosures, but the consumer need
not be required to scroll completely through the disclosures; or
iv. The disclosures could be located on the same Web page as the
application without necessarily appearing on the initial screen,
immediately preceding the button that the consumer will click to
submit the application.
40(a)(2) Precedence of Certain Disclosures
1. Precedence rule. The list of conditions provided at the
creditor's option under Sec. 1026.40(d)(4)(iii) need not precede
the other disclosures.
Paragraph 40(a)(3)
1. Form of disclosures. Whether disclosures must be in
electronic form depends upon the following:
i. If a consumer accesses a home equity credit line application
electronically (other than as described under ii. below), such as
online at a home computer, the creditor must provide the disclosures
in electronic form (such as with the application form on its Web
site) in order to meet the requirement to provide disclosures in a
timely manner on or with the application. If the creditor instead
mailed paper disclosures to the consumer, this requirement would not
be met.
ii. In contrast, if a consumer is physically present in the
creditor's office, and accesses a home equity credit line
application electronically, such as via a terminal or kiosk (or if
the consumer uses a terminal or kiosk located on the premises of an
affiliate or third party that has arranged with the creditor to
provide applications to consumers), the creditor may provide
disclosures in either electronic or paper form, provided the
creditor complies with the timing, delivery, and retainability
requirements of the regulation.
40(b) Time of Disclosures
1. Mail and telephone applications. If the creditor sends
applications through the mail, the disclosures and a brochure must
accompany the application. If an application is taken over the
telephone, the disclosures and brochure may be delivered or mailed
within three business days of taking the application. If an
application is mailed to the consumer following a telephone request,
however, the creditor also must send the disclosures and a brochure
along with the application.
2. General purpose applications. The disclosures and a brochure
need not be provided when a general purpose application is given to
a consumer unless (1) the application or materials accompanying it
indicate that it can be used to apply for a home equity plan or (2)
the application is provided in response to a consumer's specific
inquiry about a home equity plan. On the other hand, if a general
purpose application is provided in response to a consumer's specific
inquiry only about credit other than a home equity plan, the
disclosures and brochure need not be provided even if the
application indicates it can be used for a home equity plan, unless
it is accompanied by promotional information about home equity
plans.
3. Publicly-available applications. Some creditors make
applications for home equity plans, such as take-ones, available
without the need for a consumer to request them. These applications
must be accompanied by the disclosures and a brochure, such as by
attaching the disclosures and brochure to the application form.
4. Response cards. A creditor may solicit consumers for its home
equity plan by mailing a response card which the consumer returns to
the creditor to indicate interest in the plan. If the only action
taken by the creditor upon receipt of the response card is to send
the consumer an application form or to telephone the consumer to
discuss the plan, the creditor need not send the disclosures and
brochure with the response card.
5. Denial or withdrawal of application. In situations where
Sec. 1026.40(b) permits the creditor a three-day delay in providing
disclosures and the brochure, if the creditor determines within that
period that an application will not be approved, the creditor need
not provide the consumer with the disclosures or brochure.
Similarly, if the consumer withdraws the application within this
three-day period, the creditor need not provide the disclosures or
brochure.
6. Intermediary agent or broker. In determining whether or not
an application involves an intermediary agent or broker as discussed
in Sec. 1026.40(b), creditors should consult the provisions in
comment 19(b)-3.
40(c) Duties of Third Parties
1. Disclosure requirements. Although third parties who give
applications to consumers for home equity plans must provide the
brochure required under Sec. 1026.40(e) in all cases, such persons
need provide the disclosures required under Sec. 1026.40(d) only in
certain instances. A third party has no duty to obtain disclosures
about a creditor's home equity plan or to create a set of
disclosures based on what it knows about a creditor's plan. If,
however, a creditor provides the third party with disclosures along
with its application form, the third party must give the disclosures
to the consumer with the application form. The duties under this
section are those of the third party; the creditor is not
responsible for ensuring that a third party complies with those
obligations. If an intermediary agent or broker takes an application
over the telephone or receives an application contained in a
magazine or other publication, Sec. 1026.40(c) permits that person
to mail the disclosures and brochure within three business days of
receipt of the application. (See the commentary to Sec. 1026.40(h)
about imposition of nonrefundable fees.)
40(d) Content of Disclosures
1. Disclosures given as applicable. The disclosures required
under this section need
[[Page 80020]]
be made only as applicable. Thus, for example, if negative
amortization cannot occur in a home equity plan, a reference to it
need not be made.
2. Duty to respond to requests for information. If the consumer,
prior to the opening of a plan, requests information as suggested in
the disclosures (such as the current index value or margin), the
creditor must provide this information as soon as reasonably
possible after the request.
40(d)(1) Retention of Information
1. When disclosure not required. The creditor need not disclose
that the consumer should make or otherwise retain a copy of the
disclosures if they are retainable--for example, if the disclosures
are not part of an application that must be returned to the creditor
to apply for the plan.
40(d)(2) Conditions for Disclosed Terms
Paragraph 40(d)(2)(i)
1. Guaranteed terms. The requirement that the creditor disclose
the time by which an application must be submitted to obtain the
disclosed terms does not require the creditor to guarantee any
terms. If a creditor chooses not to guarantee any terms, it must
disclose that all of the terms are subject to change prior to
opening the plan. The creditor also is permitted to guarantee some
terms and not others, but must indicate which terms are subject to
change.
2. Date for obtaining disclosed terms. The creditor may disclose
either a specific date or a time period for obtaining the disclosed
terms. If the creditor discloses a time period, the consumer must be
able to determine from the disclosure the specific date by which an
application must be submitted to obtain any guaranteed terms. For
example, the disclosure might read, ``To obtain the following terms,
you must submit your application within 60 days after the date
appearing on this disclosure,'' provided the disclosure form also
shows the date.
Paragraph 40(d)(2)(ii)
1. Relation to other provisions. Creditors should consult the
rules in Sec. 1026.40(g) regarding refund of fees.
40(d)(4) Possible Actions by Creditor
Paragraph 40(d)(4)(i)
1. Fees imposed upon termination. This disclosure applies only
to fees (such as penalty or prepayment fees) that the creditor
imposes if it terminates the plan prior to normal expiration. The
disclosure does not apply to fees that are imposed either when the
plan expires in accordance with the agreement or if the consumer
terminates the plan prior to its scheduled maturity. In addition,
the disclosure does not apply to fees associated with collection of
the debt, such as attorneys fees and court costs, or to increases in
the annual percentage rate linked to the consumer's failure to make
payments. The actual amount of the fee need not be disclosed.
2. Changes specified in the initial agreement. If changes may
occur pursuant to Sec. 1026.40(f)(3)(i), a creditor must state that
certain changes will be implemented as specified in the initial
agreement.
Paragraph 40(d)(4)(iii)
1. Disclosure of conditions. In making this disclosure, the
creditor may provide a highlighted copy of the document that
contains such information, such as the contract or security
agreement. The relevant items must be distinguished from the other
information contained in the document. For example, the creditor may
provide a cover sheet that specifically points out which contract
provisions contain the information, or may mark the relevant items
on the document itself. As an alternative to disclosing the
conditions in this manner, the creditor may simply describe the
conditions using the language in Sec. Sec. 1026.40(f)(2)(i)-(iii),
1026.40(f)(3)(i) (regarding freezing the line when the maximum
annual percentage rate is reached), and 1026.40(f)(3)(vi) or
language that is substantially similar. The condition contained in
Sec. 1026.40(f)(2)(iv) need not be stated. In describing specified
changes that may be implemented during the plan, the creditor may
provide a disclosure such as ``Our agreement permits us to make
certain changes to the terms of the line at specified times or upon
the occurrence of specified events.''
2. Form of disclosure. The list of conditions under Sec.
1026.40(d)(4)(iii) may appear with the segregated disclosures or
apart from them. If the creditor elects to provide the list of
conditions with the segregated disclosures, the list need not comply
with the precedence rule in Sec. 1026.40(a)(2).
40(d)(5) Payment Terms
Paragraph 40(d)(5)(i)
1. Length of the plan. The combined length of the draw period
and any repayment period need not be stated. If the length of the
repayment phase cannot be determined because, for example, it
depends on the balance outstanding at the beginning of the repayment
period, the creditor must state that the length is determined by the
size of the balance. If the length of the plan is indefinite (for
example, because there is no time limit on the period during which
the consumer can take advances), the creditor must state that fact.
2. Renewal provisions. If, under the credit agreement, a
creditor retains the right to review a line at the end of the
specified draw period and determine whether to renew or extend the
draw period of the plan, the possibility of renewal or extension--
regardless of its likelihood--should be ignored for purposes of the
disclosures. For example, if an agreement provides that the draw
period is five years and that the creditor may renew the draw period
for an additional five years, the possibility of renewal should be
ignored and the draw period should be considered five years. (See
the commentary accompanying Sec. 1026.9(c)(1) dealing with change
in terms requirements.)
Paragraph 40(d)(5)(ii)
1. Determination of the minimum periodic payment. This
disclosure must reflect how the minimum periodic payment is
determined, but need only describe the principal and interest
components of the payment. Other charges that may be part of the
payment (as well as the balance computation method) may, but need
not, be described under this provision.
2. Fixed rate and term payment options during draw period. If
the home equity plan permits the consumer to repay all or part of
the balance during the draw period at a fixed rate (rather than a
variable rate) and over a specified time period, this feature must
be disclosed. To illustrate, a variable-rate plan may permit a
consumer to elect during a ten-year draw period to repay all or a
portion of the balance over a three-year period at a fixed rate. The
creditor must disclose the rules relating to this feature including
the period during which the option can be selected, the length of
time over which repayment can occur, any fees imposed for such a
feature, and the specific rate or a description of the index and
margin that will apply upon exercise of this choice. For example,
the index and margin disclosure might state: ``If you choose to
convert any portion of your balance to a fixed rate, the rate will
be the highest prime rate published in the `Wall Street Journal'
that is in effect at the date of conversion plus a margin.'' If the
fixed rate is to be determined according to an index, it must be one
that is outside the creditor's control and is publicly available in
accordance with Sec. 1026.40(f)(1). The effect of exercising the
option should not be reflected elsewhere in the disclosures, such as
in the historical example required in Sec. 1026.40(d)(12)(xi).
3. Balloon payments. In programs where the occurrence of a
balloon payment is possible, the creditor must disclose the
possibility of a balloon payment even if such a payment is uncertain
or unlikely. In such cases, the disclosure might read, ``Your
minimum payments may not be sufficient to fully repay the principal
that is outstanding on your line. If they are not, you will be
required to pay the entire outstanding balance in a single
payment.'' In programs where a balloon payment will occur, such as
programs with interest-only payments during the draw period and no
repayment period, the disclosures must state that fact. For example,
the disclosure might read, ``Your minimum payments will not repay
the principal that is outstanding on your line. You will be required
to pay the entire outstanding balance in a single payment.'' In
making this disclosure, the creditor is not required to use the term
``balloon payment.'' The creditor also is not required to disclose
the amount of the balloon payment. (See, however, the requirement
under Sec. 1026.40(d)(5)(iii).) The balloon payment disclosure does
not apply in cases where repayment of the entire outstanding balance
would occur only as a result of termination and acceleration. The
creditor also need not make a disclosure about balloon payments if
the final payment could not be more than twice the amount of other
minimum payments under the plan.
Paragraph 40(d)(5)(iii)
1. Minimum periodic payment example. In disclosing the payment
example, the creditor may assume that the credit limit as well as
the outstanding balance is $10,000 if such an assumption is relevant
to calculating payments. (If the creditor only offers lines of
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credit for less than $10,000, the creditor may assume an outstanding
balance of $5,000 instead of $10,000 in making this disclosure.) The
example should reflect the payment comprised only of principal and
interest. Creditors may provide an additional example reflecting
other charges that may be included in the payment, such as credit
insurance premiums. Creditors may assume that all months have an
equal number of days, that payments are collected in whole cents,
and that payments will fall on a business day even though they may
be due on a non-business day. For variable-rate plans, the example
must be based on the last rate in the historical example required in
Sec. 1026.40(d)(12)(xi), or a more recent rate. In cases where the
last rate shown in the historical example is different from the
index value and margin (for example, due to a rate cap), creditors
should calculate the rate by using the index value and margin. A
discounted rate may not be considered a more recent rate in
calculating this payment example for either variable- or fixed-rate
plans.
2. Representative examples. i. In plans with multiple payment
options within the draw period or within any repayment period, the
creditor may provide representative examples as an alternative to
providing examples for each payment option. The creditor may elect
to provide representative payment examples based on three categories
of payment options. The first category consists of plans that permit
minimum payment of only accrued finance charges (interest only
plans). The second category includes plans in which a fixed
percentage or a fixed fraction of the outstanding balance or credit
limit (for example, 2% of the balance or 1/180th of the balance) is
used to determine the minimum payment. The third category includes
all other types of minimum payment options, such as a specified
dollar amount plus any accrued finance charges. Creditors may
classify their minimum payment arrangements within one of these
three categories even if other features exist, such as varying
lengths of a draw or repayment period, required payment of past due
amounts, late charges, and minimum dollar amounts. The creditor may
use a single example within each category to represent the payment
options in that category. For example, if a creditor permits minimum
payments of 1%, 2%, 3% or 4% of the outstanding balance, it may pick
one of these four options and provide the example required under
Sec. 1026.40(d)(5)(iii) for that option alone.
ii. The example used to represent a category must be an option
commonly chosen by consumers, or a typical or representative
example. (See the commentary to Sec. 1026.40(d)(12)(x) and (xi) for
a discussion of the use of representative examples for making those
disclosures. Creditors using a representative example within each
category must use the same example for purposes of the disclosures
under Sec. 1026.40(d)(5)(iii) and (d)(12)(x) and (xi).) Creditors
may use representative examples under Sec. 1026.40(d)(5) only with
respect to the payment example required under paragraph (d)(5)(iii).
Creditors must provide a full narrative description of all payment
options under Sec. 1026.40(d)(5)(i) and (ii).
3. Examples for draw and repayment periods. Separate examples
must be given for the draw and repayment periods unless the payments
are determined the same way during both periods. In setting forth
payment examples for any repayment period under this section (and
the historical example under Sec. 1026.40(d)(12)(xi)), creditors
should assume a $10,000 advance is taken at the beginning of the
draw period and is reduced according to the terms of the plan.
Creditors should not assume an additional advance is taken at any
time, including at the beginning of any repayment period.
4. Reverse mortgages. Reverse mortgages, also known as reverse
annuity or home equity conversion mortgages, in addition to
permitting the consumer to obtain advances, may involve the
disbursement of monthly advances to the consumer for a fixed period
or until the occurrence of an event such as the consumer's death.
Repayment of the reverse mortgage (generally a single payment of
principal and accrued interest) may be required to be made at the
end of the disbursements or, for example, upon the death of the
consumer. In disclosing these plans, creditors must apply the
following rules, as applicable:
i. If the reverse mortgage has a specified period for advances
and disbursements but repayment is due only upon occurrence of a
future event such as the death of the consumer, the creditor must
assume that disbursements will be made until they are scheduled to
end. The creditor must assume repayment will occur when
disbursements end (or within a period following the final
disbursement which is not longer than the regular interval between
disbursements). This assumption should be used even though repayment
may occur before or after the disbursements are scheduled to end. In
such cases, the creditor may include a statement such as ``The
disclosures assume that you will repay the line at the time the draw
period and our payments to you end. As provided in your agreement,
your repayment may be required at a different time.'' The single
payment should be considered the ``minimum periodic payment'' and
consequently would not be treated as a balloon payment. The example
of the minimum payment under Sec. 1026.40(d)(5)(iii) should assume
a single $10,000 draw.
ii. If the reverse mortgage has neither a specified period for
advances or disbursements nor a specified repayment date and these
terms will be determined solely by reference to future events,
including the consumer's death, the creditor may assume that the
draws and disbursements will end upon the consumer's death
(estimated by using actuarial tables, for example) and that
repayment will be required at the same time (or within a period
following the date of the final disbursement which is not longer
than the regular interval for disbursements). Alternatively, the
creditor may base the disclosures upon another future event it
estimates will be most likely to occur first. (If terms will be
determined by reference to future events which do not include the
consumer's death, the creditor must base the disclosures upon the
occurrence of the event estimated to be most likely to occur first.)
iii. In making the disclosures, the creditor must assume that
all draws and disbursements and accrued interest will be paid by the
consumer. For example, if the note has a non-recourse provision
providing that the consumer is not obligated for an amount greater
than the value of the house, the creditor must nonetheless assume
that the full amount to be drawn or disbursed will be repaid. In
this case, however, the creditor may include a statement such as
``The disclosures assume full repayment of the amount advanced plus
accrued interest, although the amount you may be required to pay is
limited by your agreement.''
iv. Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared between the
consumer and the creditor. The creditor must disclose the
appreciation feature, including describing how the creditor's share
will be determined, any limitations, and when the feature may be
exercised.
40(d)(6) Annual Percentage Rate
1. Preferred-rate plans. If a creditor offers a preferential
fixed-rate plan in which the rate will increase a specified amount
upon the occurrence of a specified event, the creditor must disclose
the specific amount the rate will increase.
40(d)(7) Fees Imposed by Creditor
1. Applicability. The fees referred to in Sec. 1026.40(d)(7)
include items such as application fees, points, annual fees,
transaction fees, fees to obtain checks to access the plan, and fees
imposed for converting to a repayment phase that is provided for in
the original agreement. This disclosure includes any fees that are
imposed by the creditor to use or maintain the plan, whether the
fees are kept by the creditor or a third party. For example, if a
creditor requires an annual credit report on the consumer and
requires the consumer to pay this fee to the creditor or directly to
the third party, the fee must be specifically stated. Third party
fees to open the plan that are initially paid by the consumer to the
creditor may be included in this disclosure or in the disclosure
under Sec. 1026.40(d)(8).
2. Manner of describing fees. Charges may be stated as an
estimated dollar amount for each fee, or as a percentage of a
typical or representative amount of credit. The creditor may provide
a stepped fee schedule in which a fee will increase a specified
amount at a specified date. (See the discussion contained in the
commentary to Sec. 1026.40(f)(3)(i).)
3. Fees not required to be disclosed. Fees that are not imposed
to open, use, or maintain a plan, such as fees for researching an
account, photocopying, paying late, stopping payment, having a check
returned, exceeding the credit limit, or closing out an account do
not have to be disclosed under this section. Credit report and
appraisal fees imposed to investigate whether a condition permitting
a freeze continues to exist--as discussed in the commentary to Sec.
1026.40(f)(3)(vi)--are not required to be disclosed under this
section or Sec. 1026.40(d)(8).
[[Page 80022]]
4. Rebates of closing costs. If closing costs are imposed they
must be disclosed, regardless of whether such costs may be rebated
later (for example, rebated to the extent of any interest paid
during the first year of the plan).
5. Terms used in disclosure. Creditors need not use the terms
finance charge or other charge in describing the fees imposed by the
creditor under this section or those imposed by third parties under
Sec. 1026.40(d)(8).
40(d)(8) Fees Imposed by Third Parties to Open a Plan
1. Applicability. Section 1026.40(d)(8) applies only to fees
imposed by third parties to open the plan. Thus, for example, this
section does not require disclosure of a fee imposed by a government
agency at the end of a plan to release a security interest. Fees to
be disclosed include appraisal, credit report, government agency,
and attorneys fees. In cases where property insurance is required by
the creditor, the creditor either may disclose the amount of the
premium or may state that property insurance is required. For
example, the disclosure might state, ``You must carry insurance on
the property that secures this plan.''
2. Itemization of third-party fees. In all cases creditors must
state the total of third-party fees as a single dollar amount or a
range except that the total need not include costs for property
insurance if the creditor discloses that such insurance is required.
A creditor has two options with regard to providing the more
detailed information about third party fees. Creditors may provide a
statement that the consumer may request more specific cost
information about third party fees from the creditor. As an
alternative to including this statement, creditors may provide an
itemization of such fees (by type and amount) with the early
disclosures. Any itemization provided upon the consumer's request
need not include a disclosure about property insurance.
3. Manner of describing fees. A good faith estimate of the
amount of fees must be provided. Creditors may provide, based on a
typical or representative amount of credit, a range for such fees or
state the dollar amount of such fees. Fees may be expressed on a
unit cost basis, for example, $5 per $1,000 of credit.
4. Rebates of third party fees. Even if fees imposed by third
parties may be rebated, they must be disclosed. (See the commentary
to Sec. 1026.40(d)(7).)
40(d)(9) Negative Amortization
1. Disclosure required. In transactions where the minimum
payment will not or may not be sufficient to cover the interest that
accrues on the outstanding balance, the creditor must disclose that
negative amortization will or may occur. This disclosure is required
whether or not the unpaid interest is added to the outstanding
balance upon which interest is computed. A disclosure is not
required merely because a loan calls for non-amortizing or partially
amortizing payments.
40(d)(10) Transaction Requirements
1. Applicability. A limitation on automated teller machine usage
need not be disclosed under this paragraph unless that is the only
means by which the consumer can obtain funds.
40(d)(12) Disclosures for Variable-Rate Plans
1. Variable-rate provisions. Sample forms in Appendix G-14
provide illustrative guidance on the variable-rate rules.
Paragraph 40(d)(12)(iv)
1. Determination of annual percentage rate. If the creditor
adjusts its index through the addition of a margin, the disclosure
might read, ``Your annual percentage rate is based on the index plus
a margin.'' The creditor is not required to disclose a specific
value for the margin.
Paragraph 40(d)(12)(viii)
1. Preferred-rate provisions. This paragraph requires disclosure
of preferred-rate provisions, where the rate will increase upon the
occurrence of some event, such as the borrower-employee leaving the
creditor's employ or the consumer closing an existing deposit
account with the creditor.
2. Provisions on conversion to fixed rates. The commentary to
Sec. 1026.40(d)(5)(ii) discusses the disclosure requirements for
options permitting the consumer to convert from a variable rate to a
fixed rate.
Paragraph 40(d)(12)(ix)
1. Periodic limitations on increases in rates. The creditor must
disclose any annual limitations on increases in the annual
percentage rate. If the creditor bases its rate limitation on 12
monthly billing cycles, such a limitation should be treated as an
annual cap. Rate limitations imposed on less than an annual basis
must be stated in terms of a specific amount of time. For example,
if the creditor imposes rate limitations on only a semiannual basis,
this must be expressed as a rate limitation for a six-month time
period. If the creditor does not impose periodic limitations (annual
or shorter) on rate increases, the fact that there are no annual
rate limitations must be stated.
2. Maximum limitations on increases in rates. The maximum annual
percentage rate that may be imposed under each payment option over
the term of the plan (including the draw period and any repayment
period provided for in the initial agreement) must be provided. The
creditor may disclose this rate as a specific number (for example,
18%) or as a specific amount above the initial rate. For example,
this disclosure might read, ``The maximum annual percentage rate
that can apply to your line will be 5 percentage points above your
initial rate.'' If the creditor states the maximum rate as a
specific amount above the initial rate, the creditor must include a
statement that the consumer should inquire about the rate
limitations that are currently available. If an initial discount is
not taken into account in applying maximum rate limitations, that
fact must be disclosed. If separate overall limitations apply to
rate increases resulting from events such as the exercise of a
fixed-rate conversion option or leaving the creditor's employ, those
limitations also must be stated. Limitations do not include legal
limits in the nature of usury or rate ceilings under state or
Federal statutes or regulations.
3. Form of disclosures. The creditor need not disclose each
periodic or maximum rate limitation that is currently available.
Instead, the creditor may disclose the range of the lowest and
highest periodic and maximum rate limitations that may be applicable
to the creditor's home equity plans. Creditors using this
alternative must include a statement that the consumer should
inquire about the rate limitations that are currently available.
Paragraph 40(d)(12)(x)
1. Maximum rate payment example. In calculating the payment
creditors should assume the maximum rate is in effect. Any
discounted or premium initial rates or periodic rate limitations
should be ignored for purposes of this disclosure. If a range is
used to disclose the maximum cap under Sec. 1026.40(d)(12)(ix), the
highest rate in the range must be used for the disclosure under this
paragraph. As an alternative to making disclosures based on each
payment option, the creditor may choose a representative example
within the three categories of payment options upon which to base
this disclosure. (See the commentary to Sec. 1026.40(d)(5).)
However, separate examples must be provided for the draw period and
for any repayment period unless the payment is determined the same
way in both periods. Creditors should calculate the example for the
repayment period based on an assumed $10,000 balance. (See the
commentary to Sec. 1026.40(d)(5) for a discussion of the
circumstances in which a creditor may use a lower outstanding
balance.)
2. Time the maximum rate could be reached. In stating the date
or time when the maximum rate could be reached, creditors should
assume the rate increases as rapidly as possible under the plan. In
calculating the date or time, creditors should factor in any
discounted or premium initial rates and periodic rate limitations.
This disclosure must be provided for the draw phase and any
repayment phase. Creditors should assume the index and margin shown
in the last year of the historical example (or a more recent rate)
is in effect at the beginning of each phase.
Paragraph 40(d)(12)(xi)
1. Index movement. Index values and annual percentage rates must
be shown for the entire 15 years of the historical example and must
be based on the most recent 15 years. The example must be updated
annually to reflect the most recent 15 years of index values as soon
as reasonably possible after the new index value becomes available.
If the values for an index have not been available for 15 years, a
creditor need only go back as far as the values have been available
and may start the historical example at the year for which values
are first available.
2. Selection of index values. The historical example must
reflect the method of choosing index values for the plan. For
example, if an average of index values is used in the plan, averages
must be used in the example, but if an index value as of a
particular date is used, a single index value must be shown. The
creditor is required to assume one date (or one period, if an
average is used) within a year on which to base the history of index
[[Page 80023]]
values. The creditor may choose to use index values as of any date
or period as long as the index value as of this date or period is
used for each year in the example. Only one index value per year
need be shown, even if the plan provides for adjustments to the
annual percentage rate or payment more than once in a year. In such
cases, the creditor can assume that the index rate remained constant
for the full year for the purpose of calculating the annual
percentage rate and payment.
3. Selection of margin. A value for the margin must be assumed
in order to prepare the example. A creditor may select a
representative margin that it has used with the index during the six
months preceding preparation of the disclosures and state that the
margin is one that it has used recently. The margin selected may be
used until the creditor annually updates the disclosure form to
reflect the most recent 15 years of index values.
4. Amount of discount or premium. In reflecting any discounted
or premium initial rate, the creditor may select a discount or
premium that it has used during the six months preceding preparation
of the disclosures, and should disclose that the discount or premium
is one that the creditor has used recently. The discount or premium
should be reflected in the example for as long as it is in effect.
The creditor may assume that a discount or premium that would have
been in effect for any part of a year was in effect for the full
year for purposes of reflecting it in the historical example.
5. Rate limitations. Limitations on both periodic and maximum
rates must be reflected in the historical example. If ranges of rate
limitations are provided under Sec. 1026.40(d)(12)(ix), the highest
rates provided in those ranges must be used in the example. Rate
limitations that may apply more often than annually should be
treated as if they were annual limitations. For example, if a
creditor imposes a 1% cap every six months, this should be reflected
in the example as if it were a 2% annual cap.
6. Assumed advances. The creditor should assume that the $10,000
balance is an advance taken at the beginning of the first billing
cycle and is reduced according to the terms of the plan, and that
the consumer takes no subsequent draws. As discussed in the
commentary to Sec. 1026.40(d)(5), creditors should not assume an
additional advance is taken at the beginning of any repayment
period. If applicable, the creditor may assume the $10,000 is both
the advance and the credit limit. (See the commentary to Sec.
1026.40(d)(5) for a discussion of the circumstances in which a
creditor may use a lower outstanding balance.)
7. Representative payment options. The creditor need not provide
an historical example for all of its various payment options, but
may select a representative payment option within each of the three
categories of payments upon which to base its disclosure. (See the
commentary to Sec. 1026.40(d)(5).)
8. Payment information. i. The payment figures in the historical
example must reflect all significant program terms. For example,
features such as rate and payment caps, a discounted initial rate,
negative amortization, and rate carryover must be taken into account
in calculating the payment figures if these would have applied to
the plan. The historical example should include payments for as much
of the length of the plan as would occur during a 15-year period.
For example:
A. If the draw period is 10 years and the repayment period is 15
years, the example should illustrate the entire 10-year draw period
and the first 5 years of the repayment period.
B. If the length of the draw period is 15 years and there is a
15-year repayment phase, the historical example must reflect the
payments for the 15-year draw period and would not show any of the
repayment period. No additional historical example would be required
to reflect payments for the repayment period.
C. If the length of the plan is less than 15 years, payments in
the historical example need only be shown for the number of years in
the term. In such cases, however, the creditor must show the index
values, margin and annual percentage rates and continue to reflect
all significant plan terms such as rate limitations for the entire
15 years.
ii. A creditor need show only a single payment per year in the
example, even though payments may vary during a year. The
calculations should be based on the actual payment computation
formula, although the creditor may assume that all months have an
equal number of days. The creditor may assume that payments are made
on the last day of the billing cycle, the billing date or the
payment due date, but must be consistent in the manner in which the
period used to illustrate payment information is selected.
Information about balloon payments and remaining balance may, but
need not, be reflected in the example.
9. Disclosures for repayment period. The historical example must
reflect all features of the repayment period, including the
appropriate index values, margin, rate limitations, length of the
repayment period, and payments. For example, if different indices
are used during the draw and repayment periods, the index values for
that portion of the 15 years that reflect the repayment period must
be the values for the appropriate index.
10. Reverse mortgages. The historical example for reverse
mortgages should reflect 15 years of index values and annual
percentage rates, but the payment column should be blank until the
year that the single payment will be made, assuming that payment is
estimated to occur within 15 years. (See the commentary to Sec.
1026.40(d)(5) for a discussion of reverse mortgages.)
40(e) Brochure
1. Substitutes. A brochure is a suitable substitute for the home
equity brochure, ``What You Should Know About Home Equity Lines of
Credit,'' (available on the Bureau's Web site) if it is, at a
minimum, comparable to that brochure in substance and
comprehensiveness. Creditors are permitted to provide more detailed
information than is contained in that brochure.
2. Effect of third party delivery of brochure. If a creditor
determines that a third party has provided a consumer with the
required brochure pursuant to Sec. 1026.40(c), the creditor need
not give the consumer a second brochure.
40(f) Limitations on Home Equity Plans
1. Coverage. Section 1026.40(f) limits both actions that may be
taken and language that may be included in contracts, and applies to
any assignee or holder as well as to the original creditor. The
limitations apply to the draw period and any repayment period, and
to any renewal or modification of the original agreement.
Paragraph 40(f)(1)
1. External index. A creditor may change the annual percentage
rate for a plan only if the change is based on an index outside the
creditor's control. Thus, a creditor may not make rate changes based
on its own prime rate or cost of funds and may not reserve a
contractual right to change rates at its discretion. A creditor is
permitted, however, to use a published prime rate, such as that in
the Wall Street Journal, even if the bank's own prime rate is one of
several rates used to establish the published rate.
2. Publicly available. The index must be available to the
public. A publicly available index need not be published in a
newspaper, but it must be one the consumer can independently obtain
(by telephone, for example) and use to verify rates imposed under
the plan.
3. Provisions not prohibited. This paragraph does not prohibit
rate changes that are specifically set forth in the agreement. For
example, stepped-rate plans, in which specified rates are imposed
for specified periods, are permissible. In addition, preferred-rate
provisions, in which the rate increases by a specified amount upon
the occurrence of a specified event, also are permissible.
Paragraph 40(f)(2)
1. Limitations on termination and acceleration. In general,
creditors are prohibited from terminating and accelerating payment
of the outstanding balance before the scheduled expiration of a
plan. However, creditors may take these actions in the four
circumstances specified in Sec. 1026.40(f)(2). Creditors are not
permitted to specify in their contracts any other events that allow
termination and acceleration beyond those permitted by the
regulation. Thus, for example, an agreement may not provide that the
balance is payable on demand nor may it provide that the account
will be terminated and the balance accelerated if the rate cap is
reached.
2. Other actions permitted. If an event permitting termination
and acceleration occurs, a creditor may instead take actions short
of terminating and accelerating. For example, a creditor could
temporarily or permanently suspend further advances, reduce the
credit limit, change the payment terms, or require the consumer to
pay a fee. A creditor also may provide in its agreement that a
higher rate or higher fees will apply in circumstances under which
it would otherwise be permitted to terminate the plan and accelerate
the balance. A creditor that does not immediately terminate an
account and accelerate payment or take another
[[Page 80024]]
permitted action may take such action at a later time, provided one
of the conditions permitting termination and acceleration exists at
that time.
Paragraph 40(f)(2)(i)
1. Fraud or material misrepresentation. A creditor may terminate
a plan and accelerate the balance if there has been fraud or
material misrepresentation by the consumer in connection with the
plan. This exception includes fraud or misrepresentation at any
time, either during the application process or during the draw
period and any repayment period. What constitutes fraud or
misrepresentation is determined by applicable state law and may
include acts of omission as well as overt acts, as long as any
necessary intent on the part of the consumer exists.
Paragraph 40(f)(2)(ii)
1. Failure to meet repayment terms. A creditor may terminate a
plan and accelerate the balance when the consumer fails to meet the
repayment terms provided for in the agreement. However, a creditor
may terminate and accelerate under this provision only if the
consumer actually fails to make payments. For example, a creditor
may not terminate and accelerate if the consumer, in error, sends a
payment to the wrong location, such as a branch rather than the main
office of the creditor. If a consumer files for or is placed in
bankruptcy, the creditor may terminate and accelerate under this
provision if the consumer fails to meet the repayment terms of the
agreement. This section does not override any state or other law
that requires a right-to-cure notice, or otherwise places a duty on
the creditor before it can terminate a plan and accelerate the
balance.
Paragraph 40(f)(2)(iii)
1. Impairment of security. A creditor may terminate a plan and
accelerate the balance if the consumer's action or inaction
adversely affects the creditor's security for the plan, or any right
of the creditor in that security. Action or inaction by third
parties does not, in itself, permit the creditor to terminate and
accelerate.
2. Examples. i. A creditor may terminate and accelerate, for
example, if:
A. The consumer transfers title to the property or sells the
property without the permission of the creditor.
B. The consumer fails to maintain required insurance on the
dwelling.
C. The consumer fails to pay taxes on the property.
D. The consumer permits the filing of a lien senior to that held
by the creditor.
E. The sole consumer obligated on the plan dies.
F. The property is taken through eminent domain.
G. A prior lienholder forecloses.
ii. By contrast, the filing of a judgment against the consumer
would permit termination and acceleration only if the amount of the
judgment and collateral subject to the judgment is such that the
creditor's security is adversely affected. If the consumer commits
waste or otherwise destructively uses or fails to maintain the
property such that the action adversely affects the security, the
plan may be terminated and the balance accelerated. Illegal use of
the property by the consumer would permit termination and
acceleration if it subjects the property to seizure. If one of two
consumers obligated on a plan dies the creditor may terminate the
plan and accelerate the balance if the security is adversely
affected. If the consumer moves out of the dwelling that secures the
plan and that action adversely affects the security, the creditor
may terminate a plan and accelerate the balance.
Paragraph 40(f)(3)
1. Scope of provision. In general, a creditor may not change the
terms of a plan after it is opened. For example, a creditor may not
increase any fee or impose a new fee once the plan has been opened,
even if the fee is charged by a third party, such as a credit
reporting agency, for a service. The change of terms prohibition
applies to all features of a plan, not only those required to be
disclosed under this section. For example, this provision applies to
charges imposed for late payment, although this fee is not required
to be disclosed under Sec. 1026.40(d)(7).
2. Charges not covered. There are three charges not covered by
this provision. A creditor may pass on increases in taxes since such
charges are imposed by a governmental body and are beyond the
control of the creditor. In addition, a creditor may pass on
increases in premiums for property insurance that are excluded from
the finance charge under Sec. 1026.4(d)(2), since such insurance
provides a benefit to the consumer independent of the use of the
line and is often maintained notwithstanding the line. A creditor
also may pass on increases in premiums for credit insurance that are
excluded from the finance charge under Sec. 1026.4(d)(1), since the
insurance is voluntary and provides a benefit to the consumer.
Paragraph 40(f)(3)(i)
1. Changes provided for in agreement. A creditor may provide in
the initial agreement that further advances will be prohibited or
the credit line reduced during any period in which the maximum
annual percentage rate is reached. A creditor also may provide for
other specific changes to take place upon the occurrence of specific
events. Both the triggering event and the resulting modification
must be stated with specificity. For example, in home equity plans
for employees, the agreement could provide that a specified higher
rate or margin will apply if the borrower's employment with the
creditor ends. A contract could contain a stepped-rate or stepped-
fee schedule providing for specified changes in the rate or the fees
on certain dates or after a specified period of time. A creditor
also may provide in the initial agreement that it will be entitled
to a share of the appreciation in the value of the property as long
as the specific appreciation share and the specific circumstances
which require the payment of it are set forth. A contract may permit
a consumer to switch among minimum payment options during the plan.
2. Prohibited provisions. A creditor may not include a general
provision in its agreement permitting changes to any or all of the
terms of the plan. For example, creditors may not include
``boilerplate'' language in the agreement stating that they reserve
the right to change the fees imposed under the plan. In addition, a
creditor may not include any ``triggering events'' or responses that
the regulation expressly addresses in a manner different from that
provided in the regulation. For example, an agreement may not
provide that the margin in a variable-rate plan will increase if
there is a material change in the consumer's financial
circumstances, because the regulation specifies that temporarily
freezing the line or lowering the credit limit is the permissible
response to a material change in the consumer's financial
circumstances. Similarly a contract cannot contain a provision
allowing the creditor to freeze a line due to an insignificant
decline in property value since the regulation allows that response
only for a significant decline.
Paragraph 40(f)(3)(ii)
1. Substitution of index. A creditor may change the index and
margin used under the plan if the original index becomes
unavailable, as long as historical fluctuations in the original and
replacement indices were substantially similar, and as long as the
replacement index and margin will produce a rate similar to the rate
that was in effect at the time the original index became
unavailable. If the replacement index is newly established and
therefore does not have any rate history, it may be used if it
produces a rate substantially similar to the rate in effect when the
original index became unavailable.
Paragraph 40(f)(3)(iii)
1. Changes by written agreement. A creditor may change the terms
of a plan if the consumer expressly agrees in writing to the change
at the time it is made. For example, a consumer and a creditor could
agree in writing to change the repayment terms from interest-only
payments to payments that reduce the principal balance. The
provisions of any such agreement are governed by the limitations in
Sec. 1026.40(f). For example, a mutual agreement could not provide
for future annual percentage rate changes based on the movement of
an index controlled by the creditor or for termination and
acceleration under circumstances other than those specified in the
regulation. By contrast, a consumer could agree to a new credit
limit for the plan, although the agreement could not permit the
creditor to later change the credit limit except by a subsequent
written agreement or in the circumstances described in Sec.
1026.40(f)(3)(vi).
2. Written agreement. The change must be agreed to in writing by
the consumer. Creditors are not permitted to assume consent because
the consumer uses an account, even if use of an account would
otherwise constitute acceptance of a proposed change under state
law.
Paragraph 40(f)(3)(iv)
1. Beneficial changes. After a plan is opened, a creditor may
make changes that unequivocally benefit the consumer. Under this
provision, a creditor may offer more
[[Page 80025]]
options to consumers, as long as existing options remain. For
example, a creditor may offer the consumer the option of making
lower monthly payments or could increase the credit limit.
Similarly, a creditor wishing to extend the length of the plan on
the same terms may do so. Creditors are permitted to temporarily
reduce the rate or fees charged during the plan (though a change in
terms notice may be required under Sec. 1026.9(c) when the rate or
fees are returned to their original level). Creditors also may offer
an additional means of access to the line, even if fees are
associated with using the device, provided the consumer retains the
ability to use prior access devices on the original terms.
Paragraph 40(f)(3)(v)
1. Insignificant changes. A creditor is permitted to make
insignificant changes after a plan is opened. This rule accommodates
operational and similar problems, such as changing the address of
the creditor for purposes of sending payments. It does not permit a
creditor to change a term such as a fee charged for late payments.
2. Examples of insignificant changes. Creditors may make minor
changes to features such as the billing cycle date, the payment due
date (as long as the consumer does not have a diminished grace
period if one is provided), and the day of the month on which index
values are measured to determine changes to the rate for variable-
rate plans. A creditor also may change its rounding practice in
accordance with the tolerance rules set forth in Sec. 1026.14 (for
example, stating an exact APR of 14.3333 percent as 14.3 percent,
even if it had previously been stated as 14.33 percent). A creditor
may change the balance computation method it uses only if the change
produces an insignificant difference in the finance charge paid by
the consumer. For example, a creditor may switch from using the
average daily balance method (including new transactions) to the
daily balance method (including new transactions).
Paragraph 40(f)(3)(vi)
1. Suspension of credit privileges or reduction of credit limit.
A creditor may prohibit additional extensions of credit or reduce
the credit limit in the circumstances specified in this section of
the regulation. In addition, as discussed under Sec.
1026.40(f)(3)(i), a creditor may contractually reserve the right to
take such actions when the maximum annual percentage rate is
reached. A creditor may not take these actions under other
circumstances, unless the creditor would be permitted to terminate
the line and accelerate the balance as described in Sec.
1026.40(f)(2). The creditor's right to reduce the credit limit does
not permit reducing the limit below the amount of the outstanding
balance if this would require the consumer to make a higher payment.
2. Temporary nature of suspension or reduction. Creditors are
permitted to prohibit additional extensions of credit or reduce the
credit limit only while one of the designated circumstances exists.
When the circumstance justifying the creditor's action ceases to
exist, credit privileges must be reinstated, assuming that no other
circumstance permitting such action exists at that time.
3. Imposition of fees. If not prohibited by state law, a
creditor may collect only bona fide and reasonable appraisal and
credit report fees if such fees are actually incurred in
investigating whether the condition permitting the freeze continues
to exist. A creditor may not, in any circumstances, impose a fee to
reinstate a credit line once the condition has been determined not
to exist.
4. Reinstatement of credit privileges. Creditors are responsible
for ensuring that credit privileges are restored as soon as
reasonably possible after the condition that permitted the
creditor's action ceases to exist. One way a creditor can meet this
responsibility is to monitor the line on an ongoing basis to
determine when the condition ceases to exist. The creditor must
investigate the condition frequently enough to assure itself that
the condition permitting the freeze continues to exist. The
frequency with which the creditor must investigate to determine
whether a condition continues to exist depends upon the specific
condition permitting the freeze. As an alternative to such
monitoring, the creditor may shift the duty to the consumer to
request reinstatement of credit privileges by providing a notice in
accordance with Sec. 1026.9(c)(1)(iii). A creditor may require a
reinstatement request to be in writing if it notifies the consumer
of this requirement on the notice provided under Sec.
1026.9(c)(1)(iii). Once the consumer requests reinstatement, the
creditor must promptly investigate to determine whether the
condition allowing the freeze continues to exist. Under this
alternative, the creditor has a duty to investigate only upon the
consumer's request.
5. Suspension of credit privileges following request by
consumer. A creditor may honor a specific request by a consumer to
suspend credit privileges. If the consumer later requests that the
creditor reinstate credit privileges, the creditor must do so
provided no other circumstance justifying a suspension exists at
that time. If two or more consumers are obligated under a plan and
each has the ability to take advances, the agreement may permit any
of the consumers to direct the creditor not to make further
advances. A creditor may require that all persons obligated under a
plan request reinstatement.
6. Significant decline defined. What constitutes a significant
decline for purposes of Sec. 1026.40(f)(3)(vi)(A) will vary
according to individual circumstances. In any event, if the value of
the dwelling declines such that the initial difference between the
credit limit and the available equity (based on the property's
appraised value for purposes of the plan) is reduced by fifty
percent, this constitutes a significant decline in the value of the
dwelling for purposes of Sec. 1026.40(f)(3)(vi)(A). For example,
assume that a house with a first mortgage of $50,000 is appraised at
$100,000 and the credit limit is $30,000. The difference between the
credit limit and the available equity is $20,000, half of which is
$10,000. The creditor could prohibit further advances or reduce the
credit limit if the value of the property declines from $100,000 to
$90,000. This provision does not require a creditor to obtain an
appraisal before suspending credit privileges although a significant
decline must occur before suspension can occur.
7. Material change in financial circumstances. Two conditions
must be met for Sec. 1026.40(f)(3)(vi)(B) to apply. First, there
must be a ``material change'' in the consumer's financial
circumstances, such as a significant decrease in the consumer's
income. Second, as a result of this change, the creditor must have a
reasonable belief that the consumer will be unable to fulfill the
payment obligations of the plan. A creditor may, but does not have
to, rely on specific evidence (such as the failure to pay other
debts) in concluding that the second part of the test has been met.
A creditor may prohibit further advances or reduce the credit limit
under this section if a consumer files for or is placed in
bankruptcy.
8. Default of a material obligation. Creditors may specify
events that would qualify as a default of a material obligation
under Sec. 1026.40(f)(3)(vi)(C). For example, a creditor may
provide that default of a material obligation will exist if the
consumer moves out of the dwelling or permits an intervening lien to
be filed that would take priority over future advances made by the
creditor.
9. Government limits on the annual percentage rate. Under Sec.
1026.40(f)(3)(vi)(D), a creditor may prohibit further advances or
reduce the credit limit if, for example, a state usury law is
enacted which prohibits a creditor from imposing the agreed-upon
annual percentage rate.
40(g) Refund of Fees
1. Refund of fees required. If any disclosed term, including any
term provided upon request pursuant to Sec. 1026.40(d), changes
between the time the early disclosures are provided to the consumer
and the time the plan is opened, and the consumer as a result
decides to not enter into the plan, a creditor must refund all fees
paid by the consumer in connection with the application. All fees,
including credit report fees and appraisal fees, must be refunded
whether such fees are paid to the creditor or directly to third
parties. A consumer is entitled to a refund of fees under these
circumstances whether or not terms are guaranteed by the creditor
under Sec. 1026.40(d)(2)(i).
2. Variable-rate plans. The right to a refund of fees does not
apply to changes in the annual percentage rate resulting from
fluctuations in the index value in a variable-rate plan. Also, if
the maximum annual percentage rate is expressed as an amount over
the initial rate, the right to refund of fees would not apply to
changes in the cap resulting from fluctuations in the index value.
3. Changes in terms. If a term, such as the maximum rate, is
stated as a range in the early disclosures, and the term ultimately
applicable to the plan falls within that range, a change does not
occur for purposes of this section. If, however, no range is used
and the term is changed (for example, a rate cap of 6 rather than 5
percentage points over the initial rate), the change would permit
the
[[Page 80026]]
consumer to obtain a refund of fees. If a fee imposed by the
creditor is stated in the early disclosures as an estimate and the
fee changes, the consumer could elect to not enter into the
agreement and would be entitled to a refund of fees. On the other
hand, if fees imposed by third parties are disclosed as estimates
and those fees change, the consumer is not entitled to a refund of
fees paid in connection with the application. Creditors must,
however, use the best information reasonably available in providing
disclosures about such fees.
4. Timing of refunds and relation to other provisions. The
refund of fees must be made as soon as reasonably possible after the
creditor is notified that the consumer is not entering into the plan
because of the changed term, or that the consumer wants a refund of
fees. The fact that an application fee may be refunded to some
applicants under this provision does not render such fees finance
charges under Sec. 1026.4(c)(1) of the regulation.
40(h) Imposition of Nonrefundable Fees
1. Collection of fees after consumer receives disclosures. A fee
may be collected after the consumer receives the disclosures and
brochure and before the expiration of three days, although the fee
must be refunded if, within three days of receiving the required
information, the consumer decides to not enter into the agreement.
In such a case, the consumer must be notified that the fee is
refundable for three days. The notice must be clear and conspicuous
and in writing, and may be included with the disclosures required
under Sec. 1026.40(d) or as an attachment to them. If disclosures
and brochure are mailed to the consumer, Sec. 1026.40(h) provides
that a nonrefundable fee may not be imposed until six business days
after the mailing.
2. Collection of fees before consumer receives disclosures. An
application fee may be collected before the consumer receives the
disclosures and brochure (for example, when an application contained
in a magazine is mailed in with an application fee) provided that it
remains refundable until three business days after the consumer
receives the Sec. 1026.40 disclosures. No other fees except a
refundable membership fee may be collected until after the consumer
receives the disclosures required under Sec. 1026.40.
3. Relation to other provisions. A fee collected before
disclosures are provided may become nonrefundable except that, under
Sec. 1026.40(g), it must be refunded if the consumer elects to not
enter into the plan because of a change in terms. (Of course, all
fees must be refunded if the consumer later rescinds under Sec.
1026.15.)
Section 1026.42--Valuation Independence
42(a) Scope
1. Open- and closed-end credit. Section 1026.42 applies to both
open-end and closed-end transactions secured by the consumer's
principal dwelling.
2. Consumer's principal dwelling. Section 1026.42 applies only
if the dwelling that will secure a consumer credit transaction is
the principal dwelling of the consumer who obtains credit.
42(b) Definitions
Paragraph 42(b)(1)
1. Examples of covered persons. ``Covered persons'' include
creditors, mortgage brokers, appraisers, appraisal management
companies, real estate agents, and other persons that provide
``settlement services'' as defined under the Real Estate Settlement
Procedures Act and implementing regulations. See 12 U.S.C. 2602(3).
2. Examples of persons not covered. The following persons are
not ``covered persons'' (unless, of course, they are creditors with
respect to a covered transaction or perform ``settlement services''
in connection with a covered transaction):
i. The consumer who obtains credit through a covered
transaction.
ii. A person secondarily liable for a covered transaction, such
as a guarantor.
iii. A person that resides in or will reside in the consumer's
principal dwelling but will not be liable on the covered
transaction, such as a non-obligor spouse.
Paragraph 42(b)(2)
1. Principal dwelling. The term ``principal dwelling'' has the
same meaning under Sec. 1026.42(b) as under Sec. Sec.
1026.2(a)(24), 1026.15(a), and 1026.23(a). See comments 2(a)(24)-3,
15(a)-5, and 23(a)-3.
Paragraph 42(b)(3)
1. Valuation. A ``valuation'' is an estimate of value prepared
by a natural person, such as an appraisal report prepared by an
appraiser or an estimate of market value prepared by a real estate
agent. The term includes photographic or other information included
with a written estimate of value. A ``valuation'' includes an
estimate provided or viewed electronically, such as an estimate
transmitted via electronic mail or viewed using a computer.
2. Automated model or system. A ``valuation'' does not include
an estimate of value produced exclusively using an automated model
or system. However, a ``valuation'' includes an estimate of value
developed by a natural person based in part on an estimate of value
produced using an automated model or system.
3. Estimate. An estimate of the value of the consumer's
principal dwelling includes an estimate of a range of values for the
consumer's principal dwelling.
42(c) Valuation for consumer's principal dwelling
42(c)(1) Coercion
1. State law. The terms ``coercion,'' ``extortion,''
``inducement,'' ``bribery,'' ``intimidation,'' ``compensation,''
``instruction,'' and ``collusion'' have the meanings given to them
by applicable state law or contract. See Sec. 1026.2(b)(3).
2. Purpose. A covered person does not violate Sec.
1026.42(c)(1) if the person does not engage in an act or practice
set forth in Sec. 1026.42(c)(1) for the purpose of causing the
value assigned to the consumer's principal dwelling to be based on a
factor other than the independent judgment of a person that prepares
valuations. For example, requesting that a person that prepares a
valuation take certain actions, such as consider additional,
appropriate property information, does not violate Sec. 1026.42(c),
because such request does not supplant the independent judgment of
the person that prepares a valuation. See Sec. 1026.42(c)(3)(i). A
covered person also may provide incentives, such as additional
compensation, to a person that prepares valuations or performs
valuation management functions under Sec. 1026.42(c)(1), as long as
the covered person does not cause or attempt to cause the value
assigned to the consumer's principal dwelling to be based on a
factor other than the independent judgment of the person that
prepares valuations.
3. Person that prepares valuations. For purposes of Sec.
1026.42, the term ``valuation'' includes an estimate of value
regardless of whether it is an appraisal prepared by a state-
certified or -licensed appraiser. See comment 42(b)(3)-1. A person
that prepares valuations may or may not be a state-licensed or
state-certified appraiser. Thus a person violates Sec.
1026.42(c)(1) by engaging in prohibited acts or practices directed
towards any person that prepares or may prepare a valuation of the
consumer's principal dwelling for a covered transaction. For
example, a person violates Sec. 1026.42(c)(1) by seeking to coerce
a real estate agent to assign a value to the consumer's principal
dwelling based on a factor other than the independent judgment of
the real estate agent, in connection with a covered transaction.
4. Indirect acts or practices. Section 1026.42(c)(1) prohibits
both direct and indirect attempts to cause the value assigned to the
consumer's principal dwelling to be based on a factor other than the
independent judgment of the person that prepares the valuation,
through coercion and certain other acts and practices. For example,
a creditor violates Sec. 1026.42(c)(1) if the creditor attempts to
cause the value an appraiser engaged by an appraisal management
company assigns to the consumer's principal dwelling to be based on
a factor other than the appraiser's independent judgment, by
threatening to withhold future business from a title company
affiliated with the appraisal management company unless the
appraiser assigns a value to the dwelling that meets or exceeds a
minimum threshold.
Paragraph 42(c)(1)(i)
1. Applicability of examples. Section 1026.42(c)(1)(i) provides
examples of coercion of a person that prepares valuations. However,
Sec. 1026.42(c)(1)(i) also applies to coercion of a person that
performs valuation management functions or its affiliate. See Sec.
1026.42(c)(1); comment 42(c)(1) 4.
2. Specific value or predetermined threshold. As used in the
examples of actions prohibited under Sec. 1026.42(c)(1), a
``specific value'' and a ``predetermined threshold'' include a
predetermined minimum, maximum, or range of values. Further,
although the examples assume a covered person's prohibited actions
are designed to cause the value assigned to the consumer's principal
dwelling to equal or exceed a certain amount, the rule applies
equally to cases where a covered person's prohibited actions are
designed to cause the value assigned to the dwelling to be below a
certain amount.
[[Page 80027]]
42(c)(2) Mischaracterization of Value
42(c)(2)(i) Misrepresentation
1. Opinion of value. Section 1026.42(c)(2)(i) prohibits a person
that performs valuations from misrepresenting the value of the
consumer's principal dwelling in a valuation. Such person
misrepresents the value of the consumer's principal dwelling by
assigning a value to such dwelling that does not reflect the
person's opinion of the value of such dwelling. For example, an
appraiser misrepresents the value of the consumer's principal
dwelling if the appraiser estimates that the value of such dwelling
is $250,000 applying the standards required by the Uniform Standards
of Professional Appraisal Standards but assigns a value of $300,000
to such dwelling in a Uniform Residential Appraisal Report.
42(c)(2)(iii) Inducement of Mischaracterization
1. Inducement. A covered person may not induce a person to
materially misrepresent the value of the consumer's principal
dwelling in a valuation or to falsify or alter a valuation. For
example, a loan originator may not coerce a loan underwriter to
alter an appraisal report to increase the value assigned to the
consumer's principal dwelling.
42(d) Prohibition on Conflicts of Interest
42(d)(1)(i) In General
1. Prohibited interest in the property. A person preparing a
valuation or performing valuation management functions for a covered
transaction has a prohibited interest in the property under
paragraph (d)(1)(i) if the person has any ownership or reasonably
foreseeable ownership interest in the property. For example, a
person who seeks a mortgage to purchase a home has a reasonably
foreseeable ownership interest in the property securing the
mortgage, and therefore is not permitted to prepare the valuation or
perform valuation management functions for that mortgage transaction
under paragraph (d)(1)(i).
2. Prohibited interest in the transaction. A person preparing a
valuation or performing valuation management functions has a
prohibited interest in the transaction under paragraph (d)(1)(i) if
that person or an affiliate of that person also serves as a loan
officer of the creditor, mortgage broker, real estate broker, or
other settlement service provider for the transaction and the
conditions under paragraph (d)(4) are not satisfied. A person also
has a prohibited interest in the transaction if the person is
compensated or otherwise receives financial or other benefits based
on whether the transaction is consummated. Under these
circumstances, the person is not permitted to prepare the valuation
or perform valuation management functions for that transaction under
paragraph (d)(1)(i).
42(d)(1)(ii) Employees and Affiliates of Creditors; Providers of
Multiple Settlement Services
1. Employees and affiliates of creditors. In general, a creditor
may use employees or affiliates to prepare a valuation or perform
valuation management functions without violating paragraph
(d)(1)(i). However, whether an employee or affiliate has a direct or
indirect interest in the property or transaction that creates a
prohibited conflict of interest under paragraph (d)(1)(i) depends on
the facts and circumstances of a particular case, including the
structure of the employment or affiliate relationship.
2. Providers of multiple settlement services. In general, a
person who prepares a valuation or perform valuation management
functions for a covered transaction may perform another settlement
service for the same transaction, or the person's affiliate may
perform another settlement service, without violating paragraph
(d)(1)(i). However, whether the person has a direct or indirect
interest in the property or transaction that creates a prohibited
conflict of interest under paragraph (d)(1)(i) depends on the facts
and circumstances of a particular case.
42(d)(2) Employees and Affiliates of Creditors with Assets of More than
$250 Million for Both of the Past two Calendar Years
1. Safe harbor. A person who a prepares valuation or performs
valuation management functions for a covered transaction and is an
employee or affiliate of the creditor will not be deemed to have an
interest prohibited under paragraph (d)(1)(i) on the basis of the
employment or affiliate relationship with the creditor if the
conditions in paragraph (d)(2) are satisfied. Even if the conditions
in paragraph (d)(2) are satisfied, however, the person may have a
prohibited conflict of interest on other grounds, such as if the
person performs a valuation for a purchase-money mortgage
transaction in which the person is the buyer or seller of the
subject property. Thus, in general, in any covered transaction in
which the creditor had assets of more than $250 million for both of
the past two years, the creditor may use its own employee or
affiliate to prepare a valuation or perform valuation management
functions for a particular transaction, as long as the conditions
described in paragraph (d)(2) are satisfied. If the conditions in
paragraph (d)(2) are not satisfied, whether a person preparing a
valuation or performing valuation management functions has violated
paragraph (d)(1)(i) depends on all of the facts and circumstances.
Paragraph 42(d)(2)(ii)
1. Prohibition on reporting to a person who is part of the
creditor's loan production function. To qualify for the safe harbor
under paragraph (d)(2), the person preparing a valuation or
performing valuation management functions may not report to a person
who is part of the creditor's loan production function (as defined
in paragraph (d)(5)(i) and comment 42(d)(5)(i)-1). For example, if a
person preparing a valuation is directly supervised or managed by a
loan officer or other person in the creditor's loan production
function, or by a person who is directly supervised or managed by a
loan officer, the condition under paragraph (d)(2)(ii) is not met.
2. Prohibition on reporting to a person whose compensation is
based on the transaction closing. To qualify for the safe harbor
under paragraph (d)(2), the person preparing a valuation or
performing valuation management functions may not report to a person
whose compensation is based on the closing of the transaction to
which the valuation relates. For example, assume an appraisal
management company performs valuation management functions for a
transaction in which the creditor is an affiliate of the appraisal
management company. If the employee of the appraisal management
company who is in charge of valuation management functions for that
transaction is supervised by a person who earns a commission or
bonus based on the percentage of closed transactions for which the
appraisal management company provides valuation management
functions, the condition under paragraph (d)(2)(ii) is not met.
Paragraph 42(d)(2)(iii)
1. Direct or indirect involvement in selection of person who
prepares a valuation. In any covered transaction, the safe harbor
under paragraph (d)(2) is available if, among other things, no
employee, officer or director in the creditor's loan production
function (as defined in paragraph (d)(4)(ii) and comment
42(d)(4)(ii)-1) is directly or indirectly involved in selecting,
retaining, recommending or influencing the selection of the person
to prepare a valuation or perform valuation management functions, or
to be included in or excluded from a list or panel of approved
persons who prepare valuations or perform valuation management
functions. For example, if the person who selects the person to
prepare the valuation for a covered transaction is supervised by an
employee of the creditor who also supervises loan officers, the
condition in paragraph (d)(2)(iii) is not met.
42(d)(3) Employees and Affiliates of Creditors With Assets of $250
Million or Less for Either of the Past Two Calendar Years
1. Safe harbor. A person who prepares a valuation or performs
valuation management functions for a covered transaction and is an
employee or affiliate of the creditor will not be deemed to have
interest prohibited under paragraph (d)(1)(i) on the basis of the
employment or affiliate relationship with the creditor if the
conditions in paragraph (d)(3) are satisfied. Even if the conditions
in paragraph (d)(3) are satisfied, however, the person may have a
prohibited conflict of interest on other grounds, such as if the
person performs a valuation for a purchase-money mortgage
transaction in which the person is the buyer or seller of the
subject property. Thus, in general, in any covered transaction in
which the creditor had assets of $250 million or less for either of
the past two calendar years, the creditor may use its own employee
or affiliate to prepare a valuation or perform valuation management
functions for a particular transaction, as long as the conditions
described in paragraph (d)(3) are satisfied. If the conditions in
paragraph (d)(3) are not satisfied, whether a person preparing
valuations or performing valuation management functions has violated
paragraph (d)(1)(i) depends on all of the facts and circumstances.
[[Page 80028]]
42(d)(4) Providers of Multiple Settlement Services
Paragraph 42(d)(4)(i)
1. Safe harbor in transactions in which the creditor had assets
of more than $250 million for both of the past two calendar years. A
person preparing a valuation or performing valuation management
functions in addition to performing another settlement service for
the same transaction, or whose affiliate performs another settlement
service for the transaction, will not be deemed to have interest
prohibited under paragraph (d)(1)(i) as a result of the person or
the person's affiliate performing another settlement service if the
conditions in paragraph (d)(4)(i) are satisfied. Even if the
conditions in paragraph (d)(4)(i) are satisfied, however, the person
may have a prohibited conflict of interest on other grounds, such as
if the person performs a valuation for a purchase-money mortgage
transaction in which the person is the buyer or seller of the
subject property. Thus, in general, in any covered transaction with
a creditor that had assets of more than $250 million for the past
two years, a person preparing a valuation or performing valuation
management functions, or its affiliate, may provide another
settlement service for the same transaction, as long as the
conditions described in paragraph (d)(4)(i) are satisfied. If the
conditions in paragraph (d)(4)(i) are not satisfied, whether a
person preparing valuations or performing valuation management
functions has violated paragraph (d)(1)(i) depends on all of the
facts and circumstances.
2. Reporting. The safe harbor under paragraph (d)(4)(i) is
available if the condition specified in paragraph (d)(2)(ii), among
others, is met. Paragraph (d)(2)(ii) prohibits a person preparing a
valuation or performing valuation management functions from
reporting to a person whose compensation is based on the closing of
the transaction to which the valuation relates. For example, assume
an appraisal management company performs both valuation management
functions and title services, including providing title insurance,
for the same covered transaction. If the appraisal management
company employee in charge of valuation management functions for the
transaction is supervised by the title insurance agent in the
transaction, whose compensation depends in whole or in part on
whether title insurance is sold at the loan closing, the condition
in paragraph (d)(2)(ii) is not met.
Paragraph 42(d)(4)(ii)
1. Safe harbor in transactions in which the creditor had assets
of $250 million or less for either of the past two calendar years. A
person preparing a valuation or performing valuation management
functions in addition to performing another settlement service for
the same transaction, or whose affiliate performs another settlement
service for the transaction, will not be deemed to have an interest
prohibited under paragraph (d)(1)(i) as a result of the person or
the person's affiliate performing another settlement service if the
conditions in paragraph (d)(4)(ii) are satisfied. Even if the
conditions in paragraph (d)(4)(ii) are satisfied, however, the
person may have a prohibited conflict of interest on other grounds,
such as if the person performs a valuation for a purchase-money
mortgage transaction in which the person is the buyer or seller of
the subject property. Thus, in general, in any covered transaction
in which the creditor had assets of $250 million or less for either
of the past two years, a person preparing a valuation or performing
valuation management functions, or its affiliate, may provide other
settlement services for the same transaction, as long as the
conditions described in paragraph (d)(4)(ii) are satisfied. If the
conditions in paragraph (d)(4)(ii) are not satisfied, whether a
person preparing valuations or performing valuation management
functions has violated paragraph (d)(1)(i) depends on all of the
facts and circumstances.
42(d)(5) Definitions
42(d)(5)(i) Loan Production Function
1. Loan production function. One condition of the safe harbors
under paragraphs (d)(2) and (d)(4)(i), involving transactions in
which the creditor had assets of more than $250 million for both of
the past two calendar years, is that the person who prepares a
valuation or performs valuation management functions must report to
a person who is not part of the creditor's ``loan production
function.'' A creditor's ``loan production function'' includes
retail sales staff, loan officers, and any other employee of the
creditor with responsibility for taking a loan application, offering
or negotiating loan terms or whose compensation is based on loan
processing volume. A person is not considered part of a creditor's
loan production function solely because part of the person's
compensation includes a general bonus not tied to specific
transactions or a specific percentage of transactions closing, or a
profit sharing plan that benefits all employees. A person solely
responsible for credit administration or risk management is also not
considered part of a creditor's loan production function. Credit
administration and risk management includes, for example, loan
underwriting, loan closing functions (e.g., loan documentation),
disbursing funds, collecting mortgage payments and otherwise
servicing the loan (e.g., escrow management and payment of taxes),
monitoring loan performance, and foreclosure processing.
42(e) When Extension of Credit Prohibited
1. Reasonable diligence. A creditor will be deemed to have acted
with reasonable diligence under Sec. 1026.42(e) if the creditor
extends credit based on a valuation other than the valuation subject
to the restriction in Sec. 1026.42(e). A creditor need not obtain a
second valuation to document that the creditor has acted with
reasonable diligence to determine that the valuation does not
materially misstate or misrepresent the value of the consumer's
principal dwelling, however. For example, assume an appraiser
notifies a creditor before consummation that a loan originator
attempted to cause the value assigned to the consumer's principal
dwelling to be based on a factor other than the appraiser's
independent judgment, through coercion. If the creditor reasonably
determines and documents that the appraisal does not materially
misstate or misrepresent the value of the consumer's principal
dwelling, for purposes of Sec. 1026.42(e), the creditor may extend
credit based on the appraisal.
42(f) Customary and Reasonable Compensation
42(f)(1) Requirement to Provide Customary and Reasonable Compensation
to Fee Appraisers
1. Agents of the creditor. Whether a person is an agent of the
creditor is determined by applicable law; however, a ``fee
appraiser'' as defined in paragraph (f)(4)(i) is not an agent of the
creditor for purposes of paragraph (f), and therefore is not
required to pay other fee appraisers customary and reasonable
compensation under paragraph (f).
2. Geographic market. For purposes of paragraph (f), the
``geographic market of the property being appraised'' means the
geographic market relevant to compensation levels for appraisal
services. Depending on the facts and circumstances, the relevant
geographic market may be a state, metropolitan statistical area
(MSA), metropolitan division, area outside of an MSA, county, or
other geographic area. For example, assume that fee appraisers who
normally work only in County A generally accept $400 to appraise an
attached single-family property in County A. Assume also that very
few or no fee appraisers who work only in contiguous County B will
accept a rate comparable to $400 to appraise an attached single-
family property in County A. The relevant geographic market for an
attached single-family property in County A may reasonably be
defined as County A. On the other hand, assume that fee appraisers
who normally work only in County A generally accept $400 to appraise
an attached single-family property in County A. Assume also that
many fee appraisers who normally work only in contiguous County B
will accept a rate comparable to $400 to appraise an attached
single-family property in County A. The relevant geographic market
for an attached single-family property in County A may reasonably be
defined to include both County A and County B.
3. Failure to perform contractual obligations. Paragraph (f)(1)
does not prohibit a creditor or its agent from withholding
compensation from a fee appraiser for failing to meet contractual
obligations, such as failing to provide the appraisal report or
violating state or Federal appraisal laws in performing the
appraisal.
4. Agreement that fee is ``customary and reasonable.'' A
document signed by a fee appraiser indicating that the appraiser
agrees that the fee paid to the appraiser is ``customary and
reasonable'' does not by itself create a presumption of compliance
with Sec. 1026.42(f) or otherwise satisfy the requirement to pay a
fee appraiser at a customary and reasonable rate.
5. Volume-based discounts. Section 1026.42(f)(1) does not
prohibit a fee appraiser and a creditor (or its agent) from agreeing
to compensation based on transaction volume, so long as the
compensation is customary and reasonable. For example, assume that a
[[Page 80029]]
fee appraiser typically receives $300 for appraisals from creditors
with whom it does business; the fee appraiser, however, agrees to
reduce the fee to $280 for a particular creditor, in exchange for a
minimum number of assignments from the creditor.
42(f)(2) Presumption of Compliance
1. In general. A creditor and its agent are presumed to comply
with paragraph (f)(1) if the creditor or its agent meets the
conditions specified in paragraph (f)(2) in determining the
compensation paid to a fee appraiser. These conditions are not
requirements for compliance but, if met, create a presumption that
the creditor or its agent has complied with Sec. 1026.42(f)(1). A
person may rebut this presumption with evidence that the amount of
compensation paid to a fee appraiser was not customary and
reasonable for reasons unrelated to the conditions in paragraph
(f)(2)(i) or (f)(2)(ii). If a creditor or its agent does not meet
one of the non-required conditions set forth in paragraph (f)(2),
the creditor's and its agent's compliance with paragraph (f)(1) is
determined based on all of the facts and circumstances without a
presumption of either compliance or violation.
Paragraph 42(f)(2)(i)
1. Two-step process for determining customary and reasonable
rates. Paragraph (f)(2)(i) sets forth a two-step process for a
creditor or its agent to determine the amount of compensation that
is customary and reasonable in a given transaction. First, the
creditor or its agent must identify recent rates paid for comparable
appraisal services in the relevant geographic market. Second, once
recent rates have been identified, the creditor or its agent must
review the factors listed in paragraph (f)(2)(i)(A)-(F) and make any
appropriate adjustments to the rates to ensure that the amount of
compensation is reasonable.
2. Identifying recent rates. Whether rates may reasonably be
considered ``recent'' depends on the facts and circumstances.
Generally, ``recent'' rates would include rates charged within one
year of the creditor's or its agent's reliance on this information
to qualify for the presumption of compliance under paragraph (f)(2).
For purposes of the presumption of compliance under paragraph
(f)(2), a creditor or its agent may gather information about recent
rates by using a reasonable method that provides information about
rates for appraisal services in the geographic market of the
relevant property; a creditor or its agent may, but is not required
to, use or perform a fee survey.
3. Accounting for factors. Once recent rates in the relevant
geographic market have been identified, the creditor or its agent
must review the factors listed in paragraph (f)(2)(i)(A)-(F) to
determine the appropriate rate for the current transaction. For
example, if the recent rates identified by the creditor or its agent
were solely for appraisal assignments in which the scope of work
required consideration of two comparable properties, but the current
transaction required an appraisal that considered three comparable
properties, the creditor or its agent might reasonably adjust the
rate by an amount that accounts for the increased scope of work, in
addition to making any other appropriate adjustments based on the
remaining factors.
Paragraph 42(f)(2)(i)(A)
1. Type of property. The type of property may include, for
example, detached or attached single-family property, condominium or
cooperative unit, or manufactured home.
Paragraph 42(f)(2)(i)(B)
1. Scope of work. The scope of work may include, for example,
the type of inspection (such as exterior only or both interior and
exterior) or number of comparables required for the appraisal.
Paragraph 42(f)(2)(i)(D)
1. Fee appraiser qualifications. The fee appraiser
qualifications may include, for example, a state license or
certification in accordance with the minimum criteria issued by the
Appraisal Qualifications Board of the Appraisal Foundation, or
completion of continuing education courses on effective appraisal
methods and related topics.
2. Membership in professional appraisal organization. Paragraph
42(f)(2)(i)(D) does not override state or Federal laws prohibiting
the exclusion of an appraiser from consideration for an assignment
solely by virtue of membership or lack of membership in any
particular appraisal organization. See, e.g., 12 CFR 225.66(a).
Paragraph 42(f)(2)(i)(E)
1. Fee appraiser experience and professional record. The fee
appraiser's level of experience may include, for example, the fee
appraiser's years of service as a state-licensed or state-certified
appraiser, or years of service appraising properties in a particular
geographical area or of a particular type. The fee appraiser's
professional record may include, for example, whether the fee
appraiser has a past record of suspensions, disqualifications,
debarments, or judgments for waste, fraud, abuse or breach of legal
or professional standards.
Paragraph 42(f)(2)(i)(F)
1. Fee appraiser work quality. The fee appraiser's work quality
may include, for example, the past quality of appraisals performed
by the appraiser based on the written performance and review
criteria of the creditor or agent of the creditor.
Paragraph 42(f)(2)(ii)
1. Restraining trade. Under Sec. 1026.42(f)(2)(ii)(A), creditor
or its agent would not qualify for the presumption of compliance
under paragraph (f)(2) if it engaged in any acts to restrain trade
such as entering into a price fixing or market allocation agreement
that affect the compensation of fee appraisers. For example, if
appraisal management company A and appraisal management company B
agreed to compensate fee appraisers at no more than a specific rate
or range of rates, neither appraisal management company would
qualify for the presumption of compliance. Likewise, if appraisal
management company A and appraisal management company B agreed that
appraisal management company A would limit its business to a certain
portion of the relevant geographic market and appraisal management
company B would limit its business to a different portion of the
relevant geographic market, and as a result each appraisal
management company unilaterally set the fees paid to fee appraisers
in their respective portions of the market, neither appraisal
management company would qualify for the presumption of compliance
under paragraph (f)(2).
2. Acts of monopolization. Under Sec. 1026.42(f)(2)(ii)(B), a
creditor or its agent would not qualify for the presumption of
compliance under paragraph (f)(2) if it engaged in any act of
monopolization such as restricting entry into the relevant
geographic market or causing any person to leave the relevant
geographic market, resulting in anticompetitive effects that affect
the compensation paid to fee appraisers. For example, if only one
appraisal management company exists or is predominant in a
particular market area, that appraisal management company might not
qualify for the presumption of compliance if it entered into
exclusivity agreements with all creditors in the market or all fee
appraisers in the market, such that other appraisal management
companies had to leave or could not enter the market. Whether this
behavior would be considered an anticompetitive act that affects the
compensation paid to fee appraisers depends on all of the facts and
circumstances, including applicable law.
42(f)(3) Alternative Presumption of Compliance
1. In general. A creditor and its agent are presumed to comply
with paragraph (f)(1) if the creditor or its agent determine the
compensation paid to a fee appraiser based on information about
customary and reasonable rates that satisfies the conditions in
paragraph (f)(3) for that information. Reliance on information
satisfying the conditions in paragraph (f)(3) is not a requirement
for compliance with paragraph (f)(1), but creates a presumption that
the creditor or its agent has complied. A person may rebut this
presumption with evidence that the rate of compensation paid to a
fee appraiser by the creditor or its agent is not customary and
reasonable based on facts or information other than third-party
information satisfying the conditions of this paragraph (f)(3). If a
creditor or its agent does not rely on information that meets the
conditions in paragraph (f)(3), the creditor's and its agent's
compliance with paragraph (f)(1) is determined based on all of the
facts and circumstances without a presumption of either compliance
or violation.
2. Geographic market. The meaning of ``geographic market'' for
purposes of paragraph (f) is explained in comment (f)(1)-1.
3. Recent rates. Whether rates may reasonably be considered
``recent'' depends on the facts and circumstances. Generally,
``recent'' rates would include rates charged within one year of the
creditor's or its agent's reliance on this information to qualify
for the presumption of compliance under paragraph (f)(3).
[[Page 80030]]
42(f)(4) Definitions
42(f)(4)(i) Fee Appraiser
1. Organization. The term ``organization'' in paragraph
42(f)(4)(i)(B) includes a corporation, partnership, proprietorship,
association, cooperative, or other business entity and does not
include a natural person.
42(g) Mandatory Reporting
42(g)(1) Reporting Required
1. Reasonable basis. A person reasonably believes that an
appraiser has materially failed to comply with the Uniform Standards
of Professional Appraisal Practice (USPAP) established by the
Appraisal Standards Board of the Appraisal Foundation (as defined in
12 U.S.C. 3350(9)) or ethical or professional requirements for
appraisers under applicable state or Federal statutes or regulations
if the person possesses knowledge or information that would lead a
reasonable person in the same circumstances to conclude that the
appraiser has materially failed to comply with USPAP or such
statutory or regulatory requirements.
2. Material failure to comply. For purposes of Sec.
1026.42(g)(1), a material failure to comply is one that is likely to
affect the value assigned to the consumer's principal dwelling. The
following are examples of a material failure to comply with USPAP or
ethical or professional requirements:
i. Mischaracterizing the value of the consumer's principal
dwelling in violation of Sec. 1026.42(c)(2)(i).
ii. Performing an assignment in a grossly negligent manner, in
violation of a rule under USPAP.
iii. Accepting an appraisal assignment on the condition that the
appraiser will report a value equal to or greater than the purchase
price for the consumer's principal dwelling, in violation of a rule
under USPAP.
3. Other matters. Section 1026.42(g)(1) does not require
reporting of a matter that is not material under Sec.
1026.42(g)(1), for example:
i. An appraiser's disclosure of confidential information in
violation of applicable state law.
ii. An appraiser's failure to maintain errors and omissions
insurance in violation of applicable state law.
4. Examples of covered persons. ``Covered persons'' include
creditors, mortgage brokers, appraisers, appraisal management
companies, real estate agents, and other persons that provide
``settlement services'' as defined in section 3(3) of the Real
Estate Settlement Procedures Act (12 U.S.C. 2602(3)) and the
implementing regulation at 12 CFR 1024.2. See Sec. 1026.42(b)(1).
5. Examples of persons not covered. The following persons are
not ``covered persons'' (unless, of course, they are creditors with
respect to a covered transaction or perform ``settlement services''
in connection with a covered transaction):
i. The consumer who obtains credit through a covered
transaction.
ii. A person secondarily liable for a covered transaction, such
as a guarantor.
iii. A person that resides in or will reside in the consumer's
principal dwelling but will not be liable on the covered
transaction, such as a non-obligor spouse.
6. Appraiser. For purposes of Sec. 1026.42(g)(1), an
``appraiser'' is a natural person who provides opinions of the value
of dwellings and is required to be licensed or certified under the
laws of the state in which the consumer's principal dwelling is
located or otherwise is subject to the jurisdiction of the appraiser
certifying and licensing agency for that state. See 12 U.S.C.
3350(1).
Subpart F--Special Rules for Private Education Loans
Section 1026.46--Special Disclosure Requirements for Private
Education Loans
46(a) Coverage
1. Coverage. This subpart applies to all private education loans
as defined in Sec. 1026.46(b)(5). Coverage under this subpart is
optional for certain extensions of credit that do not meet the
definition of ``private education loan'' because the credit is not
extended, in whole or in part, for ``postsecondary educational
expenses'' defined in Sec. 1026.46(b)(3). If a transaction is not
covered and a creditor opts to comply with any section of this
subpart, the creditor must comply with all applicable sections of
this subpart. If a transaction is not covered and a creditor opts
not to comply with this subpart, the creditor must comply with all
applicable requirements under Sec. Sec. 1026.17 and 1026.18.
Compliance with this subpart is optional for an extension of credit
for expenses incurred after graduation from a law, medical, dental,
veterinary, or other graduate school and related to relocation,
study for a bar or other examination, participation in an internship
or residency program, or similar purposes. However, if any part of
such loan is used for postsecondary educational expenses as defined
in Sec. 1026.46(b)(3), then compliance with Subpart F is mandatory
not optional.
46(b) Definitions
46(b)(1) Covered Educational Institution
1. General. A covered educational institution includes any
educational institution that meets the definition of an institution
of higher education in Sec. 1026.46(b)(2). An institution is also a
covered educational institution if it otherwise meets the definition
of an institution of higher education, except for its lack of
accreditation. Such an institution may include, for example, a
university or community college. It may also include an institution,
whether accredited or unaccredited, offering instruction to prepare
students for gainful employment in a recognized profession, such as
flying, culinary arts, or dental assistance. A covered educational
institution does not include elementary or secondary schools.
2. Agent. For purposes of Sec. 1026.46(b)(1), the term agent
means an institution-affiliated organization as defined by Section
151 of the Higher Education Act of 1965 (20 U.S.C 1019) or an
officer or employee of an institution-affiliated organization. Under
Section 151 of the Higher Education Act, an institution-affiliated
organization means any organization that is directly or indirectly
related to a covered institution and is engaged in the practice of
recommending, promoting, or endorsing education loans for students
attending the covered institution or the families of such students.
An institution-affiliated organization may include an alumni
organization, athletic organization, foundation, or social,
academic, or professional organization, of a covered institution,
but does not include any creditor with respect to any private
education loan made by that creditor.
46(b)(2) Institution of Higher Education
1. General. An institution of higher education includes any
institution that meets the definitions contained in sections 101 and
102 of the Higher Education Act of 1965 (20 U.S.C. 1001-1002) and
implementing Department of Education regulations (34 CFR 600). Such
an institution may include, for example, a university or community
college. It may also include an institution offering instruction to
prepare students for gainful employment in a recognized profession,
such as flying, culinary arts, or dental assistance. An institution
of higher education does not include elementary or secondary
schools.
46(b)(3) Postsecondary Educational Expenses
1. General. The examples listed in Sec. 1026.46(b)(3) are
illustrative only. The full list of postsecondary educational
expenses is contained in section 472 of the Higher Education Act of
1965 (20 U.S.C. 1087ll).
46(b)(4) Preferred Lender Arrangement
1. General. The term ``preferred lender arrangement'' is defined
in section 151 of the Higher Education Act of 1965 (20 U.S.C. 1019).
The term refers to an arrangement or agreement between a creditor
and a covered educational institution (or an institution-affiliated
organization as defined by section 151 of the Higher Education Act
of 1965 (20 U.S.C 1019)) under which a creditor provides private
education loans to consumers for students attending the covered
educational institution and the covered educational institution
recommends, promotes, or endorses the private education loan
products of the creditor. It does not include arrangements or
agreements with respect to Federal Direct Stafford/Ford loans, or
Federal PLUS loans made under the Federal PLUS auction pilot
program.
46(b)(5) Private Education Loan
1. Extended expressly for postsecondary educational expenses. A
private education loan is one that is extended expressly for
postsecondary educational expenses. The term includes loans extended
for postsecondary educational expenses incurred while a student is
enrolled in a covered educational institution as well as loans
extended to consolidate a consumer's pre-existing private education
loans.
2. Multiple-purpose loans. i. Definition. A private education
loan may include an extension of credit not excluded under Sec.
1026.46(b)(5) that the consumer may use for multiple purposes
including, but not limited to, postsecondary educational expenses.
If the consumer expressly indicates that the proceeds of the loan
will be used to pay for postsecondary educational expenses by
indicating the loan's purpose on an application, the loan is a
private education loan.
[[Page 80031]]
ii. Coverage. A creditor generally will not know before an
application is received whether the consumer intends to use the loan
for postsecondary educational expenses. For this reason, the
creditor need not provide the disclosures required by Sec.
1026.47(a) on or with the application or solicitation for a loan
that may be used for multiple purposes. See Sec. 1026.47(d)(1)(i).
However, if the consumer expressly indicates that the proceeds of
the loan will be used to pay for postsecondary educational expenses,
the creditor must comply with Sec. Sec. 1026.47(b) and (c) and
Sec. 1026.48. For purposes of the required disclosures, the
creditor must calculate the disclosures based on the entire amount
of the loan, even if only a part of the proceeds is intended for
postsecondary educational expenses. The creditor may rely solely on
a check-box, or a purpose line, on a loan application to determine
whether or not the applicant intends to use loan proceeds for
postsecondary educational expenses.
iii. Examples. The creditor must comply only if the extension of
credit also meets the other parts of the definition of private
education loan. For example, if the creditor uses a single
application form for both open-end and closed-end credit, and the
consumer applies for open-end credit to be used for postsecondary
educational expenses, the extension of credit is not covered.
Similarly, if the consumer indicates the extension of credit will be
used for educational expenses that are not postsecondary educational
expenses, such as elementary or secondary educational expenses, the
extension of credit is not covered. These examples are only
illustrative, not exhaustive.
3. Short-term loans. Some covered educational institutions offer
loans to students with terms of 90 days or less to assist the
student in paying for educational expenses, usually while the
student waits for other funds to be disbursed. Under Sec.
1026.46(b)(5)(iv)(A) such loans are not considered private education
loans, even if interest is charged on the credit balance. (Because
these loans charge interest, they are not covered by the exception
under Sec. 1026.46(b)(5)(iv)(B).) However, these loans are
extensions of credit subject to the requirements of Sec. Sec.
1026.17 and 18. The legal agreement may provide that repayment is
required when the consumer or the educational institution receives
certain funds. If, under the terms of the legal obligation,
repayment of the loan is required when the certain funds are
received by the consumer or the educational institution (such as by
deposit into the consumer's or educational institution's account),
the disclosures should be based on the creditor's estimate of the
time the funds will be delivered.
4. Billing plans. Some covered educational institutions offer
billing plans that permit a consumer to make payments in
installments. Such plans are not considered private education loans,
if an interest rate will not be applied to the credit balance and
the term of the extension of credit is one year or less, even if the
plan is payable in more than four installments. However, such plans
may be extensions of credit subject to the requirements of
Sec. Sec. 1026.17 and 1026.18.
46(c) Form of Disclosures
1. Form of disclosures--relation to other sections. Creditors
must make the disclosures required under this subpart in accordance
with Sec. 1026.46(c). Section 1026.46(c)(2) requires that the
disclosures be grouped together and segregated from everything else.
In complying with this requirement, creditors may follow the rules
in Sec. 1026.17, except where specifically provided otherwise. For
example, although Sec. 1026.17(b) requires creditors to provide
only one set of disclosures before consummation of the transaction,
Sec. Sec. 1026.47(b) and (c) require that the creditor provide the
disclosures under Sec. 1026.18 both upon approval and after the
consumer accepts the loan.
46(c)(3) Electronic Disclosures
1. Application and solicitation disclosures--electronic
disclosures. If the disclosures required under Sec. 1026.47(a) are
provided electronically, they must be provided on or with the
application or solicitation reply form. Electronic disclosures are
deemed to be on or with an application or solicitation if they meet
one of the following conditions:
i. They automatically appear on the screen when the application
or solicitation reply form appears;
ii. They are located on the same Web ``page'' as the application
or solicitation reply form without necessarily appearing on the
initial screen, if the application or reply form contains a clear
and conspicuous reference to the location of the disclosures and
indicates that the disclosures contain rate, fee, and other cost
information, as applicable; or
iii. They are posted on a Web site and the application or
solicitation reply form is linked to the disclosures in a manner
that prevents the consumer from by passing the disclosures before
submitting the application or reply form.
46(d) Timing of Disclosures
1. Receipt of disclosures. Under Sec. 1026.46(d)(4), if the
creditor places the disclosures in the mail, the consumer is
considered to have received them three business days after they are
mailed. For purposes of Sec. 1026.46(d)(4), ``business day'' means
all calendar days except Sundays and the legal public holidays
referred to in Sec. 1026.2(a)(6). See comment 2(a)(6)-2. For
example, if the creditor places the disclosures in the mail on
Thursday, June 4, the disclosures are considered received on Monday,
June 8.
46(d)(1) Application or Solicitation Disclosures
1. Invitations to apply. A creditor may contact a consumer who
has not been pre-selected for a private education loan about taking
out a loan (whether by direct mail, telephone, or other means) and
invite the consumer to complete an application. Such a contact does
not meet the definition of solicitation, nor is it covered by this
subpart, unless the contact itself includes the following:
i. An application form in a direct mailing, electronic
communication or a single application form as a ``take-one'' (in
racks in public locations, for example);
ii. An oral application in a telephone contact; or
iii. An application in an in-person contact.
46(d)(2) Approval Disclosures
1. Timing. The creditor must provide the disclosures required by
Sec. 1026.47(b) at the time the creditor provides to the consumer
any notice that the loan has been approved. However, nothing in this
section prevents the creditor from communicating to the consumer
that additional information is required from the consumer before
approval may be granted. In such a case, a creditor is not required
to provide the disclosures at that time. If the creditor
communicates notice of approval to the consumer by mail, the
disclosures must be mailed at the same time as the notice of
approval. If the creditor communicates notice of approval by
telephone, the creditor must place the disclosures in the mail
within three business days of the telephone call. If the creditor
communicates notice of approval in electronic form, the creditor may
provide the disclosures in electronic form. If the creditor has
complied with the consumer consent and other applicable provisions
of the Electronic Signatures in Global and National Commerce Act (E-
Sign Act) (15 U.S.C. 7001 et seq.) the creditor may provide the
disclosures solely in electronic form; otherwise, the creditor must
place the disclosures in the mail within three business days of the
communication.
46(g) Effect of Subsequent Events
1. Approval disclosures. Inaccuracies in the disclosures
required under Sec. 1026.47(b) are not violations if attributable
to events occurring after disclosures are made, although creditors
are restricted under Sec. 1026.48(c)(2) from making certain changes
to the loan's rate or terms after the creditor provides an approval
disclosure to a consumer. Since creditors are required provide the
final disclosures under Sec. 1026.47(c), they need not make new
approval disclosures in response to an event that occurs after the
creditor delivers the required approval disclosures, except as
specified under Sec. 1026.48(c)(4). For example, at the time the
approval disclosures are provided, the creditor may not know the
precise disbursement date of the loan funds and must provide
estimated disclosures based on the best information reasonably
available and labeled as an estimate. If, after the approval
disclosures are provided, the creditor learns from the educational
institution the precise disbursement date, new approval disclosures
would not be required, unless specifically required under Sec.
1026.48(c)(4) if other changes are made. Similarly, the creditor may
not know the precise amounts of each loan to be consolidated in a
consolidation loan transaction and information about the precise
amounts would not require new approval disclosures, unless
specifically required under Sec. 1026.48(c)(4) if other changes are
made.
2. Final disclosures. Inaccuracies in the disclosures required
under Sec. 1026.47(c) are not violations if attributable to events
occurring after disclosures are made. For example, if the consumer
initially chooses to defer payment of principal and interest while
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enrolled in a covered educational institution, but later chooses to
make payments while enrolled, such a change does not make the
original disclosures inaccurate.
Section 1026.47--Content of Disclosures
1. As applicable. The disclosures required by this subpart need
be made only as applicable, unless specifically required otherwise.
The creditor need not provide any disclosure that is not applicable
to a particular transaction. For example, in a transaction
consolidating private education loans, or in transactions under
Sec. 1026.46(a) for which compliance with this subpart is optional,
the creditor need not disclose the information under Sec. Sec.
1026.47(a)(6), and (b)(4), and any other information otherwise
required to be disclosed under this subpart that is not applicable
to the transaction. Similarly, creditors making loans to consumers
where the student is not attending an institution of higher
education, as defined in Sec. 1026.46(b)(2), need not provide the
disclosures regarding the self-certification form in Sec.
1026.47(a)(8).
47(a) Application or Solicitation Disclosures
Paragraph 47(a)(1)(i)
1. Rates actually offered. The disclosure may state only those
rates that the creditor is actually prepared to offer. For example,
a creditor may not disclose a very low interest rate that will not
in fact be offered at any time. For a loan with variable interest
rates, the ranges of rates will be considered actually offered if:
i. For disclosures in applications or solicitations sent by
direct mail, the rates were in effect within 60 days before mailing;
ii. For disclosures in applications or solicitations in
electronic form, the rates were in effect within 30 days before the
disclosures are sent to a consumer, or for disclosures made on an
Internet Web site, within 30 days before being viewed by the public;
iii. For disclosures in printed applications or solicitations
made available to the general public, the rates were in effect
within 30 days before printing; or
iv. For disclosures provided orally in telephone applications or
solicitations, the rates are currently available at the time the
disclosures are provided.
2. Creditworthiness and other factors. If the rate will depend,
at least in part, on a later determination of the consumer's
creditworthiness or other factors, the disclosure must include a
statement that the rate for which the consumer may qualify at
approval will depend on the consumer's creditworthiness and other
factors. The creditor may, but is not required to, specify any
additional factors that it will use to determine the interest rate.
For example, if the creditor will determine the interest rate based
on information in the consumer's or cosigner's credit report and the
type of school the consumer attends, the creditor may state, ``Your
interest rate will be based on your credit history and other factors
(cosigner credit and school type).''
3. Rates applicable to the loan. For a variable-rate private
education loan, the disclosure of the interest rate or range of
rates must reflect the rate or rates calculated based on the index
and margin that will be used to make interest rate adjustments for
the loan. The creditor may provide a description of the index and
margin or range of margins used to make interest rate adjustments,
including a reference to a source, such as a newspaper, where the
consumer may look up the index.
Paragraph 47(a)(1)(iii)
1. Coverage. The interest rate is considered variable if the
terms of the legal obligation allow the creditor to increase the
interest rate originally disclosed to the consumer and the
requirements of Sec. 1026.47(a)(1)(iii) apply to all such
transactions. The provisions do not apply to increases resulting
from delinquency (including late payment), default, assumption, or
acceleration.
2. Limitations. The creditor must disclose how often the rate
may change and any limit on the amount that the rate may increase at
any one time. The creditor must also disclose any maximum rate over
the life of the transaction. If the legal obligation between the
parties does specify a maximum rate, the creditor must disclose any
legal limits in the nature of usury or rate ceilings under state or
Federal statutes or regulations. However, if the applicable maximum
rate is in the form of a legal limit, such as a state's usury cap
(rather than a maximum rate specified in the legal obligation
between the parties), the creditor must disclose that the maximum
rate is determined by applicable law. The creditor must also
disclose that the consumer's actual rate may be higher or lower than
the initial rates disclosed under Sec. 1026.47(a)(1)(i), if
applicable.
Paragraph 47(a)(1)(iv)
1. Cosigner or guarantor--changes in applicable interest rate.
The creditor must state whether the interest rate typically will be
higher if the loan is not co-signed or guaranteed by a third party.
The creditor is required to provide a statement of the effect on the
interest rate and is not required to provide a numerical estimate of
the effect on the interest rate. For example, a creditor may state:
``Rates are typically higher without a cosigner.''
47(a)(2) Fees and Default or Late Payment Costs
1. Fees or range of fees. The creditor must itemize fees
required to obtain the private education loan. The creditor must
give a single dollar amount for each fee, unless the fee is based on
a percentage, in which case a percentage must be stated. If the
exact amount of the fee is not known at the time of disclosure, the
creditor may disclose the dollar amount or percentage for each fee
as an estimated range.
2. Fees required to obtain the private education loan. The
creditor must itemize the fees that the consumer must pay to obtain
the private education loan. Fees disclosed include all finance
charges under Sec. 1026.4, such as loan origination fees, credit
report fees, and fees charged upon entering repayment, as well as
fees not considered finance charges but required to obtain credit,
such as application fees that are charged whether or not credit is
extended. Fees disclosed include those paid by the consumer directly
to the creditor and fees paid to third parties by the creditor on
the consumer's behalf. Creditors are not required to disclose fees
that apply if the consumer exercises an option under the loan
agreement after consummation, such as fees for deferment,
forbearance, or loan modification.
47(a)(3) Repayment Terms
1. Loan term. The term of the loan is the maximum period of time
during which regularly scheduled payments of principal and interest
will be due on the loan.
2. Payment deferral options--general. The creditor must describe
the options that the consumer has under the loan agreement to defer
payment on the loan. When there is no deferment option provided for
the loan, the creditor must disclose that fact. Payment deferral
options required to be disclosed include options for immediate
deferral of payments, such as when the student is currently enrolled
at a covered educational institution. The description may include of
the length of the maximum initial in-school deferment period, the
types of payments that may be deferred, and a description of any
payments that are required during the deferment period. The creditor
may, but need not, disclose any conditions applicable to the
deferment option, such as that deferment is permitted only while the
student is continuously enrolled in school. If payment deferral is
not an option while the student is enrolled in school, the creditor
may disclose that the consumer must begin repayment upon
disbursement of the loan and that the consumer may not defer
repayment while enrolled in school. If the creditor offers payment
deferral options that may apply during the repayment period, such as
an option to defer payments if the student returns to school to
pursue an additional degree, the creditor must include a statement
referring the consumer to the contract document or promissory note
for more information.
3. Payment deferral options--in school deferment. For each
payment deferral option applicable while the student is enrolled at
a covered educational institution the creditor must disclose whether
interest will accrue while the student is enrolled at a covered
educational institution and, if interest does accrue, whether
payment of interest may be deferred and added to the principal
balance.
4. Combination with cost estimate disclosure. The disclosures of
the loan term under Sec. 1026.47(a)(3)(i) and of the payment
deferral options applicable while the student is enrolled at a
covered educational institution under Sec. Sec. 1026.47(a)(3)(ii)
and (iii) may be combined with the disclosure of cost estimates
required in Sec. 1026.47(a)(4). For example, the creditor may
describe each payment deferral option in the same chart or table
that provides the cost estimates for each payment deferral option.
See Appendix H-21.
5. Bankruptcy limitations. The creditor may comply with Sec.
1026.47(a)(3)(iv) by disclosing the following statement: ``If you
file for bankruptcy you may still be required to pay back this
loan.''
47(a)(4) Cost Estimates
1. Total cost of the loan. For purposes of Sec. 1026.47(a)(4),
the creditor must calculate
[[Page 80033]]
the example of the total cost of the loan in accordance with the
rules in Sec. 1026.18(h) for calculating the loan's total of
payments.
2. Basis for estimates. i. The creditor must calculate the total
cost estimate by determining all finance charges that would be
applicable to loans with the highest rate of interest required to be
disclosed under Sec. 1026.47(a)(1)(i). For example, if a creditor
charges a range of origination fees from 0% to 3%, but the 3%
origination fee would apply to loans with the highest initial rate,
the lender must assume the 3% origination fee is charged. The
creditor must base the total cost estimate on a total loan amount
that includes all prepaid finance charges and results in a $10,000
amount financed. For example, if the prepaid finance charges are
$600, the creditor must base the estimate on a $10,600 total loan
amount and an amount financed of $10,000. The example must reflect
an amount provided of $10,000. If the creditor only offers a
particular private education loan for less than $10,000, the
creditor may assume a loan amount that results in a $5,000 amount
financed for that loan.
ii. If a prepaid finance charge is determined as a percentage of
the amount financed, for purposes of the example, the creditor
should assume that the fee is determined as a percentage of the
total loan amount, even if this is not the creditor's usual
practice. For example, suppose the consumer requires a disbursement
of $10,000 and the creditor charges a 3% origination fee. In order
to calculate the total cost example, the creditor must determine the
loan amount that will result in a $10,000 amount financed after the
3% fee is assessed. In this example, the resulting loan amount would
be $10,309.28. Assessing the 3% origination fee on the loan amount
of $10,309.28 results in an origination fee of $309.28, which is
withheld from the loan funds disbursed to the consumer. The
principal loan amount of $10,309.28 minus the prepaid finance charge
of $309.28 results in an amount financed of $10,000.
3. Calculated for each option to defer interest payments. The
example must include an estimate of the total cost of the loan for
each in-school deferral option disclosed in Sec.
1026.47(a)(3)(iii). For example, if the creditor provides the
consumer with the option to begin making principal and interest
payments immediately, to defer principal payments but begin making
interest-only payments immediately, or to defer all principal and
interest payments while in school, the creditor is required to
disclose three estimates of the total cost of the loan, one for each
deferral option. If the creditor adds accrued interest to the loan
balance (i.e., interest is capitalized), the estimate of the total
loan cost should be based on the capitalization method that the
creditor actually uses for the loan. For instance, for each deferred
payment option where the creditor would capitalize interest on a
quarterly basis, the total loan cost must be calculated assuming
interest capitalizes on a quarterly basis.
4. Deferment period assumptions. Creditors may use either of the
following two methods for estimating the duration of in-school
deferment periods:
i. For loan programs intended for educational expenses of
undergraduate students, the creditor may assume that the consumer
defers payments for a four-year matriculation period, plus the
loan's maximum applicable grace period, if any. For all other loans,
the creditor may assume that the consumer defers for a two-year
matriculation period, plus the maximum applicable grace period, if
any, or the maximum time the consumer may defer payments under the
loan program, whichever is shorter.
ii. Alternatively, if the creditor knows that the student will
be enrolled in a program with a standard duration, the creditor may
assume that the consumer defers payments for the full duration of
the program (plus any grace period). For example, if a creditor
makes loans intended for students enrolled in a four-year medical
school degree program, the creditor may assume that the consumer
defers payments for four years plus the loan's maximum applicable
grace period, if any. However, the creditor may not modify the
disclosure to correspond to a particular student's situation. For
example, even if the creditor knows that a student will be a second-
year medical school student, the creditor must assume a four-year
deferral period.
Paragraph 47(a)(6)(ii)
1. Terms of Federal student loans. The creditor must disclose
the interest rates available under each program under Title IV of
the Higher Education Act of 1965 and whether the rates are fixed or
variable, as prescribed in the Higher Education Act of 1965 (20
U.S.C. 1077a). Where the fixed interest rate for a loan varies by
statute depending on the date of disbursement or receipt of
application, the creditor must disclose only the interest rate as of
the time the disclosure is provided.
Paragraph 47(a)(6)(iii)
1. Web site address. The creditor must include with this
disclosure an appropriate U.S. Department of Education Web site
address such as ``federalstudentaid.ed.gov.''
47(b) Approval Disclosures
47(b)(1) Interest Rate
1. Variable rate disclosures. The interest rate is considered
variable if the terms of the legal obligation allow the creditor to
increase the interest rate originally disclosed to the consumer. The
provisions do not apply to increases resulting from delinquency
(including late payment), default, assumption, or acceleration. In
addition to disclosing the information required under Sec. Sec.
1026.47(b)(ii) and (iii), the creditor must disclose the information
required under Sec. Sec. 1026.18(f)(1)(i) and (iii)--the
circumstances under which the rate may increase and the effect of an
increase, respectively. The creditor is required to disclose the
maximum monthly payment based on the maximum possible rate in Sec.
1026.47(b)(3)(viii), and the creditor need not disclose a separate
example of the payment terms that would result from an increase
under Sec. 1026.18(f)(1)(iv).
2. Limitations on rate adjustments. The creditor must disclose
how often the rate may change and any limit on the amount that the
rate may increase at any one time. The creditor must also disclose
any maximum rate over the life of the transaction. If the legal
obligation between the parties does provide a maximum rate, the
creditor must disclose any legal limits in the nature of usury or
rate ceilings under state or Federal statutes or regulations.
However, if the applicable maximum rate is in the form of a legal
limit, such as a state's usury cap (rather than a maximum rate
specified in the legal obligation between the parties), the creditor
must disclose that the maximum rate is determined by applicable law.
Compliance with Sec. 1026.18(f)(1)(ii) (requiring disclosure of any
limitations on the increase of the interest rate) does not
necessarily constitute compliance with this section. Specifically,
this section requires that if there are no limitations on interest
rate increases, the creditor must disclose that fact. By contrast,
comment 18(f)(1)(ii)-1 states that if there are no limitations the
creditor need not disclose that fact. In addition, under this
section, limitations on rate increases include, rather than exclude,
legal limits in the nature of usury or rate ceilings under state or
Federal statutes or regulations.
3. Rates applicable to the loan. For a variable-rate loan, the
disclosure of the interest rate must reflect the index and margin
that will be used to make interest rate adjustments for the loan.
The creditor may provide a description of the index and margin or
range of margins used to make interest rate adjustments, including a
reference to a source, such as a newspaper, where the consumer may
look up the index.
47(b)(2) Fees and Default or Late Payment Costs
1. Fees and default or late payment costs. Creditors may follow
the commentary for Sec. 1026.47(a)(2) in complying with Sec.
1026.47(b)(2). Creditors must disclose the late payment fees
required to be disclosed under Sec. 1026.18(l) as part of the
disclosure required under Sec. 1026.47(b)(2)(ii). If the creditor
includes the itemization of the amount financed under Sec.
1026.18(c)(1), any fees disclosed as part of the itemization need
not be separately disclosed elsewhere.
47(b)(3) Repayment Terms
1. Principal amount. The principal amount must equal what the
face amount of the note would be as of the time of approval, and it
must be labeled ``Total Loan Amount.'' See Appendix H-18. This
amount may be different from the ``principal loan amount'' used to
calculate the amount financed under comment 18(b)(3)-1, because the
creditor has the option under that comment of using a ``principal
loan amount'' that is different from the face amount of the note. If
the creditor elects to provide an itemization of the amount financed
under Sec. 1026.18(c)(1) the creditor need not disclose the amount
financed elsewhere.
2. Loan term. The term of the loan is the maximum period of time
during which regularly scheduled payments of principal and interest
are due on the loan.
3. Payment deferral options applicable to the consumer.
Creditors may follow the commentary for Sec. 1026.47(a)(3)(ii) in
complying with Sec. 1026.47(b)(3)(iii).
[[Page 80034]]
4. Payments required during enrollment. Required payments that
must be disclosed include payments of interest and principal,
interest only, or other payments that the consumer must make during
the time that the student is enrolled. Compliance with Sec.
1026.18(g) constitutes compliance with Sec. 1026.47(b)(3)(iv).
5. Bankruptcy limitations. The creditor may comply with Sec.
1026.47(b)(3)(vi) by disclosing the following statement: ``If you
file for bankruptcy you may still be required to pay back this
loan.''
6. An estimate of the total amount for repayment. The creditor
must disclose an estimate of the total amount for repayment at two
interest rates:
i. The interest rate in effect on the date of approval.
Compliance with the total of payments disclosure requirement of
Sec. 1026.18(h) constitutes compliance with this requirement.
ii. The maximum possible rate of interest applicable to the loan
or, if the maximum rate cannot be determined, a rate of 25%. If the
legal obligation between the parties specifies a maximum rate of
interest, the creditor must calculate the total amount for repayment
based on that rate. If the legal obligation does not specify a
maximum rate but a usury or rate ceiling under state or Federal
statutes or regulations applies, the creditor must use that rate. If
a there is no maximum rate in the legal obligation or under a usury
or rate ceiling, the creditor must base the disclosure on a rate of
25% and must disclose that there is no maximum rate and that the
total amount for repayment disclosed under Sec.
1026.47(b)(3)(vii)(B) is an estimate and will be higher if the
applicable interest rate increases.
iii. If terms of the legal obligation provide a limitation on
the amount that the interest rate may increase at any one time, the
creditor may reflect the effect of the interest rate limitation in
calculating the total cost example. For example, if the legal
obligation provides that the interest rate may not increase by more
than three percentage points each year, the creditor may assume that
the rate increases by three percentage points each year until it
reaches that maximum possible rate, or if a maximum rate cannot be
determined, an interest rate of 25%.
7. The maximum monthly payment. The creditor must disclose the
maximum payment that the consumer could be required to make under
the loan agreement, calculated using the maximum rate of interest
applicable to the loan, or if the maximum rate cannot be determined,
a rate of 25%. The creditor must determine and disclose the maximum
rate of interest in accordance with comments 47(b)(3)-6.ii and
47(b)(3)-6.iii. In addition, if a maximum rate cannot be determined,
the creditor must state that there is no maximum rate and that the
monthly payment amounts disclosed under Sec. 1026.47(b)(3)(viii)
are estimates and will be higher if the applicable interest rate
increases.
47(b)(4) Alternatives to Private Education Loans
1. General. Creditors may use the guidance provided in the
commentary for Sec. 1026.47(a)(6) in complying with Sec.
1026.47(b)(4).
47(b)(5) Rights of the Consumer
1. Notice of acceptance period. The disclosure that the consumer
may accept the terms of the loan until the acceptance period under
Sec. 1026.48(c)(1) has expired must include the specific date on
which the acceptance period expires and state that the consumer may
accept the terms of the loan until that date. Under Sec.
1026.48(c)(1), the date on which the acceptance period expires is
based on when the consumer receives the disclosures. If the creditor
mails the disclosures, the consumer is considered to have received
them three business days after the creditor places the disclosures
in the mail See Sec. 1026.46(d)(4). If the creditor provides an
acceptance period longer than the minimum 30 calendar days, the
disclosure must reflect the later date. The disclosure must also
specify the method or methods by which the consumer may communicate
acceptance.
47(c) Final Disclosures
1. Notice of right to cancel. The disclosure of the right to
cancel must include the specific date on which the three-day
cancellation period expires and state that the consumer has a right
to cancel by that date. See comments 48(d)-1 and -2. For example, if
the disclosures were mailed to the consumer on Friday, June 1, and
the consumer is deemed to receive them on Tuesday, June 5, the
creditor could state: ``You have a right to cancel this transaction,
without penalty, by midnight on June 8, 2009. No funds will be
disbursed to you or to your school until after this time. You may
cancel by calling us at 800-XXX-XXXX.'' If the creditor permits
cancellation by mail, the statement must specify that the consumer's
mailed request will be deemed timely if placed in the mail not later
than the cancellation date specified on the disclosure. The
disclosure must also specify the method or methods by which the
consumer may cancel.
2. More conspicuous. The statement of the right to cancel must
be more conspicuous than any other disclosure required under this
section except for the finance charge, the interest rate, and the
creditor's identity. See Sec. 1026.46(c)(2)(iii). The statement
will be deemed to be made more conspicuous if it is segregated from
other disclosures, placed near or at the top of the disclosure
document, and highlighted in relation to other required disclosures.
For example, the statement may be outlined with a prominent,
noticeable box; printed in contrasting color; printed in larger
type, bold print, or different type face; underlined; or set off
with asterisks.
Section 1026.48--Limitations on Private Education Loans
1. Co-branding--definition of marketing. The prohibition on co-
branding in Sec. Sec. 1026.48(a) and (b) applies to the marketing
of private education loans. The term marketing includes any
advertisement under Sec. 1026.2(a)(2). In addition, the term
marketing includes any document provided by the creditor to the
consumer related to a specific transaction, such as an application
or solicitation, a promissory note or a contract provided to the
consumer. For example, prominently displaying the name of the
educational institution at the top of the application form or
promissory note without mentioning the name of the creditor, such as
by naming the loan product the ``University of ABC Loan,'' would be
prohibited.
2. Implied endorsement. A suggestion that a private education
loan is offered or made by the covered educational institution
instead of by the creditor is included in the prohibition on
implying that the covered educational institution endorses the
private education loan under Sec. 1026.48(a)(1). For example,
naming the loan the ``University of ABC Loan,'' suggests that the
loan is offered by the educational institution. However, the use of
a creditor's full name, even if that name includes the name of a
covered educational institution, does not imply endorsement. For
example, a credit union whose name includes the name of a covered
educational institution is not prohibited from using its own name.
In addition, the authorized use of a state seal by a state or an
institution of higher education in the marketing of state education
loan products does not imply endorsement.
3. Disclosure. i. A creditor is considered to have complied with
Sec. 1026.48(a)(2) if the creditor's marketing contains a clear and
conspicuous statement, equally prominent and closely proximate to
the reference to the covered educational institution, using the name
of the creditor and the name of the covered educational institution
that the covered educational institution does not endorse the
creditor's loans and that the creditor is not affiliated with the
covered educational institution. For example, ``[Name of creditor]'s
loans are not endorsed by [name of school] and [name of creditor] is
not affiliated with [name of school].'' The statement is considered
to be equally prominent and closely proximate if it is the same type
size and is located immediately next to or directly above or below
the reference to the educational institution, without any
intervening text or graphical displays.
ii. A creditor is considered to have complied with Sec.
1026.48(b) if the creditor's marketing contains a clear and
conspicuous statement, equally prominent and closely proximate to
the reference to the covered educational institution, using the name
of the creditor's loan or loan program, the name of the covered
educational institution, and the name of the creditor, that the
creditor's loans are not offered or made by the covered educational
institution, but are made by the creditor. For example, ``[Name of
loan or loan program] is not being offered or made by [name of
school], but by [name of creditor].'' The statement is considered to
be equally prominent and closely proximate if it is the same type
size and is located immediately next to or directly above or below
the reference to the educational institution, without any
intervening text or graphical displays.
48(c) Consumer's Right to Accept
1. 30 day acceptance period. The creditor must provide the
consumer with at least 30 calendar days from the date the consumer
[[Page 80035]]
receives the disclosures required under Sec. 1026.47(b) to accept
the terms of the loan. The creditor may provide the consumer with a
longer period of time. If the creditor places the disclosures in the
mail, the consumer is considered to have received them three
business days after they are mailed under Sec. 1026.46(d)(4). For
purposes of determining when a consumer receives mailed disclosures,
``business day'' means all calendar days except Sundays and the
legal public holidays referred to in Sec. 1026.2(a)(6). See comment
46(d)-1. The consumer may accept the loan at any time before the end
of the 30-day period.
2. Method of acceptance. The creditor must specify a method or
methods by which the consumer can accept the loan at any time within
the 30-day acceptance period. The creditor may require the consumer
to communicate acceptance orally or in writing. Acceptance may also
be communicated electronically, but electronic communication must
not be the only means provided for the consumer to communicate
acceptance unless the creditor has provided the approval disclosure
electronically in compliance with the consumer consent and other
applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). If
acceptance by mail is allowed, the consumer's communication of
acceptance is considered timely if placed in the mail within the 30-
day period.
3. Prohibition on changes to rates and terms. The prohibition on
changes to the rates and terms of the loan applies to changes that
affect those terms that are required to be disclosed under
Sec. Sec. 1026.47(b) and (c). The creditor is permitted to make
changes that do not affect any of the terms disclosed to the
consumer under those sections.
4. Permissible changes to rates and terms--re-disclosure not
required. Creditors are not required to consummate a loan where the
extension of credit would be prohibited by law or where the creditor
has reason to believe that the consumer has committed fraud. A
creditor may make changes to the rate based on adjustments to the
index used for the loan and changes that will unequivocally benefit
the consumer. For example, a creditor is permitted to reduce the
interest rate or lower the amount of a fee. A creditor may also
reduce the loan amount based on a certification or other information
received from a covered educational institution or from the consumer
indicating that the student's cost of attendance has decreased or
the amount of other financial aid has increased. A creditor may also
withdraw the loan approval based on a certification or other
information received from a covered educational institution or from
the consumer indicating that the student is not enrolled in the
institution. For these changes permitted by Sec. 1026.48(c)(3), the
creditor is not required to provide a new set of approval
disclosures required under Sec. 1026.47(b) or provide the consumer
with a new 30-day acceptance period under Sec. 1026.48(c)(1). The
creditor must provide the final disclosures under Sec. 1026.47(c).
5. Permissible changes to rates and terms--school certification.
If the creditor reduces the loan amount based on information that
the student's cost of attendance has decreased or the amount of
other financial aid has increased, the creditor may make certain
corresponding changes to the rate and terms. The creditor may change
the rate or terms to those that the consumer would have received if
the consumer had applied for the reduced loan amount. For example,
assume a consumer applies for, and is approved for, a $10,000 loan
at a 7% interest rate. However, after the consumer receives the
approval disclosures, the consumer's school certifies that the
consumer's financial need is only $8,000. The creditor may reduce
the loan amount for which the consumer is approved to $8,000. The
creditor may also, for example, increase the interest rate on the
loan to 7.125%, but only if the consumer would have received a rate
of 7.125% if the consumer had originally applied for an $8,000 loan.
6. Permissible changes to rates and terms--re-disclosure
required. A creditor may make changes to the interest rate or terms
to accommodate a request from a consumer. For example, assume a
consumer applies for a $10,000 loan and is approved for the $10,000
amount at an interest rate of 6%. After the creditor has provided
the approval disclosures, the consumer's financial need increases,
and the consumer requests to a loan amount of $15,000. In this
situation, the creditor is permitted to offer a $15,000 loan, and to
make any other changes such as raising the interest rate to 7%, in
response to the consumer's request. The creditor must provide a new
set of disclosures under Sec. 1026.47(b) and provide the consumer
with 30 days to accept the offer under Sec. 1026.48(c) for the
$15,000 loan offered in response to the consumer's request. However,
because the consumer may choose not to accept the offer for the
$15,000 loan at the higher interest rate, the creditor may not
withdraw or change the rate or terms of the offer for the $10,000
loan, except as permitted under Sec. 1026.48(c)(3), unless the
consumer accepts the $15,000 loan.
48(d) Consumer's Right to Cancel
1. Right to cancel. If the creditor mails the disclosures, the
disclosures are considered received by the consumer three business
days after the disclosures were mailed. For purposes of determining
when the consumer receives the disclosures, the term ``business
day'' is defined as all calendar days except Sunday and the legal
public holidays referred to in Sec. 1026.2(a)(6). See Sec.
1026.46(d)(4). The consumer has three business days from the date on
which the disclosures are deemed received to cancel the loan. For
example, if the creditor places the disclosures in the mail on
Thursday, June 4, the disclosures are considered received on Monday,
June 8. The consumer may cancel any time before midnight Thursday,
June 11. The creditor may provide the consumer with more time to
cancel the loan than the minimum three business days required under
this section. If the creditor provides the consumer with a longer
period of time in which to cancel the loan, the creditor may
disburse the funds three business days after the consumer has
received the disclosures required under this section, but the
creditor must honor the consumer's later timely cancellation
request.
2. Method of cancellation. The creditor must specify a method or
methods by which the consumer may cancel. For example, the creditor
may require the consumer to communicate cancellation orally or in
writing. Cancellation may also be communicated electronically, but
electronic communication must not be the only means by which the
consumer may cancel unless the creditor provided the final
disclosure electronically in compliance with the consumer consent
and other applicable provisions of the Electronic Signatures in
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et
seq.). If the creditor allows cancellation by mail, the creditor
must specify an address or the name and address of an agent of the
creditor to receive notice of cancellation. The creditor must wait
to disburse funds until it is reasonably satisfied that the consumer
has not canceled. For example, the creditor may satisfy itself by
waiting a reasonable time after expiration of the cancellation
period to allow for delivery of a mailed notice. The creditor may
also satisfy itself by obtaining a written statement from the
consumer, which must be provided to and signed by the consumer only
at the end of the three-day period, that the right has not been
exercised.
3. Cancellation without penalty. The creditor may not charge the
consumer a fee for exercising the right to cancel under Sec.
1026.48(d). The prohibition extends only to fees charged
specifically for canceling the loan. The creditor is not required to
refund fees, such as an application fee, that are charged to all
consumers whether or not the consumer cancels the loan.
48(e) Self-Certification Form
1. General. Section 1026.48(e) requires that the creditor obtain
the self-certification form, signed by the consumer, before
consummating the private education loan. The rule applies only to
private education loans that will be used for the postsecondary
educational expenses of a student while that student is attending an
institution of higher education as defined in Sec. 1026.46(b)(2).
It does not apply to all covered educational institutions. The
requirement applies even if the student is not currently attending
an institution of higher education, but will use the loan proceeds
for postsecondary educational expenses while attending such
institution. For example, a creditor is required to obtain the form
before consummating a private education loan provided to a high
school senior for expenses to be incurred during the consumer's
first year of college. This provision does not require that the
creditor obtain the self-certification form in instances where the
loan is not intended for a student attending an institution of
higher education, such as when the consumer is consolidating loans
after graduation. Section 155(a)(2) of the Higher Education Act of
1965 provides that the form shall be made available to the consumer
by the relevant institution of higher education. However, Sec.
1026.48(e) provides flexibility to institutions of higher education
and creditors as to how the completed self-certification form is
provided to the lender. The creditor
[[Page 80036]]
may receive the form directly from the consumer, or the creditor may
receive the form from the consumer through the institution of higher
education. In addition, the creditor may provide the form, and the
information the consumer will require to complete the form, directly
to the consumer.
2. Electronic signature. Under section 155(a)(2) of the Higher
Education Act of 1965, the institution of higher education may
provide the self-certification form to the consumer in written or
electronic form. Under section 155(a)(5) of the Higher Education Act
of 1965, the form may be signed electronically by the consumer. A
creditor may accept the self-certification form from the consumer in
electronic form. A consumer's electronic signature is considered
valid if it meets the requirements issued by the Department of
Education under section 155(a)(5) of the Higher Education Act of
1965.
48(f) Provision of Information by Preferred Lenders
1. General. Section 1026.48(f) does not specify the format in
which creditors must provide the required information to the covered
educational institution. Creditors may choose to provide only the
required information or may provide copies of the form or forms the
lender uses to comply with Sec. 1026.47(a). A creditor is only
required to provide the required information if the creditor is
aware that it is a party to a preferred lender arrangement. For
example, if a creditor is placed on a covered educational
institution's preferred lender list without the creditor's
knowledge, the creditor is not required to comply with Sec.
1026.48(f).
Subpart G--Special Rules Applicable to Credit Card Accounts and Open-
End Credit Offered to College Students
Section 1026.51 Ability To Pay
51(a) General Rule
51(a)(1)(i) Consideration of Ability to Pay
1. Consideration of additional factors. Section 1026.51(a)
requires a card issuer to consider a consumer's independent ability
to make the required minimum periodic payments under the terms of an
account based on the consumer's independent income or assets and
current obligations. The card issuer may also consider consumer
reports, credit scores, and other factors, consistent with
Regulation B (12 CFR part 1002).
2. Ability to pay as of application or consideration of
increase. A card issuer complies with Sec. 1026.51(a) if it bases
its determination regarding a consumer's independent ability to make
the required minimum periodic payments on the facts and
circumstances known to the card issuer at the time the consumer
applies to open the credit card account or when the card issuer
considers increasing the credit line on an existing account.
3. Credit line increase. When a card issuer considers increasing
the credit line on an existing account, Sec. 1026.51(a) applies
whether the consideration is based upon a request of the consumer or
is initiated by the card issuer.
4. Income and assets. i. Sources of information. For purposes of
Sec. 1026.51(a), a card issuer may consider the consumer's income
and assets based on:
A. Information provided by the consumer in connection with the
credit card account under an open-end (not home-secured) consumer
credit plan;
B. Information provided by the consumer in connection with any
other financial relationship the card issuer or its affiliates have
with the consumer (subject to any applicable information-sharing
rules);
C. Information obtained through third parties (subject to any
applicable information-sharing rules); and
D. Information obtained through any empirically derived,
demonstrably and statistically sound model that reasonably estimates
a consumer's income and assets.
ii. Income and assets of persons liable for debts incurred on
account. For purposes of Sec. 1026.51(a), a card issuer may
consider any current or reasonably expected income and assets of the
consumer or consumers who are applying for a new account and will be
liable for debts incurred on that account. Similarly, when a card
issuer is considering whether to increase the credit limit on an
existing account, the card issuer may consider any current or
reasonably expected income and assets of the consumer or consumers
who are accountholders and are liable for debts incurred on that
account. A card issuer may also consider any current or reasonably
expected income and assets of a cosigner or guarantor who is or will
be liable for debts incurred on the account. However, a card issuer
may not use the income and assets of an authorized user or other
person who is not liable for debts incurred on the account to
satisfy the requirements of Sec. 1026.51, unless a Federal or state
statute or regulation grants a consumer who is liable for debts
incurred on the account an ownership interest in such income and
assets. Information about current or reasonably expected income and
assets includes, for example, information about current or expected
salary, wages, bonus pay, tips, and commissions. Employment may be
full-time, part-time, seasonal, irregular, military, or self-
employment. Other sources of income could include interest or
dividends, retirement benefits, public assistance, alimony, child
support, or separate maintenance payments. A card issuer may also
take into account assets such as savings accounts or investments.
iii. Household income and assets. Consideration of information
regarding a consumer's household income does not by itself satisfy
the requirement in Sec. 1026.51(a) to consider the consumer's
independent ability to pay. For example, if a card issuer requests
on its application forms that applicants provide their ``household
income,'' the card issuer may not rely solely on the information
provided by applicants to satisfy the requirements of Sec.
1026.51(a). Instead, the card issuer would need to obtain additional
information about an applicant's independent income (such as by
contacting the applicant). However, if a card issuer requests on its
application forms that applicants provide their income without
reference to household income (such as by requesting ``income'' or
``salary''), the card issuer may rely on the information provided by
applicants to satisfy the requirements of Sec. 1026.51(a).
5. Current obligations. A card issuer may consider the
consumer's current obligations based on information provided by the
consumer or in a consumer report. In evaluating a consumer's current
obligations, a card issuer need not assume that credit lines for
other obligations are fully utilized.
6. Joint applicants and joint accountholders. With respect to
the opening of a joint account for two or more consumers or a credit
line increase on such an account, the card issuer may consider the
collective ability of all persons who are or will be liable for
debts incurred on the account to make the required payments.
51(a)(2) Minimum Periodic Payments
1. Applicable minimum payment formula. For purposes of
estimating required minimum periodic payments under the safe harbor
set forth in Sec. 1026.51(a)(2)(ii), if the account has or may have
a promotional program, such as a deferred payment or similar
program, where there is no applicable minimum payment formula during
the promotional period, the issuer must estimate the required
minimum periodic payment based on the minimum payment formula that
will apply when the promotion ends.
2. Interest rate for purchases. For purposes of estimating
required minimum periodic payments under the safe harbor set forth
in Sec. 1026.51(a)(2)(ii), if the interest rate for purchases is or
may be a promotional rate, the issuer must use the post-promotional
rate to estimate interest charges.
3. Mandatory fees. For purposes of estimating required minimum
periodic payments under the safe harbor set forth in Sec.
1026.51(a)(2)(ii), mandatory fees that must be assumed to be charged
include those fees the card issuer knows the consumer will be
required to pay under the terms of the account if the account is
opened, such as an annual fee. If a mandatory fee is a promotional
fee (as defined in Sec. 1026.16(g)), the issuer must use the post-
promotional fee amount for purposes of Sec. 1026.51(a)(2)(ii).
51(b) Rules Affecting Young Consumers
1. Age as of date of application or consideration of credit line
increase. Sections 1026.51(b)(1) and (b)(2) apply only to a consumer
who has not attained the age of 21 as of the date of submission of
the application under Sec. 1026.51(b)(1) or the date the credit
line increase is requested by the consumer (or if no request has
been made, the date the credit line increase is considered by the
card issuer) under Sec. 1026.51(b)(2).
2. Liability of cosigner, guarantor, or joint accountholder.
Sections 1026.51(b)(1)(ii) and (b)(2) require the signature or
written consent of a cosigner, guarantor, or joint accountholder
agreeing either to be secondarily liable for any debt on the account
incurred by the consumer before the consumer has attained the age of
21 or to be jointly liable with the consumer for any debt on the
account. Sections 1026.51(b)(1)(ii) and (b)(2) do not prohibit a
card issuer from also requiring the cosigner, guarantor, or joint
accountholder to assume liability for debts
[[Page 80037]]
incurred after the consumer has attained the age of 21, consistent
with any agreement made between the parties.
3. Authorized users exempt. If a consumer who has not attained
the age of 21 is being added to another person's account as an
authorized user and has no liability for debts incurred on the
account, Sec. 1026.51(b)(1) and (b)(2) do not apply.
4. Electronic application. Consistent with Sec.
1026.5(a)(1)(iii), an application may be provided to the consumer in
electronic form without regard to the consumer consent or other
provisions of the Electronic Signatures in Global and National
Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.) in the
circumstances set forth in Sec. 1026.60. The electronic submission
of an application from a consumer or a consent to a credit line
increase from a cosigner, guarantor, or joint accountholder to a
card issuer would constitute a written application or consent for
purposes of Sec. 1026.51(b) and would not be considered a consumer
disclosure for purposes of the E-Sign Act.
51(b)(1) Applications from young consumers
1. Relation to Regulation B. In considering an application or
credit line increase on the credit card account of a consumer who is
less than 21 years old, creditors must comply with the applicable
rules in Regulation B (12 CFR part 1002).
2. Financial information. Information regarding income and
assets that satisfies the requirements of Sec. 1026.51(a) also
satisfies the requirements of Sec. 1026.51(b)(1). See comment
51(a)(1)-4.
51(b)(2) Credit line increases for young consumers
1. Credit line request by joint accountholder aged 21 or older.
The requirement under Sec. 1026.51(b)(2) that a cosigner,
guarantor, or joint accountholder for a credit card account opened
pursuant to Sec. 1026.51(b)(1)(ii) must agree in writing to assume
liability for the increase before a credit line is increased, does
not apply if the cosigner, guarantor or joint accountholder who is
at least 21 years old initiates the request for the increase.
Section 1026.52--Limitations on Fees
52(a) Limitations prior to account opening and during first year after
account opening
52(a)(1) General rule
1. Application. The 25 percent limit in Sec. 1026.52(a)(1)
applies to fees that the card issuer charges to the account as well
as to fees that the card issuer requires the consumer to pay with
respect to the account through other means (such as through a
payment from the consumer's asset account to the card issuer or from
another credit account provided by the card issuer). For example:
i. Assume that, under the terms of a credit card account, a
consumer is required to pay $120 in fees for the issuance or
availability of credit at account opening. The consumer is also
required to pay a cash advance fee that is equal to five percent of
the cash advance and a late payment fee of $15 if the required
minimum periodic payment is not received by the payment due date
(which is the twenty-fifth of the month). At account opening on
January 1 of year one, the credit limit for the account is $500.
Section 1026.52(a)(1) permits the card issuer to charge to the
account the $120 in fees for the issuance or availability of credit
at account opening. On February 1 of year one, the consumer uses the
account for a $100 cash advance. Section 1026.52(a)(1) permits the
card issuer to charge a $5 cash-advance fee to the account. On March
26 of year one, the card issuer has not received the consumer's
required minimum periodic payment. Section 1026.52(a)(2) permits the
card issuer to charge a $15 late payment fee to the account. On July
15 of year one, the consumer uses the account for a $50 cash
advance. Section 1026.52(a)(1) does not permit the card issuer to
charge a $2.50 cash advance fee to the account. Furthermore, Sec.
1026.52(a)(1) prohibits the card issuer from collecting the $2.50
cash advance fee from the consumer by other means.
ii. Assume that, under the terms of a credit card account, a
consumer is required to pay $125 in fees for the issuance or
availability of credit during the first year after account opening.
At account opening on January 1 of year one, the credit limit for
the account is $500. Section 1026.52(a)(1) permits the card issuer
to charge the $125 in fees to the account. However, Sec.
1026.52(a)(1) prohibits the card issuer from requiring the consumer
to make payments to the card issuer for additional non-exempt fees
with respect to the account prior to account opening or during the
first year after account opening. Section 1026.52(a)(1) also
prohibits the card issuer from requiring the consumer to open a
separate credit account with the card issuer to fund the payment of
additional non-exempt fees prior to the opening of the credit card
account or during the first year after the credit card account is
opened.
iii. Assume that, on January 1 of year one, a consumer is
required to pay a $100 fee in order to apply for a credit card
account. On January 5, the card issuer approves the consumer's
application, assigns the account a credit limit of $1,000, and
provides the consumer with account-opening disclosures consistent
with Sec. 1026.6. The date on which the account may first be used
by the consumer to engage in transactions is January 5. The consumer
is required to pay $150 in fees for the issuance or availability of
credit, which Sec. 1026.52(a)(1) permits the card issuer to charge
to the account on January 5. However, because the $100 application
fee is subject to the 25 percent limit in Sec. 1026.52(a)(1), the
card issuer is prohibited from requiring the consumer to pay any
additional non-exempt fees with respect to the account until January
5 of year two.
2. Fees that exceed 25 percent limit. A card issuer that charges
a fee to a credit card account that exceeds the 25 percent limit
complies with Sec. 1026.52(a)(1) if the card issuer waives or
removes the fee and any associated interest charges or credits the
account for an amount equal to the fee and any associated interest
charges within a reasonable amount of time but no later than the end
of the billing cycle following the billing cycle during which the
fee was charged. For example, assuming the facts in the example in
comment 52(a)(1)-1.i above, the card issuer complies with Sec.
1026.52(a)(1) if the card issuer charged the $2.50 cash advance fee
to the account on July 15 of year one but waived or removed the fee
or credited the account for $2.50 (plus any interest charges on that
$2.50) at the end of the billing cycle.
3. Changes in credit limit during first year. i. Increases in
credit limit. If a card issuer increases the credit limit during the
first year after the account is opened, Sec. 1026.52(a)(1) does not
permit the card issuer to require the consumer to pay additional
fees that would otherwise be prohibited (such as a fee for
increasing the credit limit). For example, assume that, at account
opening on January 1, the credit limit for a credit card account is
$400 and the consumer is required to pay $100 in fees for the
issuance or availability of credit. On July 1, the card issuer
increases the credit limit for the account to $600. Section
1026.52(a)(1) does not permit the card issuer to require the
consumer to pay additional fees based on the increased credit limit.
ii. Decreases in credit limit. If a card issuer decreases the
credit limit during the first year after the account is opened,
Sec. 1026.52(a)(1) requires the card issuer to waive or remove any
fees charged to the account that exceed 25 percent of the reduced
credit limit or to credit the account for an amount equal to any
fees the consumer was required to pay with respect to the account
that exceed 25 percent of the reduced credit limit within a
reasonable amount of time but no later than the end of the billing
cycle following the billing cycle during which the credit limit was
reduced. For example:
A. Assume that, at account opening on January 1, the credit
limit for a credit card account is $1,000 and the consumer is
required to pay $250 in fees for the issuance or availability of
credit. The billing cycles for the account begin on the first day of
the month and end on the last day of the month. On July 30, the card
issuer decreases the credit limit for the account to $500. Section
1026.52(a)(1) requires the card issuer to waive or remove $175 in
fees from the account or to credit the account for an amount equal
to $175 within a reasonable amount of time but no later than August
31.
B. Assume that, on June 25 of year one, a consumer is required
to pay a $75 fee in order to apply for a credit card account. At
account opening on July 1 of year one, the credit limit for the
account is $500 and the consumer is required to pay $50 in fees for
the issuance or availability of credit. The billing cycles for the
account begin on the first day of the month and end on the last day
of the month. On February 15 of year two, the card issuer decreases
the credit limit for the account to $250. Section 1026.52(a)(1)
requires the card issuer to waive or remove fees from the account or
to credit the account for an amount equal to $62.50 within a
reasonable amount of time but no later than March 31 of year two.
4. Date on which account may first be used by consumer to engage
in transactions. i. Methods of compliance. For purposes of Sec.
1026.52(a)(1), an account is considered open no earlier than the
date on which the
[[Page 80038]]
account may first be used by the consumer to engage in transactions.
A card issuer may consider an account open for purposes of Sec.
1026.52(a)(1) on any of the following dates:
A. The date the account is first used by the consumer for a
transaction (such as when an account is established in connection
with financing the purchase of goods or services).
B. The date the consumer complies with any reasonable activation
procedures imposed by the card issuer for preventing fraud or
unauthorized use of a new account (such as requiring the consumer to
provide information that verifies his or her identity), provided
that the account may be used for transactions on that date.
C. The date that is seven days after the card issuer mails or
delivers to the consumer account-opening disclosures that comply
with Sec. 1026.6, provided that the consumer may use the account
for transactions after complying with any reasonable activation
procedures imposed by the card issuer for preventing fraud or
unauthorized use of the new account (such as requiring the consumer
to provide information that verifies his or her identity). If a card
issuer has reasonable procedures designed to ensure that account-
opening disclosures that comply with Sec. 1026.6 are mailed or
delivered to consumers no later than a certain number of days after
the card issuer establishes the account, the card issuer may add
that number of days to the seven-day period for purposes of
determining the date on which the account was opened.
ii. Examples. A. Assume that, on July 1 of year one, a credit
card account under an open-end (not home-secured) consumer credit
plan is established in connection with financing the purchase of
goods or services and a $500 transaction is charged to the account
by the consumer. The card issuer may consider the account open on
July 1 of year one for purposes of Sec. 1026.52(a)(1). Accordingly,
Sec. 1026.52(a)(1) ceases to apply to the account on July 1 of year
two.
B. Assume that, on July 1 of year one, a card issuer approves a
consumer's application for a credit card account under an open-end
(not home-secured) consumer credit plan and establishes the account
on its internal systems. On July 5, the card issuer mails or
delivers to the consumer account-opening disclosures that comply
with Sec. 1026.6. If the consumer may use the account for
transactions on the date the consumer complies with any reasonable
procedures imposed by the card issuer for preventing fraud or
unauthorized use, the card issuer may consider the account open on
July 12 of year one for purposes of Sec. 1026.52(a)(1).
Accordingly, Sec. 1026.52(a)(1) ceases to apply to the account on
July 12 of year two.
C. Same facts as in paragraph B above except that the card
issuer has adopted reasonable procedures designed to ensure that
account-opening disclosures that comply with Sec. 1026.6 are mailed
or delivered to consumers no later than three days after an account
is established on its systems. If the consumer may use the account
for transactions on the date the consumer complies with any
reasonable procedures imposed by the card issuer for preventing
fraud or unauthorized use, the card issuer may consider the account
open on July 11 of year one for purposes of Sec. 1026.52(a)(1).
Accordingly, Sec. 1026.52(a)(1) ceases to apply to the account on
July 11 of year two. However, if the consumer uses the account for a
transaction or complies with the card issuer's reasonable procedures
for preventing fraud or unauthorized use on July 8 of year one, the
card issuer may, at its option, consider the account open on that
date for purposes of Sec. 1026.52(a)(1) and Sec. 1026.52(a)(1)
therefore ceases to apply to the account on July 8 of year two.
52(a)(2) Fees Not Subject to Limitations
1. Covered fees. Except as provided in Sec. 1026.52(a)(2),
Sec. 1026.52(a) applies to any fees or other charges that a card
issuer will or may require the consumer to pay with respect to a
credit card account prior to account opening and during the first
year after account opening, other than charges attributable to
periodic interest rates. For example, Sec. 1026.52(a) applies to:
i. Fees that the consumer is required to pay for the issuance or
availability of credit described in Sec. 1026.60(b)(2), including
any fee based on account activity or inactivity and any fee that a
consumer is required to pay in order to receive a particular credit
limit;
ii. Fees for insurance described in Sec. 1026.4(b)(7) or debt
cancellation or debt suspension coverage described in Sec.
1026.4(b)(10) written in connection with a credit transaction, if
the insurance or debt cancellation or debt suspension coverage is
required by the terms of the account;
iii. Fees that the consumer is required to pay in order to
engage in transactions using the account (such as cash advance fees,
balance transfer fees, foreign transaction fees, and fees for using
the account for purchases);
iv. Fees that the consumer is required to pay for violating the
terms of the account (except to the extent specifically excluded by
Sec. 1026.52(a)(2)(i));
v. Fixed finance charges; and
vi. Minimum charges imposed if a charge would otherwise have
been determined by applying a periodic interest rate to a balance
except for the fact that such charge is smaller than the minimum.
2. Fees the consumer is not required to pay. Section
1026.52(a)(2)(ii) provides that Sec. 1026.52(a) does not apply to
fees that the consumer is not required to pay with respect to the
account. For example, Sec. 1026.52(a) generally does not apply to
fees for making an expedited payment (to the extent permitted by
Sec. 1026.10(e)), fees for optional services (such as travel
insurance), fees for reissuing a lost or stolen card, or statement
reproduction fees.
3. Security deposits. A security deposit that is charged to a
credit card account is a fee for purposes of Sec. 1026.52(a). In
contrast, however, a security deposit is not subject to the 25
percent limit in Sec. 1026.52(a)(1) if it is not charged to the
account. For example, Sec. 1026.52(a)(1) does not prohibit a card
issuer from requiring a consumer to provide funds at account opening
pledged as security for the account that exceed 25 percent of the
credit limit at account opening so long as those funds are not
obtained from the account.
52(a)(3) Rule of Construction
1. Fees or charges otherwise prohibited by law. Section
1026.52(a) does not authorize the imposition or payment of fees or
charges otherwise prohibited by law. For example, see 16 CFR
310.4(a)(4).
52(b) Limitations on Penalty Fees
1. Fees for violating the account terms or other requirements.
For purposes of Sec. 1026.52(b), a fee includes any charge imposed
by a card issuer based on an act or omission that violates the terms
of the account or any other requirements imposed by the card issuer
with respect to the account, other than charges attributable to
periodic interest rates. Accordingly, for purposes of Sec.
1026.52(b), a fee does not include charges attributable to an
increase in an annual percentage rate based on an act or omission
that violates the terms or other requirements of an account.
i. The following are examples of fees that are subject to the
limitations in Sec. 1026.52(b) or are prohibited by Sec.
1026.52(b):
A. Late payment fees and any other fees imposed by a card issuer
if an account becomes delinquent or if a payment is not received by
a particular date.
B. Returned payment fees and any other fees imposed by a card
issuer if a payment received via check, automated clearing house, or
other payment method is returned.
C. Any fee or charge for an over-the-limit transaction as
defined in Sec. 1026.56(a), to the extent the imposition of such a
fee or charge is permitted by Sec. 1026.56.
D. Any fee imposed by a card issuer if payment on a check that
accesses a credit card account is declined.
E. Any fee or charge for a transaction that the card issuer
declines to authorize. See Sec. 1026.52(b)(2)(i)(B).
F. Any fee imposed by a card issuer based on account inactivity
(including the consumer's failure to use the account for a
particular number or dollar amount of transactions or a particular
type of transaction). See Sec. 1026.52(b)(2)(i)(B).
G. Any fee imposed by a card issuer based on the closure or
termination of an account. See Sec. 1026.52(b)(2)(i)(B).
ii. The following are examples of fees to which Sec. 1026.52(b)
does not apply:
A. Balance transfer fees.
B. Cash advance fees.
C. Foreign transaction fees.
D. Annual fees and other fees for the issuance or availability
of credit described in Sec. 1026.60(b)(2), except to the extent
that such fees are based on account inactivity. See Sec.
1026.52(b)(2)(i)(B).
E. Fees for insurance described in Sec. 1026.4(b)(7) or debt
cancellation or debt suspension coverage described in Sec.
1026.4(b)(10) written in connection with a credit transaction,
provided that such fees are not imposed as a result of a violation
of the account terms or other requirements of an account.
F. Fees for making an expedited payment (to the extent permitted
by Sec. 1026.10(e)).
G. Fees for optional services (such as travel insurance).
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H. Fees for reissuing a lost or stolen card.
2. Rounding to nearest whole dollar. A card issuer may round any
fee that complies with Sec. 1026.52(b) to the nearest whole dollar.
For example, if Sec. 1026.52(b) permits a card issuer to impose a
late payment fee of $21.50, the card issuer may round that amount up
to the nearest whole dollar and impose a late payment fee of $22.
However, if the late payment fee permitted by Sec. 1026.52(b) were
$21.49, the card issuer would not be permitted to round that amount
up to $22, although the card issuer could round that amount down and
impose a late payment fee of $21.
52(b)(1) General Rule
1. Relationship between Sec. 1026.52(b)(1)(i), (b)(1)(ii), and
(b)(2). i. Relationship between Sec. 1026.52(b)(1)(i) and
(b)(1)(ii). A card issuer may impose a fee for violating the terms
or other requirements of an account pursuant to either Sec.
1026.52(b)(1)(i) or (b)(1)(ii).
A. A card issuer that complies with the safe harbors in Sec.
1026.52(b)(1)(ii) is not required to determine that its fees
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of a type of violation under Sec.
1026.52(b)(1)(i).
B. A card issuer may impose a fee for one type of violation
pursuant to Sec. 1026.52(b)(1)(i) and may impose a fee for a
different type of violation pursuant to Sec. 1026.52(b)(1)(ii). For
example, a card issuer may impose a late payment fee of $30 based on
a cost determination pursuant to Sec. 1026.52(b)(1)(i) but impose
returned payment and over-the-limit fees of $25 or $35 pursuant to
the safe harbors in Sec. 1026.52(b)(1)(ii).
C. A card issuer that previously based the amount of a penalty
fee for a particular type of violation on a cost determination
pursuant to Sec. 1026.52(b)(1)(i) may begin to impose a penalty fee
for that type of violation that is consistent with Sec.
1026.52(b)(1)(ii) at any time (subject to the notice requirements in
Sec. 1026.9), provided that the first fee imposed pursuant to Sec.
1026.52(b)(1)(ii) is consistent with Sec. 1026.52(b)(1)(ii)(A). For
example, assume that a late payment occurs on January 15 and that,
based on a cost determination pursuant to Sec. 1026.52(b)(1)(i),
the card issuer imposes a $30 late payment fee. Another late payment
occurs on July 15. The card issuer may impose another $30 late
payment fee pursuant to Sec. 1026.52(b)(1)(i) or may impose a $25
late payment fee pursuant to Sec. 1026.52(b)(1)(ii)(A). However,
the card issuer may not impose a $35 late payment fee pursuant to
Sec. 1026.52(b)(1)(ii)(B). If the card issuer imposes a $25 fee
pursuant to Sec. 1026.52(b)(1)(ii)(A) for the July 15 late payment
and another late payment occurs on September 15, the card issuer may
impose a $35 fee for the September 15 late payment pursuant to Sec.
1026.52(b)(1)(ii)(B).
ii. Relationship between Sec. 1026.52(b)(1) and (b)(2). Section
1026.52(b)(1) does not permit a card issuer to impose a fee that is
inconsistent with the prohibitions in Sec. 1026.52(b)(2). For
example, if Sec. 1026.52(b)(2)(i) prohibits the card issuer from
imposing a late payment fee that exceeds $15, Sec.
1026.52(b)(1)(ii) does not permit the card issuer to impose a higher
late payment fee.
52(b)(1)(i) Fees Based on Costs
1. Costs incurred as a result of violations. Section
1026.52(b)(1)(i) does not require a card issuer to base a fee on the
costs incurred as a result of a specific violation of the terms or
other requirements of an account. Instead, for purposes of Sec.
1026.52(b)(1)(i), a card issuer must have determined that a fee for
violating the terms or other requirements of an account represents a
reasonable proportion of the costs incurred by the card issuer as a
result of that type of violation. A card issuer may make a single
determination for all of its credit card portfolios or may make
separate determinations for each portfolio. The factors relevant to
this determination include:
i. The number of violations of a particular type experienced by
the card issuer during a prior period of reasonable length (for
example, a period of twelve months).
ii. The costs incurred by the card issuer during that period as
a result of those violations.
iii. At the card issuer's option, the number of fees imposed by
the card issuer as a result of those violations during that period
that the card issuer reasonably estimates it will be unable to
collect. See comment 52(b)(1)(i)-5.
iv. At the card issuer's option, reasonable estimates for an
upcoming period of changes in the number of violations of that type,
the resulting costs, and the number of fees that the card issuer
will be unable to collect. See illustrative examples in comments
52(b)(1)(i)-6 through -9.
2. Amounts excluded from cost analysis. The following amounts
are not costs incurred by a card issuer as a result of violations of
the terms or other requirements of an account for purposes of Sec.
1026.52(b)(1)(i):
i. Losses and associated costs (including the cost of holding
reserves against potential losses and the cost of funding delinquent
accounts).
ii. Costs associated with evaluating whether consumers who have
not violated the terms or other requirements of an account are
likely to do so in the future (such as the costs associated with
underwriting new accounts). However, once a violation of the terms
or other requirements of an account has occurred, the costs
associated with preventing additional violations for a reasonable
period of time are costs incurred by a card issuer as a result of
violations of the terms or other requirements of an account for
purposes of Sec. 1026.52(b)(1)(i).
3. Third party charges. As a general matter, amounts charged to
the card issuer by a third party as a result of a violation of the
terms or other requirements of an account are costs incurred by the
card issuer for purposes of Sec. 1026.52(b)(1)(i). For example, if
a card issuer is charged a specific amount by a third party for each
returned payment, that amount is a cost incurred by the card issuer
as a result of returned payments. However, if the amount is charged
to the card issuer by an affiliate or subsidiary of the card issuer,
the card issuer must have determined that the charge represents a
reasonable proportion of the costs incurred by the affiliate or
subsidiary as a result of the type of violation. For example, if an
affiliate of a card issuer provides collection services to the card
issuer on delinquent accounts, the card issuer must have determined
that the amounts charged to the card issuer by the affiliate for
such services represent a reasonable proportion of the costs
incurred by the affiliate as a result of late payments.
4. Amounts charged by other card issuers. The fact that a card
issuer's fees for violating the terms or other requirements of an
account are comparable to fees assessed by other card issuers does
not satisfy the requirements of Sec. 1026.52(b)(1)(i).
5. Uncollected fees. For purposes of Sec. 1026.52(b)(1)(i), a
card issuer may consider fees that it is unable to collect when
determining the appropriate fee amount. Fees that the card issuer is
unable to collect include fees imposed on accounts that have been
charged off by the card issuer, fees that have been discharged in
bankruptcy, and fees that the card issuer is required to waive in
order to comply with a legal requirement (such as a requirement
imposed by 12 CFR Part 1026 or 50 U.S.C. app. 527). However, fees
that the card issuer chooses not to impose or chooses not to collect
(such as fees the card issuer chooses to waive at the request of the
consumer or under a workout or temporary hardship arrangement) are
not relevant for purposes of this determination. See illustrative
examples in comments 52(b)(2)(i)-6 through -9.
6. Late payment fees. i. Costs incurred as a result of late
payments. For purposes of Sec. 1026.52(b)(1)(i), the costs incurred
by a card issuer as a result of late payments include the costs
associated with the collection of late payments, such as the costs
associated with notifying consumers of delinquencies and resolving
delinquencies (including the establishment of workout and temporary
hardship arrangements).
ii. Examples. A. Late payment fee based on past delinquencies
and costs. Assume that, during year one, a card issuer experienced 1
million delinquencies and incurred $26 million in costs as a result
of those delinquencies. For purposes of Sec. 1026.52(b)(1)(i), a
$26 late payment fee would represent a reasonable proportion of the
total costs incurred by the card issuer as a result of late payments
during year two.
B. Adjustment based on fees card issuer is unable to collect.
Same facts as above except that the card issuer imposed a late
payment fee for each of the 1 million delinquencies experienced
during year one but was unable to collect 25% of those fees (in
other words, the card issuer was unable to collect 250,000 fees,
leaving a total of 750,000 late payments for which the card issuer
did collect or could have collected a fee). For purposes of Sec.
1026.52(b)(2)(i), a late payment fee of $35 would represent a
reasonable proportion of the total costs incurred by the card issuer
as a result of late payments during year two.
C. Adjustment based on reasonable estimate of future changes.
Same facts as paragraphs A and B above except the card issuer
reasonably estimates that--based on past delinquency rates and other
factors relevant to potential delinquency rates for year two--it
will experience a 2% decrease in delinquencies during year two (in
other words, 20,000 fewer delinquencies for a total of 980,000). The
card issuer also reasonably
[[Page 80040]]
estimates that it will be unable to collect the same percentage of
fees (25%) during year two as during year one (in other words, the
card issuer will be unable to collect 245,000 fees, leaving a total
of 735,000 late payments for which the card issuer will be able to
collect a fee). The card issuer also reasonably estimates that--
based on past changes in costs incurred as a result of delinquencies
and other factors relevant to potential costs for year two--it will
experience a 5% increase in costs during year two (in other words,
$1.3 million in additional costs for a total of $27.3 million). For
purposes of Sec. 1026.52(b)(1)(i), a $37 late payment fee would
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of late payments during year two.
7. Returned payment fees. i. Costs incurred as a result of
returned payments. For purposes of Sec. 1026.52(b)(1)(i), the costs
incurred by a card issuer as a result of returned payments include:
A. Costs associated with processing returned payments and
reconciling the card issuer's systems and accounts to reflect
returned payments;
B. Costs associated with investigating potential fraud with
respect to returned payments; and
C. Costs associated with notifying the consumer of the returned
payment and arranging for a new payment.
ii. Examples. A. Returned payment fee based on past returns and
costs. Assume that, during year one, a card issuer experienced
150,000 returned payments and incurred $3.1 million in costs as a
result of those returned payments. For purposes of Sec.
1026.52(b)(1)(i), a $21 returned payment fee would represent a
reasonable proportion of the total costs incurred by the card issuer
as a result of returned payments during year two.
B. Adjustment based on fees card issuer is unable to collect.
Same facts as above except that the card issuer imposed a returned
payment fee for each of the 150,000 returned payments experienced
during year one but was unable to collect 15% of those fees (in
other words, the card issuer was unable to collect 22,500 fees,
leaving a total of 127,500 returned payments for which the card
issuer did collect or could have collected a fee). For purposes of
Sec. 1026.52(b)(2)(i), a returned payment fee of $24 would
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of returned payments during year two.
C. Adjustment based on reasonable estimate of future changes.
Same facts as paragraphs A and B above except the card issuer
reasonably estimates that--based on past returned payment rates and
other factors relevant to potential returned payment rates for year
two--it will experience a 2% increase in returned payments during
year two (in other words, 3,000 additional returned payments for a
total of 153,000). The card issuer also reasonably estimates that it
will be unable to collect 25% of returned payment fees during year
two (in other words, the card issuer will be unable to collect
38,250 fees, leaving a total of 114,750 returned payments for which
the card issuer will be able to collect a fee). The card issuer also
reasonably estimates that--based on past changes in costs incurred
as a result of returned payments and other factors relevant to
potential costs for year two--it will experience a 1% decrease in
costs during year two (in other words, a $31,000 reduction in costs
for a total of $3.069 million). For purposes of Sec.
1026.52(b)(1)(i), a $27 returned payment fee would represent a
reasonable proportion of the total costs incurred by the card issuer
as a result of returned payments during year two.
8. Over-the-limit fees. i. Costs incurred as a result of over-
the-limit transactions. For purposes of Sec. 1026.52(b)(1)(i), the
costs incurred by a card issuer as a result of over-the-limit
transactions include:
A. Costs associated with determining whether to authorize over-
the-limit transactions; and
B. Costs associated with notifying the consumer that the credit
limit has been exceeded and arranging for payments to reduce the
balance below the credit limit.
ii. Costs not incurred as a result of over-the-limit
transactions. For purposes of Sec. 1026.52(b)(1)(i), costs
associated with obtaining the affirmative consent of consumers to
the card issuer's payment of transactions that exceed the credit
limit consistent with Sec. 1026.56 are not costs incurred by a card
issuer as a result of over-the-limit transactions.
iii. Examples. A. Over-the-limit fee based on past fees and
costs. Assume that, during year one, a card issuer authorized
600,000 over-the-limit transactions and incurred $4.5 million in
costs as a result of those over-the-limit transactions. However,
because of the affirmative consent requirements in Sec. 1026.56,
the card issuer was only permitted to impose 200,000 over-the-limit
fees during year one. For purposes of Sec. 1026.52(b)(1)(i), a $23
over-the-limit fee would represent a reasonable proportion of the
total costs incurred by the card issuer as a result of over-the-
limit transactions during year two.
B. Adjustment based on fees card issuer is unable to collect.
Same facts as above except that the card issuer was unable to
collect 30% of the 200,000 over-the-limit fees imposed during year
one (in other words, the card issuer was unable to collect 60,000
fees, leaving a total of 140,000 over-the-limit transactions for
which the card issuer did collect or could have collected a fee).
For purposes of Sec. 1026.52(b)(2)(i), an over-the-limit fee of $32
would represent a reasonable proportion of the total costs incurred
by the card issuer as a result of over-the-limit transactions during
year two.
C. Adjustment based on reasonable estimate of future changes.
Same facts as paragraphs A and B above except the card issuer
reasonably estimates that--based on past over-the-limit transaction
rates, the percentages of over-the-limit transactions that resulted
in an over-the-limit fee in the past (consistent with Sec.
1026.56), and factors relevant to potential changes in those rates
and percentages for year two--it will authorize approximately the
same number of over-the-limit transactions during year two (600,000)
and impose approximately the same number of over-the-limit fees
(200,000). The card issuer also reasonably estimates that it will be
unable to collect the same percentage of fees (30%) during year two
as during year one (in other words, the card issuer was unable to
collect 60,000 fees, leaving a total of 140,000 over-the-limit
transactions for which the card issuer will be able to collect a
fee). The card issuer also reasonably estimates that--based on past
changes in costs incurred as a result of over-the-limit transactions
and other factors relevant to potential costs for year two--it will
experience a 6% decrease in costs during year two (in other words, a
$270,000 reduction in costs for a total of $4.23 million). For
purposes of Sec. 1026.52(b)(1)(i), a $30 over-the-limit fee would
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of over-the-limit transactions during year
two.
9. Declined access check fees. i. Costs incurred as a result of
declined access checks. For purposes of Sec. 1026.52(b)(1)(i), the
costs incurred by a card issuer as a result of declining payment on
a check that accesses a credit card account include:
A. Costs associated with determining whether to decline payment
on access checks;
B. Costs associated with processing declined access checks and
reconciling the card issuer's systems and accounts to reflect
declined access checks;
C. Costs associated with investigating potential fraud with
respect to declined access checks; and
D. Costs associated with notifying the consumer and the merchant
or other party that accepted the access check that payment on the
check has been declined.
ii. Example. Assume that, during year one, a card issuer
declined 100,000 access checks and incurred $2 million in costs as a
result of those declined checks. The card issuer imposed a fee for
each declined access check but was unable to collect 10% of those
fees (in other words, the card issuer was unable to collect 10,000
fees, leaving a total of 90,000 declined access checks for which the
card issuer did collect or could have collected a fee). For purposes
of Sec. 1026.52(b)(1)(i), a $22 declined access check fee would
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of declined access checks during year two.
52(b)(1)(ii) Safe harbors
1. Multiple violations of same type. i. Same billing cycle or
next six billing cycles. A card issuer cannot impose a fee for a
violation pursuant to Sec. 1026.52(b)(1)(ii)(B) unless a fee has
previously been imposed for the same type of violation pursuant to
Sec. 1026.52(b)(1)(ii)(A). Once a fee has been imposed for a
violation pursuant to Sec. 1026.52(b)(1)(ii)(A), the card issuer
may impose a fee pursuant to Sec. 1026.52(b)(1)(ii)(B) for any
subsequent violation of the same type until that type of violation
has not occurred for a period of six consecutive complete billing
cycles. A fee has been imposed for purposes of Sec.
1026.52(b)(1)(ii) even if the card issuer waives or rebates all or
part of the fee.
A. Late payments. For purposes of Sec. 1026.52(b)(1)(ii), a
late payment occurs during the billing cycle in which the
[[Page 80041]]
payment may first be treated as late consistent with the
requirements of this part and the terms or other requirements of the
account.
B. Returned payments. For purposes of Sec. 1026.52(b)(1)(ii), a
returned payment occurs during the billing cycle in which the
payment is returned to the card issuer.
C. Transactions that exceed the credit limit. For purposes of
Sec. 1026.52(b)(1)(ii), a transaction that exceeds the credit limit
for an account occurs during the billing cycle in which the
transaction occurs or is authorized by the card issuer.
D. Declined access checks. For purposes of Sec.
1026.52(b)(1)(ii), a check that accesses a credit card account is
declined during the billing cycle in which the card issuer declines
payment on the check.
ii. Relationship to Sec. Sec. 1026.52(b)(2)(ii) and
1026.56(j)(1). If multiple violations are based on the same event or
transaction such that Sec. 1026.52(b)(2)(ii) prohibits the card
issuer from imposing more than one fee, the event or transaction
constitutes a single violation for purposes of Sec.
1026.52(b)(1)(ii). Furthermore, consistent with Sec.
1026.56(j)(1)(i), no more than one violation for exceeding an
account's credit limit can occur during a single billing cycle for
purposes of Sec. 1026.52(b)(1)(ii). However, Sec.
1026.52(b)(2)(ii) does not prohibit a card issuer from imposing fees
for exceeding the credit limit in consecutive billing cycles based
on the same over-the-limit transaction to the extent permitted by
Sec. 1026.56(j)(1). In these circumstances, the second and third
over-the-limit fees permitted by Sec. 1026.56(j)(1) may be imposed
pursuant to Sec. 1026.52(b)(1)(ii)(B). See comment 52(b)(2)(ii)-1.
iii. Examples. The following examples illustrate the application
of Sec. 1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B) with respect to
credit card accounts under an open-end (not home-secured) consumer
credit plan that are not charge card accounts. For purposes of these
examples, assume that the billing cycles for the account begin on
the first day of the month and end on the last day of the month and
that the payment due date for the account is the twenty-fifth day of
the month.
A. Violations of same type (late payments). A required minimum
periodic payment of $50 is due on March 25. On March 26, a late
payment has occurred because no payment has been received.
Accordingly, consistent with Sec. 1026.52(b)(1)(ii)(A), the card
issuer imposes a $25 late payment fee on March 26. In order for the
card issuer to impose a $35 late payment fee pursuant to Sec.
1026.52(b)(1)(ii)(B), a second late payment must occur during the
April, May, June, July, August, or September billing cycles.
1. The card issuer does not receive any payment during the March
billing cycle. A required minimum periodic payment of $100 is due on
April 25. On April 20, the card issuer receives a $50 payment. No
further payment is received during the April billing cycle.
Accordingly, consistent with Sec. 1026.52(b)(1)(ii)(B), the card
issuer may impose a $35 late payment fee on April 26. Furthermore,
the card issuer may impose a $35 late payment fee for any late
payment that occurs during the May, June, July, August, September,
or October billing cycles.
2. Same facts as in paragraph A above. On March 30, the card
issuer receives a $50 payment and the required minimum periodic
payments for the April, May, June, July, August, and September
billing cycles are received on or before the payment due date. A
required minimum periodic payment of $60 is due on October 25. On
October 26, a late payment has occurred because the required minimum
periodic payment due on October 25 has not been received. However,
because this late payment did not occur during the six billing
cycles following the March billing cycle, Sec. 1026.52(b)(1)(ii)
only permits the card issuer to impose a late payment fee of $25.
B. Violations of different types (late payment and over the
credit limit). The credit limit for an account is $1,000. Consistent
with Sec. 1026.56, the consumer has affirmatively consented to the
payment of transactions that exceed the credit limit. A required
minimum periodic payment of $30 is due on August 25. On August 26, a
late payment has occurred because no payment has been received.
Accordingly, consistent with Sec. 1026.52(b)(1)(ii)(A), the card
issuer imposes a $25 late payment fee on August 26. On August 30,
the card issuer receives a $30 payment. On September 10, a
transaction causes the account balance to increase to $1,150, which
exceeds the account's $1,000 credit limit. On September 11, a second
transaction increases the account balance to $1,350. On September
23, the card issuer receives the $50 required minimum periodic
payment due on September 25, which reduces the account balance to
$1,300. On September 30, the card issuer imposes a $25 over-the-
limit fee, consistent with Sec. 1026.52(b)(1)(ii)(A). On October
26, a late payment has occurred because the $60 required minimum
periodic payment due on October 25 has not been received.
Accordingly, consistent with Sec. 1026.52(b)(1)(ii)(B), the card
issuer imposes a $35 late payment fee on October 26.
C. Violations of different types (late payment and returned
payment). A required minimum periodic payment of $50 is due on July
25. On July 26, a late payment has occurred because no payment has
been received. Accordingly, consistent with Sec.
1026.52(b)(1)(ii)(A), the card issuer imposes a $25 late payment fee
on July 26. On July 30, the card issuer receives a $50 payment. A
required minimum periodic payment of $50 is due on August 25. On
August 24, a $50 payment is received. On August 27, the $50 payment
is returned to the card issuer for insufficient funds. In these
circumstances, Sec. 1026.52(b)(2)(ii) permits the card issuer to
impose either a late payment fee or a returned payment fee but not
both because the late payment and the returned payment result from
the same event or transaction. Accordingly, for purposes of Sec.
1026.52(b)(1)(ii), the event or transaction constitutes a single
violation. However, if the card issuer imposes a late payment fee,
Sec. 1026.52(b)(1)(ii)(B) permits the issuer to impose a fee of $35
because the late payment occurred during the six billing cycles
following the July billing cycle. In contrast, if the card issuer
imposes a returned payment fee, the amount of the fee may be no more
than $25 pursuant to Sec. 1026.52(b)(1)(ii)(A).
2. Adjustments based on Consumer Price Index. For purposes of
Sec. 1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B), the Bureau shall
calculate each year price level adjusted amounts using the Consumer
Price Index in effect on June 1 of that year. When the cumulative
change in the adjusted minimum value derived from applying the
annual Consumer Price level to the current amounts in Sec.
1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B) has risen by a whole dollar,
those amounts will be increased by $1.00. Similarly, when the
cumulative change in the adjusted minimum value derived from
applying the annual Consumer Price level to the current amounts in
Sec. 1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B) has decreased by a
whole dollar, those amounts will be decreased by $1.00. The Bureau
will publish adjustments to the amounts in Sec.
1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B).
3. Delinquent balance for charge card accounts. Section
1026.52(b)(1)(ii)(C) provides that, when a charge card issuer that
requires payment of outstanding balances in full at the end of each
billing cycle has not received the required payment for two or more
consecutive billing cycles, the card issuer may impose a late
payment fee that does not exceed three percent of the delinquent
balance. For purposes of Sec. 1026.52(b)(1)(ii)(C), the delinquent
balance is any previously billed amount that remains unpaid at the
time the late payment fee is imposed pursuant to Sec.
1026.52(b)(1)(ii)(C). Consistent with Sec. 1026.52(b)(2)(ii), a
charge card issuer that imposes a fee pursuant to Sec.
1026.52(b)(1)(ii)(C) with respect to a late payment may not impose a
fee pursuant to Sec. 1026.52(b)(1)(ii)(B) with respect to the same
late payment. The following examples illustrate the application of
Sec. 1026.52(b)(1)(ii)(C):
i. Assume that a charge card issuer requires payment of
outstanding balances in full at the end of each billing cycle and
that the billing cycles for the account begin on the first day of
the month and end on the last day of the month. At the end of the
June billing cycle, the account has a balance of $1,000. On July 5,
the card issuer provides a periodic statement disclosing the $1,000
balance consistent with Sec. 1026.7. During the July billing cycle,
the account is used for $300 in transactions, increasing the balance
to $1,300. At the end of the July billing cycle, no payment has been
received and the card issuer imposes a $25 late payment fee
consistent with Sec. 1026.52(b)(1)(ii)(A). On August 5, the card
issuer provides a periodic statement disclosing the $1,325 balance
consistent with Sec. 1026.7. During the August billing cycle, the
account is used for $200 in transactions, increasing the balance to
$1,525. At the end of the August billing cycle, no payment has been
received. Consistent with Sec. 1026.52(b)(1)(ii)(C), the card
issuer may impose a late payment fee of $40, which is 3% of the
$1,325 balance that was due at the end of the August billing cycle.
Section 1026.52(b)(1)(ii)(C) does not permit the card issuer to
include the $200 in transactions that occurred during the August
billing cycle.
[[Page 80042]]
ii. Same facts as above except that, on August 25, a $100
payment is received. Consistent with Sec. 1026.52(b)(1)(ii)(C), the
card issuer may impose a late payment fee of $37, which is 3% of the
unpaid portion of the $1,325 balance that was due at the end of the
August billing cycle ($1,225).
iii. Same facts as in paragraph A above except that, on August
25, a $200 payment is received. Consistent with Sec.
1026.52(b)(1)(ii)(C), the card issuer may impose a late payment fee
of $34, which is 3% of the unpaid portion of the $1,325 balance that
was due at the end of the August billing cycle ($1,125). In the
alternative, the card issuer may impose a late payment fee of $35
consistent with Sec. 1026.52(b)(1)(ii)(B). However, Sec.
1026.52(b)(2)(ii) prohibits the card issuer from imposing both fees.
52(b)(2) Prohibited fees
1. Relationship to Sec. 1026.52(b)(1). A card issuer does not
comply with Sec. 1026.52(b) if it imposes a fee that is
inconsistent with the prohibitions in Sec. 1026.52(b)(2). Thus, the
prohibitions in Sec. 1026.52(b)(2) apply even if a fee is
consistent with Sec. 1026.52(b)(1)(i) or (b)(1)(ii). For example,
even if a card issuer has determined for purposes of Sec.
1026.52(b)(1)(i) that a $27 fee represents a reasonable proportion
of the total costs incurred by the card issuer as a result of a
particular type of violation, Sec. 1026.52(b)(2)(i) prohibits the
card issuer from imposing that fee if the dollar amount associated
with the violation is less than $27. Similarly, even if Sec.
1026.52(b)(1)(ii) permits a card issuer to impose a $25 fee, Sec.
1026.52(b)(2)(i) prohibits the card issuer from imposing that fee if
the dollar amount associated with the violation is less than $25.
52(b)(2)(i) Fees That Exceed Dollar Amount Associated With Violation
1. Late payment fees. For purposes of Sec. 1026.52(b)(2)(i),
the dollar amount associated with a late payment is the amount of
the required minimum periodic payment due immediately prior to
assessment of the late payment fee. Thus, Sec. 1026.52(b)(2)(i)(A)
prohibits a card issuer from imposing a late payment fee that
exceeds the amount of that required minimum periodic payment. For
example:
i. Assume that a $15 required minimum periodic payment is due on
September 25. The card issuer does not receive any payment on or
before September 25. On September 26, the card issuer imposes a late
payment fee. For purposes of Sec. 1026.52(b)(2)(i), the dollar
amount associated with the late payment is the amount of the
required minimum periodic payment due on September 25 ($15). Thus,
under Sec. 1026.52(b)(2)(i)(A), the amount of that fee cannot
exceed $15 (even if a higher fee would be permitted under Sec.
1026.52(b)(1)).
ii. Same facts as above except that, on September 25, the card
issuer receives a $10 payment. No further payments are received. On
September 26, the card issuer imposes a late payment fee. For
purposes of Sec. 1026.52(b)(2)(i), the dollar amount associated
with the late payment is the full amount of the required minimum
periodic payment due on September 25 ($15), rather than the unpaid
portion of that payment ($5). Thus, under Sec. 1026.52(b)(2)(i)(A),
the amount of the late payment fee cannot exceed $15 (even if a
higher fee would be permitted under Sec. 1026.52(b)(1)).
iii. Assume that a $15 required minimum periodic payment is due
on October 28 and the billing cycle for the account closes on
October 31. The card issuer does not receive any payment on or
before November 3. On November 3, the card issuer determines that
the required minimum periodic payment due on November 28 is $50. On
November 5, the card issuer imposes a late payment fee. For purposes
of Sec. 1026.52(b)(2)(i), the dollar amount associated with the
late payment is the amount of the required minimum periodic payment
due on October 28 ($15), rather than the amount of the required
minimum periodic payment due on November 28 ($50). Thus, under Sec.
1026.52(b)(2)(i)(A), the amount of that fee cannot exceed $15 (even
if a higher fee would be permitted under Sec. 1026.52(b)(1)).
2. Returned payment fees. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with a returned
payment is the amount of the required minimum periodic payment due
immediately prior to the date on which the payment is returned to
the card issuer. Thus, Sec. 1026.52(b)(2)(i)(A) prohibits a card
issuer from imposing a returned payment fee that exceeds the amount
of that required minimum periodic payment. However, if a payment has
been returned and is submitted again for payment by the card issuer,
there is no additional dollar amount associated with a subsequent
return of that payment and Sec. 1026.52(b)(2)(i)(B) prohibits the
card issuer from imposing an additional returned payment fee. For
example:
i. Assume that the billing cycles for an account begin on the
first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. A minimum
payment of $15 is due on March 25. The card issuer receives a check
for $100 on March 23, which is returned to the card issuer for
insufficient funds on March 26. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with the returned
payment is the amount of the required minimum periodic payment due
on March 25 ($15). Thus, Sec. 1026.52(b)(2)(i)(A) prohibits the
card issuer from imposing a returned payment fee that exceeds $15
(even if a higher fee would be permitted under Sec. 1026.52(b)(1)).
Furthermore, Sec. 1026.52(b)(2)(ii) prohibits the card issuer from
assessing both a late payment fee and a returned payment fee in
these circumstances. See comment 52(b)(2)(ii)-1.
ii. Same facts as above except that the card issuer receives the
$100 check on March 31 and the check is returned for insufficient
funds on April 2. The minimum payment due on April 25 is $30. For
purposes of Sec. 1026.52(b)(2)(i), the dollar amount associated
with the returned payment is the amount of the required minimum
periodic payment due on March 25 ($15), rather than the amount of
the required minimum periodic payment due on April 25 ($30). Thus,
Sec. 1026.52(b)(2)(i)(A) prohibits the card issuer from imposing a
returned payment fee that exceeds $15 (even if a higher fee would be
permitted under Sec. 1026.52(b)(1)). Furthermore, Sec.
1026.52(b)(2)(ii) prohibits the card issuer from assessing both a
late payment fee and a returned payment fee in these circumstances.
See comment 52(b)(2)(ii)-1.
iii. Same facts as paragraph i above except that, on March 28,
the card issuer presents the $100 check for payment a second time.
On April 1, the check is again returned for insufficient funds.
Section 1026.52(b)(2)(i)(B) prohibits the card issuer from imposing
a returned payment fee based on the return of the payment on April
1.
iv. Assume that the billing cycles for an account begin on the
first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. A minimum
payment of $15 is due on August 25. The card issuer receives a check
for $15 on August 23, which is not returned. The card issuer
receives a check for $50 on September 5, which is returned to the
card issuer for insufficient funds on September 7. Section
1026.52(b)(2)(i)(B) does not prohibit the card issuer from imposing
a returned payment fee in these circumstances. Instead, for purposes
of Sec. 1026.52(b)(2)(i), the dollar amount associated with the
returned payment is the amount of the required minimum periodic
payment due on August 25 ($15). Thus, Sec. 1026.52(b)(2)(i)(A)
prohibits the card issuer from imposing a returned payment fee that
exceeds $15 (even if a higher fee would be permitted under Sec.
1026.52(b)(1)).
3. Over-the-limit fees. For purposes of Sec. 1026.52(b)(2)(i),
the dollar amount associated with extensions of credit in excess of
the credit limit for an account is the total amount of credit
extended by the card issuer in excess of the credit limit during the
billing cycle in which the over-the-limit fee is imposed. Thus,
Sec. 1026.52(b)(2)(i)(A) prohibits a card issuer from imposing an
over-the-limit fee that exceeds that amount. Nothing in Sec.
1026.52(b) permits a card issuer to impose an over-the-limit fee if
imposition of the fee is inconsistent with Sec. 1026.56. The
following examples illustrate the application of Sec.
1026.52(b)(2)(i)(A) to over-the-limit fees:
i. Assume that the billing cycles for a credit card account with
a credit limit of $5,000 begin on the first day of the month and end
on the last day of the month. Assume also that, consistent with
Sec. 1026.56, the consumer has affirmatively consented to the
payment of transactions that exceed the credit limit. On March 1,
the account has a $4,950 balance. On March 6, a $60 transaction is
charged to the account, increasing the balance to $5,010. On March
25, a $5 transaction is charged to the account, increasing the
balance to $5,015. On the last day of the billing cycle (March 31),
the card issuer imposes an over-the-limit fee. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with the extensions
of credit in excess of the credit limit is the total amount of
credit extended by the card issuer in excess of the credit limit
during the March billing cycle ($15). Thus, Sec.
1026.52(b)(2)(i)(A) prohibits the card issuer from imposing an over-
the-limit fee that exceeds $15 (even if a higher fee would be
permitted under Sec. 1026.52(b)(1)).
ii. Same facts as above except that, on March 26, the card
issuer receives a payment
[[Page 80043]]
of $20, reducing the balance below the credit limit to $4,995.
Nevertheless, for purposes of Sec. 1026.52(b)(2)(i), the dollar
amount associated with the extensions of credit in excess of the
credit limit is the total amount of credit extended by the card
issuer in excess of the credit limit during the March billing cycle
($15). Thus, consistent with Sec. 1026.52(b)(2)(i)(A), the card
issuer may impose an over-the-limit fee of $15.
4. Declined access check fees. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with declining
payment on a check that accesses a credit card account is the amount
of the check. Thus, when a check that accesses a credit card account
is declined, Sec. 1026.52(b)(2)(i)(A) prohibits a card issuer from
imposing a fee that exceeds the amount of that check. For example,
assume that a check that accesses a credit card account is used as
payment for a $50 transaction, but payment on the check is declined
by the card issuer because the transaction would have exceeded the
credit limit for the account. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with the declined
check is the amount of the check ($50). Thus, Sec.
1026.52(b)(2)(i)(A) prohibits the card issuer from imposing a fee
that exceeds $50. However, the amount of this fee must also comply
with Sec. 1026.52(b)(1)(i) or (b)(1)(ii).
5. Inactivity fees. Section 1026.52(b)(2)(i)(B)(2) prohibits a
card issuer from imposing a fee with respect to a credit card
account under an open-end (not home-secured) consumer credit plan
based on inactivity on that account (including the consumer's
failure to use the account for a particular number or dollar amount
of transactions or a particular type of transaction). For example,
Sec. 1026.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a
$50 fee when a credit card account under an open-end (not home-
secured) consumer credit plan is not used for at least $2,000 in
purchases over the course of a year. Similarly, Sec.
1026.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a $50
annual fee on all accounts of a particular type but waiving the fee
on any account that is used for at least $2,000 in purchases over
the course of a year if the card issuer promotes the waiver or
rebate of the annual fee for purposes of Sec. 1026.55(e). However,
if the card issuer does not promote the waiver or rebate of the
annual fee for purposes of Sec. 1026.55(e), Sec.
1026.52(b)(2)(i)(B)(2) does not prohibit a card issuer from
considering account activity along with other factors when deciding
whether to waive or rebate annual fees on individual accounts (such
as in response to a consumer's request).
6. Closed account fees. Section 1026.52(b)(2)(i)(B)(3) prohibits
a card issuer from imposing a fee based on the closure or
termination of an account. For example, Sec. 1026.52(b)(2)(i)(B)(3)
prohibits a card issuer from:
i. Imposing a one-time fee to consumers who close their
accounts.
ii. Imposing a periodic fee (such as an annual fee, a monthly
maintenance fee, or a closed account fee) after an account is closed
or terminated if that fee was not imposed prior to closure or
termination. This prohibition applies even if the fee was disclosed
prior to closure or termination. See also comment 55(d)-1.
iii. Increasing a periodic fee (such as an annual fee or a
monthly maintenance fee) after an account is closed or terminated.
However, a card issuer is not prohibited from continuing to impose a
periodic fee that was imposed before the account was closed or
terminated.
52(b)(2)(ii) Multiple Fees Based on a Single Event or Transaction
1. Single event or transaction. Section 1026.52(b)(2)(ii)
prohibits a card issuer from imposing more than one fee for
violating the terms or other requirements of an account based on a
single event or transaction. If Sec. 1026.56(j)(1) permits a card
issuer to impose fees for exceeding the credit limit in consecutive
billing cycles based on the same over-the-limit transaction, those
fees are not based on a single event or transaction for purposes of
Sec. 1026.52(b)(2)(ii). The following examples illustrate the
application of Sec. 1026.52(b)(2)(ii). Assume for purposes of these
examples that the billing cycles for a credit card account begin on
the first day of the month and end on the last day of the month and
that the payment due date for the account is the twenty-fifth day of
the month.
i. Assume that the required minimum periodic payment due on
March 25 is $20. On March 26, the card issuer has not received any
payment and imposes a late payment fee. Consistent with Sec. Sec.
1026.52(b)(1)(ii)(A) and (b)(2)(i), the card issuer may impose a $20
late payment fee on March 26. However, Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from imposing an additional late payment
fee if the $20 minimum payment has not been received by a subsequent
date (such as March 31).
A. On April 3, the card issuer provides a periodic statement
disclosing that a $70 required minimum periodic payment is due on
April 25. This minimum payment includes the $20 minimum payment due
on March 25 and the $20 late payment fee imposed on March 26. On
April 20, the card issuer receives a $20 payment. No additional
payments are received during the April billing cycle. Section
1026.52(b)(2)(ii) does not prohibit the card issuer from imposing a
late payment fee based on the consumer's failure to make the $70
required minimum periodic payment on or before April 25.
Accordingly, consistent with Sec. 1026.52(b)(1)(ii)(B) and
(b)(2)(i), the card issuer may impose a $35 late payment fee on
April 26.
B. On April 3, the card issuer provides a periodic statement
disclosing that a $20 required minimum periodic payment is due on
April 25. This minimum payment does not include the $20 minimum
payment due on March 25 or the $20 late payment fee imposed on March
26. On April 20, the card issuer receives a $20 payment. No
additional payments are received during the April billing cycle.
Because the card issuer has received the required minimum periodic
payment due on April 25 and because Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from imposing a second late payment fee
based on the consumer's failure to make the $20 minimum payment due
on March 25, the card issuer cannot impose a late payment fee in
these circumstances.
ii. Assume that the required minimum periodic payment due on
March 25 is $30.
A. On March 25, the card issuer receives a check for $50, but
the check is returned for insufficient funds on March 27. Consistent
with Sec. Sec. 1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card
issuer may impose a late payment fee of $25 or a returned payment
fee of $25. However, Sec. 1026.52(b)(2)(ii) prohibits the card
issuer from imposing both fees because those fees would be based on
a single event or transaction.
B. Same facts as paragraph ii.A above except that that card
issuer receives the $50 check on March 27 and the check is returned
for insufficient funds on March 29. Consistent with Sec. Sec.
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a
late payment fee of $25 or a returned payment fee of $25. However,
Sec. 1026.52(b)(2)(ii) prohibits the card issuer from imposing both
fees because those fees would be based on a single event or
transaction. If no payment is received on or before the next payment
due date (April 25), Sec. 1026.52(b)(2)(ii) does not prohibit the
card issuer from imposing a late payment fee.
iii. Assume that the required minimum periodic payment due on
July 25 is $30. On July 10, the card issuer receives a $50 payment,
which is not returned. On July 20, the card issuer receives a $100
payment, which is returned for insufficient funds on July 24.
Consistent with Sec. 1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the
card issuer may impose a returned payment fee of $25. Nothing in
Sec. 1026.52(b)(2)(ii) prohibits the imposition of this fee.
iv. Assume that the credit limit for an account is $1,000 and
that, consistent with Sec. 1026.56, the consumer has affirmatively
consented to the payment of transactions that exceed the credit
limit. On March 31, the balance on the account is $970 and the card
issuer has not received the $35 required minimum periodic payment
due on March 25. On that same date (March 31), a $70 transaction is
charged to the account, which increases the balance to $1,040.
Consistent with Sec. 1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the
card issuer may impose a late payment fee of $25 and an over-the-
limit fee of $25. Section 1026.52(b)(2)(ii) does not prohibit the
imposition of both fees because those fees are based on different
events or transactions. No additional transactions are charged to
the account during the March, April, or May billing cycles. If the
account balance remains more than $35 above the credit limit on
April 26, the card issuer may impose an over-the-limit fee of $35
pursuant to Sec. 1026.52(b)(1)(ii)(B), to the extent consistent
with Sec. 1026.56(j)(1). Furthermore, if the account balance
remains more than $35 above the credit limit on May 26, the card
issuer may again impose an over-the-limit fee of $35 pursuant to
Sec. 1026.52(b)(1)(ii)(B), to the extent consistent with Sec.
1026.56(j)(1). Thereafter, Sec. 1026.56(j)(1) does not permit the
card issuer to impose additional over-the-limit fees unless another
over-the-limit transaction occurs. However, if an over-the-limit
transaction occurs during the six billing cycles following the May
billing cycle, the
[[Page 80044]]
card issuer may impose an over-the-limit fee of $35 pursuant to
Sec. 1026.52(b)(1)(ii)(B).
v. Assume that the credit limit for an account is $5,000 and
that, consistent with Sec. 1026.56, the consumer has affirmatively
consented to the payment of transactions that exceed the credit
limit. On July 23, the balance on the account is $4,950. On July 24,
the card issuer receives the $100 required minimum periodic payment
due on July 25, reducing the balance to $4,850. On July 26, a $75
transaction is charged to the account, which increases the balance
to $4,925. On July 27, the $100 payment is returned for insufficient
funds, increasing the balance to $5,025. Consistent with Sec. Sec.
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a
returned payment fee of $25 or an over-the-limit fee of $25.
However, Sec. 1026.52(b)(2)(ii) prohibits the card issuer from
imposing both fees because those fees would be based on a single
event or transaction.
vi. Assume that the required minimum periodic payment due on
March 25 is $50. On March 20, the card issuer receives a check for
$50, but the check is returned for insufficient funds on March 22.
Consistent with Sec. Sec. 1026.52(b)(1)(ii)(A) and (b)(2)(i)(A),
the card issuer may impose a returned payment fee of $25. On March
25, the card issuer receives a second check for $50, but the check
is returned for insufficient funds on March 27. Consistent with
Sec. Sec. 1026.52(b)(1)(ii)(A), (b)(1)(ii)(B), and (b)(2)(i)(A),
the card issuer may impose a late payment fee of $25 or a returned
payment fee of $35. However, Sec. 1026.52(b)(2)(ii) prohibits the
card issuer from imposing both fees because those fees would be
based on a single event or transaction.
vii. Assume that the required minimum periodic payment due on
February 25 is $100. On February 25, the card issuer receives a
check for $100. On March 3, the card issuer provides a periodic
statement disclosing that a $120 required minimum periodic payment
is due on March 25. On March 4, the $100 check is returned to the
card issuer for insufficient funds. Consistent with Sec. Sec.
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a
late payment fee of $25 or a returned payment fee of $25 with
respect to the $100 payment. However, Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from imposing both fees because those fees
would be based on a single event or transaction. On March 20, the
card issuer receives a $120 check, which is not returned. No
additional payments are received during the March billing cycle.
Because the card issuer has received the required minimum periodic
payment due on March 25 and because Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from imposing a second fee based on the
$100 payment that was returned for insufficient funds, the card
issuer cannot impose a late payment fee in these circumstances.
Section 1026.53--Allocation of Payments
1. Required minimum periodic payment. Section 1026.53 addresses
the allocation of amounts paid by the consumer in excess of the
minimum periodic payment required by the card issuer. Section
1026.53 does not limit or otherwise address the card issuer's
ability to determine, consistent with applicable law and regulatory
guidance, the amount of the required minimum periodic payment or how
that payment is allocated. A card issuer may, but is not required
to, allocate the required minimum periodic payment consistent with
the requirements in Sec. 1026.53 to the extent consistent with
other applicable law or regulatory guidance.
2. Applicable rates and balances. Section 1026.53 permits a card
issuer to allocate an amount paid by the consumer in excess of the
required minimum periodic payment based on the annual percentage
rates and balances on the day the preceding billing cycle ends, on
the day the payment is credited to the account, or on any day in
between those two dates. The day used by the card issuer to
determine the applicable annual percentage rates and balances for
purposes of Sec. 1026.53 generally must be consistent from billing
cycle to billing cycle, although the card issuer may adjust this day
from time to time. For example:
i. Assume that the billing cycles for a credit card account
start on the first day of the month and end on the last day of the
month. On the date the March billing cycle ends (March 31), the
account has a purchase balance of $500 at a promotional annual
percentage rate of 5% and another purchase balance of $200 at a non-
promotional annual percentage rate of 15%. On April 5, a $100
purchase to which the 15% rate applies is charged to the account. On
April 15, the promotional rate expires and Sec. 1026.55(b)(1)
permits the card issuer to increase the rate that applies to the
$500 balance from 5% to 18%. On April 25, the card issuer credits to
the account $400 paid by the consumer in excess of the required
minimum periodic payment. If the card issuer's practice is to
allocate payments based on the rates and balances on the last day of
the prior billing cycle, the card issuer would allocate the $400
payment to pay in full the $200 balance to which the 15% rate
applied on March 31 and then allocate the remaining $200 to the $500
balance to which the 5% rate applied on March 31. In the
alternative, if the card issuer's practice is to allocate payments
based on the rates and balances on the day a payment is credited to
the account, the card issuer would allocate the $400 payment to the
$500 balance to which the 18% rate applied on April 25.
ii. Same facts as above except that, on April 25, the card
issuer credits to the account $750 paid by the consumer in excess of
the required minimum periodic payment. If the card issuer's practice
is to allocate payments based on the rates and balances on the last
day of the prior billing cycle, the card issuer would allocate the
$750 payment to pay in full the $200 balance to which the 15% rate
applied on March 31 and the $500 balance to which the 5% rate
applied on March 31 and then allocate the remaining $50 to the $100
purchase made on April 5. In the alternative, if the card issuer's
practice is to allocate payments based on the rates and balances on
the day a payment is credited to the account, the card issuer would
allocate the $750 payment to pay in full the $500 balance to which
the 18% rate applied on April 25 and then allocate the remaining
$250 to the $300 balance to which the 15% rate applied on April 25.
3. Claims or defenses under Sec. 1026.12(c) and billing error
disputes under Sec. 1026.13. When a consumer has asserted a claim
or defense against the card issuer pursuant to Sec. 1026.12(c) or
alleged a billing error under Sec. 1026.13, the card issuer must
apply the consumer's payment in a manner that avoids or minimizes
any reduction in the amount subject to that claim, defense, or
dispute. For example:
i. Assume that a credit card account has a $500 cash advance
balance at an annual percentage rate of 25% and a $1,000 purchase
balance at an annual percentage rate of 17%. Assume also that $200
of the cash advance balance is subject to a claim or defense under
Sec. 1026.12(c) or a billing error dispute under Sec. 1026.13. If
the consumer pays $900 in excess of the required minimum periodic
payment, the card issuer must allocate $300 of the excess payment to
pay in full the portion of the cash advance balance that is not
subject to the claim, defense, or dispute and then allocate the
remaining $600 to the $1,000 purchase balance.
ii. Same facts as above except that the consumer pays $1,400 in
excess of the required minimum periodic payment. The card issuer
must allocate $1,300 of the excess payment to pay in full the $300
cash advance balance that is not subject to the claim, defense, or
dispute and the $1,000 purchase balance. If there are no new
transactions or other amounts to which the remaining $100 can be
allocated, the card issuer may apply that amount to the $200 cash
advance balance that is subject to the claim, defense, or dispute.
However, if the card issuer subsequently determines that a billing
error occurred as asserted by the consumer, the card issuer must
credit the account for the disputed amount and any related finance
or other charges and send a correction notice consistent with Sec.
1026.13(e).
4. Balances with the same rate. When the same annual percentage
rate applies to more than one balance on an account and a different
annual percentage rate applies to at least one other balance on that
account, Sec. 1026.53 generally does not require that any
particular method be used when allocating among the balances with
the same annual percentage rate. Under these circumstances, a card
issuer may treat the balances with the same rate as a single balance
or separate balances. See example in comment 53-5.iv. However, when
a balance on a credit card account is subject to a deferred interest
or similar program that provides that a consumer will not be
obligated to pay interest that accrues on the balance if the balance
is paid in full prior to the expiration of a specified period of
time, that balance must be treated as a balance with an annual
percentage rate of zero for purposes of Sec. 1026.53 during that
period of time. For example, if an account has a $1,000 purchase
balance and a $2,000 balance that is subject to a deferred interest
program that expires on July 1 and a 15% annual percentage rate
applies to both, the balances must be treated as balances with
different rates for purposes
[[Page 80045]]
of Sec. 1026.53 until July 1. In addition, unless the card issuer
allocates amounts paid by the consumer in excess of the required
minimum periodic payment in the manner requested by the consumer
pursuant to Sec. 1026.53(b)(1)(ii), Sec. 1026.53(b)(1)(i) requires
the card issuer to apply any excess payments first to the $1,000
purchase balance except during the last two billing cycles of the
deferred interest period (when it must be applied first to any
remaining portion of the $2,000 balance). See example in comment 53-
5.v.
5. Examples. For purposes of the following examples, assume that
none of the required minimum periodic payment is allocated to the
balances discussed (unless otherwise stated).
i. Assume that a credit card account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $800 in excess of the required minimum periodic payment. Under
Sec. 1026.53(a), the card issuer must allocate $500 to pay off the
cash advance balance and then allocate the remaining $300 to the
purchase balance.
ii. Assume that a credit card account has a cash advance balance
of $500 at an annual percentage rate of 20% and a purchase balance
of $1,500 at an annual percentage rate of 15% and that the consumer
pays $400 in excess of the required minimum periodic payment. Under
Sec. 1026.53(a), the card issuer must allocate the entire $400 to
the cash advance balance.
iii. Assume that a credit card account has a cash advance
balance of $100 at an annual percentage rate of 20%, a purchase
balance of $300 at an annual percentage rate of 18%, and a $600
protected balance on which the 12% annual percentage rate cannot be
increased pursuant to Sec. 1026.55. If the consumer pays $500 in
excess of the required minimum periodic payment, Sec. 1026.53(a)
requires the card issuer to allocate $100 to pay off the cash
advance balance, $300 to pay off the purchase balance, and $100 to
the protected balance.
iv. Assume that a credit card account has a cash advance balance
of $500 at an annual percentage rate of 20%, a purchase balance of
$1,000 at an annual percentage rate of 15%, and a transferred
balance of $2,000 that was previously at a discounted annual
percentage rate of 5% but is now at an annual percentage rate of
15%. Assume also that the consumer pays $800 in excess of the
required minimum periodic payment. Under Sec. 1026.53(a), the card
issuer must allocate $500 to pay off the cash advance balance and
allocate the remaining $300 among the purchase balance and the
transferred balance in the manner the card issuer deems appropriate.
v. Assume that on January 1 a consumer uses a credit card
account to make a $1,200 purchase subject to a deferred interest
program under which interest accrues at an annual percentage rate of
15% but the consumer will not be obligated to pay that interest if
the balance is paid in full on or before June 30. The billing cycles
for this account begin on the first day of the month and end on the
last day of the month. Each month from January through June, the
consumer uses the account to make $200 in purchases that are not
subject to the deferred interest program but are subject to the 15%
rate.
A. Each month from February through June, the consumer pays $400
in excess of the required minimum periodic payment on the payment
due date, which is the twenty-fifth of the month. Any interest that
accrues on the purchases not subject to the deferred interest
program is paid by the required minimum periodic payment. The card
issuer does not accept requests from consumers regarding the
allocation of excess payments pursuant to Sec. 1026.53(b)(1)(ii).
Thus, Sec. 1026.53(b)(1)(i) requires the card issuer to allocate
the $400 excess payments received on February 25, March 25, and
April 25 consistent with Sec. 1026.53(a). In other words, the card
issuer must allocate those payments as follows: $200 to pay off the
balance not subject to the deferred interest program (which is
subject to the 15% rate) and the remaining $200 to the deferred
interest balance (which is treated as a balance with a rate of
zero). However, Sec. 1026.53(b)(1)(i) requires the card issuer to
allocate the entire $400 excess payment received on May 25 to the
deferred interest balance. Similarly, Sec. 1026.53(b)(1)(i)
requires the card issuer to allocate the $400 excess payment
received on June 25 as follows: $200 to the deferred interest
balance (which pays that balance in full) and the remaining $200 to
the balance not subject to the deferred interest program.
B. Same facts as above, except that the card issuer does accept
requests from consumers regarding the allocation of excess payments
pursuant to Sec. 1026.53(b)(1)(ii). In addition, on April 25, the
card issuer receives an excess payment of $800, which the consumer
requests be allocated to pay off the $800 balance subject to the
deferred interest program. Section 1026.53(b)(1)(ii) permits the
card issuer to allocate the $800 excess payment in the manner
requested by the consumer.
53(b) Special Rules
1. Deferred interest and similar programs. Section 1026.53(b)(1)
applies to deferred interest or similar programs under which the
consumer is not obligated to pay interest that accrues on a balance
if that balance is paid in full prior to the expiration of a
specified period of time. For purposes of Sec. 1026.53(b)(1),
``deferred interest'' has the same meaning as in Sec. 1026.16(h)(2)
and associated commentary. Section 1026.53(b)(1) applies regardless
of whether the consumer is required to make payments with respect to
that balance during the specified period. However, a grace period
during which any credit extended may be repaid without incurring a
finance charge due to a periodic interest rate is not a deferred
interest or similar program for purposes of Sec. 1026.53(b)(1).
Similarly, a temporary annual percentage rate of zero percent that
applies for a specified period of time consistent with Sec.
1026.55(b)(1) is not a deferred interest or similar program for
purposes of Sec. 1026.53(b)(1) unless the consumer may be obligated
to pay interest that accrues during the period if a balance is not
paid in full prior to expiration of the period.
2. Expiration of deferred interest or similar program during
billing cycle. For purposes of Sec. 1026.53(b)(1)(i), a billing
cycle does not constitute one of the two billing cycles immediately
preceding expiration of a deferred interest or similar program if
the expiration date for the program precedes the payment due date in
that billing cycle. For example, assume that a credit card account
has a balance subject to a deferred interest program that expires on
June 15. Assume also that the billing cycles for the account begin
on the first day of the month and end on the last day of the month
and that the required minimum periodic payment is due on the twenty-
fifth day of the month. The card issuer does not accept requests
from consumers regarding the allocation of excess payments pursuant
to Sec. 1026.53(b)(1)(ii). Because the expiration date for the
deferred interest program (June 15) precedes the due date in the
June billing cycle (June 25), Sec. 1026.53(b)(1)(i) requires the
card issuer to allocate first to the deferred interest balance any
amount paid by the consumer in excess of the required minimum
periodic payment during the April and May billing cycles (as well as
any amount paid by the consumer before June 15). However, if the
deferred interest program expired on June 25 or on June 30 (or on
any day in between), Sec. 1026.53(b)(1)(i) would apply only to the
May and June billing cycles.
3. Consumer requests. i. Generally. Section 1026.53(b) does not
require a card issuer to allocate amounts paid by the consumer in
excess of the required minimum periodic payment in the manner
requested by the consumer, provided that the card issuer instead
allocates such amounts consistent with Sec. 1026.53(a) or
(b)(1)(i), as applicable. For example, a card issuer may decline
consumer requests regarding payment allocation as a general matter
or may decline such requests when a consumer does not comply with
requirements set by the card issuer (such as submitting the request
in writing or submitting the request prior to or contemporaneously
with submission of the payment), provided that amounts paid by the
consumer in excess of the required minimum periodic payment are
allocated consistent with Sec. 1026.53(a) or (b)(1)(i), as
applicable. Similarly, a card issuer that accepts requests pursuant
to Sec. 1026.53(b)(1)(ii) or (b)(2) must allocate amounts paid by a
consumer in excess of the required minimum periodic payment
consistent with Sec. 1026.53(a) or (b)(1)(i), as applicable, if the
consumer does not submit a request. Furthermore, a card issuer that
accepts requests pursuant to Sec. 1026.53(b)(1)(ii) or (b)(2) must
allocate consistent with Sec. 1026.53(a) or (b)(1)(i), as
applicable, if the consumer submits a request with which the card
issuer cannot comply (such as a request that contains a mathematical
error), unless the consumer submits an additional request with which
the card issuer can comply.
ii. Examples of consumer requests that satisfy Sec.
1026.53(b)(1)(ii) or (b)(2). A consumer has made a request for
purposes of Sec. 1026.53(b)(1)(ii) or (b)(2) if:
A. The consumer contacts the card issuer orally, electronically,
or in writing and specifically requests that a payment or
[[Page 80046]]
payments be allocated in a particular manner during the period of
time that the deferred interest or similar program applies to a
balance on the account or the period of time that a balance on the
account is secured.
B. The consumer completes and submits to the card issuer a form
or payment coupon provided by the card issuer for the purpose of
requesting that a payment or payments be allocated in a particular
manner during the period of time that the deferred interest or
similar program applies to a balance on the account or the period of
time that a balance on the account is secured.
C. The consumer contacts the card issuer orally, electronically,
or in writing and specifically requests that a payment that the card
issuer has previously allocated consistent with Sec. 1026.53(a) or
(b)(1)(i), as applicable, instead be allocated in a different
manner.
iii. Examples of consumer requests that do not satisfy Sec.
1026.53(b)(1)(ii) or (b)(2). A consumer has not made a request for
purposes of Sec. 1026.53(b)(1)(ii) or (b)(2) if:
A. The terms and conditions of the account agreement contain
preprinted language stating that by applying to open an account, by
using that account for transactions subject to a deferred interest
or similar program, or by using the account to purchase property in
which the card issuer holds a security interest the consumer
requests that payments be allocated in a particular manner.
B. The card issuer's online application contains a preselected
check box indicating that the consumer requests that payments be
allocated in a particular manner and the consumer does not deselect
the box.
C. The payment coupon provided by the card issuer contains
preprinted language or a preselected check box stating that by
submitting a payment the consumer requests that the payment be
allocated in a particular manner.
D. The card issuer requires a consumer to accept a particular
payment allocation method as a condition of using a deferred
interest or similar program, purchasing property in which the card
issuer holds a security interest, making a payment, or receiving
account services or features.
Section 1026.54--Limitations on the Imposition of Finance Charges
54(a) Limitations on imposing finance charges as a result of the loss
of a grace period
54(a)(1) General Rule
1. Eligibility for grace period. Section 1026.54 prohibits the
imposition of finance charges as a result of the loss of a grace
period in certain specified circumstances. Section 1026.54 does not
require the card issuer to provide a grace period. Furthermore,
Sec. 1026.54 does not prohibit the card issuer from placing
limitations and conditions on a grace period (such as limiting
application of the grace period to certain types of transactions or
conditioning eligibility for the grace period on certain
transactions being paid in full by a particular date), provided that
such limitations and conditions are consistent with Sec.
1026.5(b)(2)(ii)(B) and Sec. 1026.54. Finally, Sec. 1026.54 does
not limit the imposition of finance charges with respect to a
transaction when the consumer is not eligible for a grace period on
that transaction at the end of the billing cycle in which the
transaction occurred. For example:
i. Assume that the billing cycles for a credit card account
begin on the first day of the month and end on the last day of the
month and that the payment due date is the twenty-fifth day of the
month. Assume also that, for purchases made during the current
billing cycle (for purposes of this example, the June billing
cycle), the grace period applies from the date of the purchase until
the payment due date in the following billing cycle (July 25),
subject to two conditions. First, the purchase balance at the end of
the preceding billing cycle (the May billing cycle) must have been
paid in full by the payment due date in the current billing cycle
(June 25). Second, the purchase balance at the end of the current
billing cycle (the June billing cycle) must be paid in full by the
following payment due date (July 25). Finally, assume that the
consumer was eligible for a grace period at the start of the June
billing cycle (in other words, assume that the purchase balance for
the April billing cycle was paid in full by May 25).
A. If the consumer pays the purchase balance for the May billing
cycle in full by June 25, then at the end of the June billing cycle
the consumer is eligible for a grace period with respect to
purchases made during that billing cycle. Therefore, Sec. 1026.54
limits the imposition of finance charges with respect to purchases
made during the June billing cycle if the consumer does not pay the
purchase balance for the June billing cycle in full by July 25.
Specifically, Sec. 1026.54(a)(1)(i) prohibits the card issuer from
imposing finance charges based on the purchase balance at the end of
the June billing cycle for days that precede the July billing cycle.
Furthermore, Sec. 1026.54(a)(1)(ii) prohibits the card issuer from
imposing finance charges based on any portion of the balance at the
end of the June billing cycle that was paid on or before July 25.
B. If the consumer does not pay the purchase balance for the May
billing cycle in full by June 25, then the consumer is not eligible
for a grace period with respect to purchases made during the June
billing cycle at the end of that cycle. Therefore, Sec. 1026.54
does not limit the imposition of finance charges with respect to
purchases made during the June billing cycle regardless of whether
the consumer pays the purchase balance for the June billing cycle in
full by July 25.
ii. Same facts as above except that the card issuer places only
one condition on the provision of a grace period for purchases made
during the current billing cycle (the June billing cycle): that the
purchase balance at the end of the current billing cycle (the June
billing cycle) be paid in full by the following payment due date
(July 25). In these circumstances, Sec. 1026.54 applies to the same
extent as discussed in paragraphs i.A and i.B above regardless of
whether the purchase balance for the April billing cycle was paid in
full by May 25.
2. Definition of grace period. For purposes of Sec. Sec.
1026.5(b)(2)(ii)(B) and 1026.54, a grace period is a period within
which any credit extended may be repaid without incurring a finance
charge due to a periodic interest rate. The following are not grace
periods for purposes of Sec. 1026.54:
i. Deferred interest and similar programs. A deferred interest
or similar promotional program under which a consumer will not be
obligated to pay interest that accrues on a balance if that balance
is paid in full prior to the expiration of a specified period of
time is not a grace period for purposes of Sec. 1026.54. Thus,
Sec. 1026.54 does not prohibit the card issuer from charging
accrued interest to an account upon expiration of a deferred
interest or similar program if the balance was not paid in full
prior to expiration (to the extent consistent with Sec. 1026.55 and
other applicable law and regulatory guidance).
ii. Waivers or rebates of interest. As a general matter, a card
issuer has not provided a grace period with respect to transactions
for purposes of Sec. 1026.54 if, on an individualized basis (such
as in response to a consumer's request), the card issuer waives or
rebates finance charges that have accrued on transactions. In
addition, when a balance at the end of the preceding billing cycle
is paid in full on or before the payment due date in the current
billing cycle, a card issuer that waives or rebates trailing or
residual interest accrued on that balance or any other transactions
during the current billing cycle has not provided a grace period
with respect to that balance or any other transactions for purposes
of Sec. 1026.54. However, if the terms of the account provide that
all interest accrued on transactions will be waived or rebated if
the balance for those transactions at the end of the billing cycle
during which the transactions occurred is paid in full by the
following payment due date, the card issuer is providing a grace
period with respect to those transactions for purposes of Sec.
1026.54. For example:
A. Assume that the billing cycles for a credit card account
begin on the first day of the month and end on the last day of the
month and that the payment due date is the twenty-fifth day of the
month. On March 31, the balance on the account is $1,000 and the
consumer is not eligible for a grace period with respect to that
balance because the balance at the end of the prior billing cycle
was not paid in full on March 25. On April 15, the consumer uses the
account for a $500 purchase. On April 25, the card issuer receives a
payment of $1,000. On May 3, the card issuer mails or delivers a
periodic statement reflecting trailing or residual interest that
accrued on the $1,000 balance from April 1 through April 24 as well
as interest that accrued on the $500 purchase from April 15 through
April 30. On May 10, the consumer requests that the trailing or
residual interest charges be waived and the card issuer complies. By
waiving these interest charges, the card issuer has not provided a
grace period with respect to the $1,000 balance or the $500
purchase.
B. Same facts as in paragraph ii.A above except that the terms
of the account state that trailing or residual interest will be
waived in these circumstances or it is the card issuer's practice to
waive trailing or residual interest in these circumstances. By
waiving these
[[Page 80047]]
interest charges, the card issuer has not provided a grace period
with respect to the $1,000 balance or the $500 purchase.
C. Assume that the billing cycles for a credit card account
begin on the first day of the month and end on the last day of the
month and that the payment due date is the twenty-fifth day of the
month. Assume also that, for purchases made during the current
billing cycle (for purposes of this example, the June billing
cycle), the terms of the account provide that interest accrued on
those purchases from the date of the purchase until the payment due
date in the following billing cycle (July 25) will be waived or
rebated, subject to two conditions. First, the purchase balance at
the end of the preceding billing cycle (the May billing cycle) must
have been paid in full by the payment due date in the current
billing cycle (June 25). Second, the purchase balance at the end of
the current billing cycle (the June billing cycle) must be paid in
full by the following payment due date (July 25). Under these
circumstances, the card issuer is providing a grace period on
purchases for purposes of Sec. 1026.54. Therefore, assuming that
the consumer was eligible for this grace period at the start of the
June billing cycle (in other words, assuming that the purchase
balance for the April billing cycle was paid in full by May 25) and
assuming that the consumer pays the purchase balance for the May
billing cycle in full by June 25, Sec. 1026.54 applies to the
imposition of finance charges with respect to purchases made during
the June billing cycle. Specifically, Sec. 1026.54(a)(1)(i)
prohibits the card issuer from imposing finance charges based on the
purchase balance at the end of the June billing cycle for days that
precede the July billing cycle. Furthermore, Sec. 1026.54(a)(1)(ii)
prohibits the card issuer from imposing finance charges based on any
portion of the balance at the end of the June billing cycle that was
paid on or before July 25.
3. Relationship to payment allocation requirements in Sec.
1026.53. Card issuers must comply with the payment allocation
requirements in Sec. 1026.53 even if doing so will result in the
loss of a grace period.
4. Prohibition on two-cycle balance computation method. When a
consumer ceases to be eligible for a grace period, Sec.
1026.54(a)(1)(i) prohibits the card issuer from computing the
finance charge using the two-cycle average daily balance computation
method. This method calculates the finance charge using a balance
that is the sum of the average daily balances for two billing
cycles. The first balance is for the current billing cycle, and is
calculated by adding the total balance (including or excluding new
purchases and deducting payments and credits) for each day in the
billing cycle, and then dividing by the number of days in the
billing cycle. The second balance is for the preceding billing
cycle.
5. Prohibition on imposing finance charges on amounts paid
within grace period. When a balance on a credit card account is
eligible for a grace period and the card issuer receives payment for
some but not all of that balance prior to the expiration of the
grace period, Sec. 1026.54(a)(1)(ii) prohibits the card issuer from
imposing finance charges on the portion of the balance paid. Card
issuers are not required to use a particular method to comply with
Sec. 1026.54(a)(1)(ii). However, when Sec. 1026.54(a)(1)(ii)
applies, a card issuer is in compliance if, for example, it applies
the consumer's payment to the balance subject to the grace period at
the end of the preceding billing cycle (in a manner consistent with
the payment allocation requirements in Sec. 1026.53) and then
calculates interest charges based on the amount of the balance that
remains unpaid.
6. Examples. Assume that the annual percentage rate for
purchases on a credit card account is 15%. The billing cycle starts
on the first day of the month and ends on the last day of the month.
The payment due date for the account is the twenty-fifth day of the
month. For purchases made during the current billing cycle, the card
issuer provides a grace period from the date of the purchase until
the payment due date in the following billing cycle, provided that
the purchase balance at the end of the current billing cycle is paid
in full by the following payment due date. For purposes of this
example, assume that none of the required minimum periodic payment
is allocated to the balances discussed. During the March billing
cycle, the following transactions are charged to the account: A $100
purchase on March 10, a $200 purchase on March 15, and a $300
purchase on March 20. On March 25, the purchase balance for the
February billing cycle is paid in full. Thus, for purposes of Sec.
1026.54, the consumer is eligible for a grace period on the March
purchases. At the end of the March billing cycle (March 31), the
consumer's total purchase balance is $600 and the consumer will not
be charged interest on that balance if it is paid in full by the
following due date (April 25).
i. On April 10, a $150 purchase is charged to the account. On
April 25, the card issuer receives $500 in excess of the required
minimum periodic payment. Section 1026.54(a)(1)(i) prohibits the
card issuer from reaching back and charging interest on any of the
March transactions from the date of the transaction through the end
of the March billing cycle (March 31). In these circumstances, the
card issuer may comply with Sec. 1026.54(a)(1)(ii) by applying the
$500 excess payment to the $600 purchase balance and then charging
interest only on the portion of the $600 purchase balance that
remains unpaid ($100) from the start of the April billing cycle
(April 1) through the end of the April billing cycle (April 30). In
addition, the card issuer may charge interest on the $150 purchase
from the date of the transaction (April 10) through the end of the
April billing cycle (April 31).
ii. Same facts as in paragraph 6 above except that, on March 18,
a $250 cash advance is charged to the account at an annual
percentage rate of 25%. The card issuer's grace period does not
apply to cash advances, but the card issuer does provide a grace
period on the March purchases because the purchase balance for the
February billing cycle is paid in full on March 25. On April 25, the
card issuer receives $600 in excess of the required minimum periodic
payment. As required by Sec. 1026.53, the card issuer allocates the
$600 excess payment first to the balance with the highest annual
percentage rate (the $250 cash advance balance). Although Sec.
1026.54(a)(1)(i) prohibits the card issuer from charging interest on
the March purchases based on days in the March billing cycle, the
card issuer may charge interest on the $250 cash advance from the
date of the transaction (March 18) through April 24. In these
circumstances, the card issuer may comply with Sec.
1026.54(a)(1)(ii) by applying the remainder of the excess payment
($350) to the $600 purchase balance and then charging interest only
on the portion of the $600 purchase balance that remains unpaid
($250) from the start of the April billing cycle (April 1) through
the end of the April billing cycle (April 30).
iii. Same facts as in paragraph 6 above except that the consumer
does not pay the balance for the February billing cycle in full on
March 25 and therefore is not eligible for a grace period on the
March purchases. Under these circumstances, Sec. 1026.54 does not
apply and the card issuer may charge interest from the date of each
transaction through April 24 and interest on the remaining $100 from
April 25 through the end of the April billing cycle (April 25).
Section 1026.55--Limitations on Increasing Annual Percentage Rates,
Fees, and Charges
55(a) General Rule
1. Increase in rate, fee, or charge. Section 1026.55(a)
prohibits card issuers from increasing an annual percentage rate or
any fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) on a credit card
account unless specifically permitted by one of the exceptions in
Sec. 1026.55(b). Except as specifically provided in Sec.
1026.55(b), this prohibition applies even if the circumstances under
which an increase will occur are disclosed in advance. The following
examples illustrate the general application of Sec. 1026.55(a) and
(b). Additional examples illustrating specific aspects of the
exceptions in Sec. 1026.55(b) are provided in the commentary to
those exceptions.
i. Account-opening disclosure of non-variable rate for six
months, then variable rate. Assume that, at account opening on
January 1 of year one, a card issuer discloses that the annual
percentage rate for purchases is a non-variable rate of 15% and will
apply for six months. The card issuer also discloses that, after six
months, the annual percentage rate for purchases will be a variable
rate that is currently 18% and will be adjusted quarterly by adding
a margin of 8 percentage points to a publicly-available index not
under the card issuer's control. Furthermore, the card issuer
discloses that the annual percentage rate for cash advances is the
same variable rate that will apply to purchases after six months.
Finally, the card issuer discloses that, to the extent consistent
with Sec. 1026.55 and other applicable law, a non-variable penalty
rate of 30% may apply if the consumer makes a late payment. The
payment due date for the account is the twenty-fifth day of the
month and the required minimum periodic payments are applied to
accrued interest and fees but do not reduce the purchase and cash
advance balances.
[[Page 80048]]
A. Change-in-terms rate increase for new transactions after
first year. On January 15 of year one, the consumer uses the account
to make a $2,000 purchase and a $500 cash advance. No other
transactions are made on the account. At the start of each quarter,
the card issuer may adjust the variable rate that applies to the
$500 cash advance consistent with changes in the index (pursuant to
Sec. 1026.55(b)(2)). All required minimum periodic payments are
received on or before the payment due date until May of year one,
when the payment due on May 25 is received by the creditor on May
28. At this time, the card issuer is prohibited by Sec. 1026.55
from increasing the rates that apply to the $2,000 purchase, the
$500 cash advance, or future purchases and cash advances. Six months
after account opening (July 1), the card issuer may begin to accrue
interest on the $2,000 purchase at the previously-disclosed variable
rate determined using an 8-point margin (pursuant to Sec.
1026.55(b)(1)). Because no other increases in rate were disclosed at
account opening, the card issuer may not subsequently increase the
variable rate that applies to the $2,000 purchase and the $500 cash
advance (except due to increases in the index pursuant to Sec.
1026.55(b)(2)). On November 16, the card issuer provides a notice
pursuant to Sec. 1026.9(c) informing the consumer of a new variable
rate that will apply on January 1 of year two (calculated using the
same index and an increased margin of 12 percentage points). On
December 15, the consumer makes a $100 purchase. On January 1 of
year two, the card issuer may increase the margin used to determine
the variable rate that applies to new purchases to 12 percentage
points (pursuant to Sec. 1026.55(b)(3)). However, Sec.
1026.55(b)(3)(ii) does not permit the card issuer to apply the
variable rate determined using the 12-point margin to the $2,000
purchase balance. Furthermore, although the $100 purchase occurred
more than 14 days after provision of the Sec. 1026.9(c) notice,
Sec. 1026.55(b)(3)(iii) does not permit the card issuer to apply
the variable rate determined using the 12-point margin to that
purchase because it occurred during the first year after account
opening. On January 15 of year two, the consumer makes a $300
purchase. The card issuer may apply the variable rate determined
using the 12-point margin to the $300 purchase.
B. Account becomes more than 60 days delinquent during first
year. Same facts as above except that the required minimum periodic
payment due on May 25 of year one is not received by the card issuer
until July 30 of year one. Because the card issuer received the
required minimum periodic payment more than 60 days after the
payment due date, Sec. 1026.55(b)(4) permits the card issuer to
increase the annual percentage rate applicable to the $2,000
purchase, the $500 cash advance, and future purchases and cash
advances. However, Sec. 1026.55(b)(4)(i) requires the card issuer
to first comply with the notice requirements in Sec. 1026.9(g).
Thus, if the card issuer provided a Sec. 1026.9(g) notice on July
25 stating that all rates on the account would be increased to the
30% penalty rate, the card issuer could apply that rate beginning on
September 8 to all balances and to future transactions.
ii. Account-opening disclosure of non-variable rate for six
months, then increased non-variable rate for six months, then
variable rate; change-in-terms rate increase for new transactions
after first year. Assume that, at account opening on January 1 of
year one, a card issuer discloses that the annual percentage rate
for purchases will increase as follows: A non-variable rate of 5%
for six months; a non-variable rate of 10% for an additional six
months; and thereafter a variable rate that is currently 15% and
will be adjusted monthly by adding a margin of 5 percentage points
to a publicly-available index not under the card issuer's control.
The payment due date for the account is the fifteenth day of the
month and the required minimum periodic payments are applied to
accrued interest and fees but do not reduce the purchase balance. On
January 15 of year one, the consumer uses the account to make a
$1,500 purchase. Six months after account opening (July 1), the card
issuer may begin to accrue interest on the $1,500 purchase at the
previously-disclosed 10% non-variable rate (pursuant to Sec.
1026.55(b)(1)). On September 15, the consumer uses the account for a
$700 purchase. On November 16, the card issuer provides a notice
pursuant to Sec. 1026.9(c) informing the consumer of a new variable
rate that will apply on January 1 of year two (calculated using the
same index and an increased margin of 8 percentage points). One year
after account opening (January 1 of year two), the card issuer may
begin accruing interest on the $2,200 purchase balance at the
previously-disclosed variable rate determined using a 5-point margin
(pursuant to Sec. 1026.55(b)(1)). Section 1026.55 does not permit
the card issuer to apply the variable rate determined using the 8-
point margin to the $2,200 purchase balance. Furthermore, Sec.
1026.55 does not permit the card issuer to subsequently increase the
variable rate determined using the 5-point margin that applies to
the $2,200 purchase balance (except due to increases in the index
pursuant to Sec. 1026.55(b)(2)). The card issuer may, however,
apply the variable rate determined using the 8-point margin to
purchases made on or after January 1 of year two (pursuant to Sec.
1026.55(b)(3)).
iii. Change-in-terms rate increase for new transactions after
first year; penalty rate increase after first year. Assume that, at
account opening on January 1 of year one, a card issuer discloses
that the annual percentage rate for purchases is a variable rate
determined by adding a margin of 6 percentage points to a publicly-
available index outside of the card issuer's control. The card
issuer also discloses that, to the extent consistent with Sec.
1026.55 and other applicable law, a non-variable penalty rate of 28%
may apply if the consumer makes a late payment. The due date for the
account is the fifteenth of the month. On May 30 of year two, the
account has a purchase balance of $1,000. On May 31, the card issuer
provides a notice pursuant to Sec. 1026.9(c) informing the consumer
of a new variable rate that will apply on July 16 for all purchases
made on or after June 15 (calculated by using the same index and an
increased margin of 8 percentage points). On June 14, the consumer
makes a $500 purchase. On June 15, the consumer makes a $200
purchase. On July 1, the card issuer has not received the payment
due on June 15 and provides the consumer with a notice pursuant to
Sec. 1026.9(g) stating that the 28% penalty rate will apply as of
August 15 to all transactions made on or after July 16 and that, if
the consumer becomes more than 60 days late, the penalty rate will
apply to all balances on the account. On July 17, the consumer makes
a $300 purchase.
A. Account does not become more than 60 days delinquent. The
payment due on June 15 of year two is received on July 2. On July
16, Sec. 1026.55(b)(3)(ii) permits the card issuer to apply the
variable rate determined using the 8-point margin disclosed in the
Sec. 1026.9(c) notice to the $200 purchase made on June 15 but does
not permit the card issuer to apply this rate to the $1,500 purchase
balance. On August 15, Sec. 1026.55(b)(3)(ii) permits the card
issuer to apply the 28% penalty rate disclosed at account opening
and in the Sec. 1026.9(g) notice to the $300 purchase made on July
17 but does not permit the card issuer to apply this rate to the
$1,500 purchase balance (which remains at the variable rate
determined using the 6-point margin) or the $200 purchase (which
remains at the variable rate determined using the 8-point margin).
B. Account becomes more than 60 days delinquent after provision
of Sec. 1026.9(g) notice. Same facts as above except the payment
due on June 15 of year two has not been received by August 15.
Section 1026.55(b)(4) permits the card issuer to apply the 28%
penalty rate to the $1,500 purchase balance and the $200 purchase
because it has not received the June 15 payment within 60 days after
the due date. However, in order to do so, Sec. 1026.55(b)(4)(i)
requires the card issuer to first provide an additional notice
pursuant to Sec. 1026.9(g). This notice must be sent no earlier
than August 15, which is the first day the account became more than
60 days' delinquent. If the notice is sent on August 15, the card
issuer may begin accruing interest on the $1,500 purchase balance
and the $200 purchase at the 28% penalty rate beginning on September
29.
2. Relationship to grace period. Nothing in Sec. 1026.55
prohibits a card issuer from assessing interest due to the loss of a
grace period to the extent consistent with Sec. 1026.5(b)(2)(ii)(B)
and Sec. 1026.54. In addition, a card issuer has not reduced an
annual percentage rate on a credit card account for purposes of
Sec. 1026.55 if the card issuer does not charge interest on a
balance or a portion thereof based on a payment received prior to
the expiration of a grace period. For example, if the annual
percentage rate for purchases on an account is 15% but the card
issuer does not charge any interest on a $500 purchase balance
because that balance was paid in full prior to the expiration of the
grace period, the card issuer has not reduced the 15% purchase rate
to 0% for purposes of Sec. 1026.55.
55(b) Exceptions
1. Exceptions not mutually exclusive. A card issuer generally
may increase an annual percentage rate or a fee or charge required
to be disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) pursuant to an exception set forth in Sec. 1026.55(b)
even if
[[Page 80049]]
that increase would not be permitted under a different exception.
For example, although a card issuer cannot increase an annual
percentage rate pursuant to Sec. 1026.55(b)(1) unless that rate is
provided for a specified period of at least six months, the card
issuer may increase an annual percentage rate during a specified
period due to an increase in an index consistent with Sec.
1026.55(b)(2). Similarly, although Sec. 1026.55(b)(3) does not
permit a card issuer to increase an annual percentage rate during
the first year after account opening, the card issuer may increase
the rate during the first year after account opening pursuant to
Sec. 1026.55(b)(4) if the required minimum periodic payment is not
received within 60 days after the due date. However, if Sec.
1026.55(b)(4)(ii) requires a card issuer to decrease the rate, fee,
or charge that applies to a balance while the account is subject to
a workout or temporary hardship arrangement or subject to 50 U.S.C.
app. 527 or a similar Federal or state statute or regulation, the
card issuer may not impose a higher rate, fee, or charge on that
balance pursuant to Sec. 1026.55(b)(5) or (b)(6) upon completion or
failure of the arrangement or once 50 U.S.C. app. 527 or the similar
Federal or state statute or regulation no longer applies. For
example, assume that, on January 1, the annual percentage rate that
applies to a $1,000 balance is increased from 12% to 30% pursuant to
Sec. 1026.55(b)(4). On February 1, the rate on that balance is
decreased from 30% to 15% consistent with Sec. 1026.55(b)(5) as a
part of a workout or temporary hardship arrangement. On July 1,
Sec. 1026.55(b)(4)(ii) requires the card issuer to reduce the rate
that applies to any remaining portion of the $1,000 balance from 15%
to 12%. If the consumer subsequently completes or fails to comply
with the terms of the workout or temporary hardship arrangement, the
card issuer may not increase the 12% rate that applies to any
remaining portion of the $1,000 balance pursuant to Sec.
1026.55(b)(5).
2. Relationship between exceptions in Sec. 1026.55(b) and
notice requirements in Sec. 1026.9. Nothing in Sec. 1026.55 alters
the requirements in Sec. 1026.9(c) and (g) that creditors provide
written notice at least 45 days prior to the effective date of
certain increases in annual percentage rates, fees, and charges.
i. 14-day rule in Sec. 1026.55(b)(3)(ii). Although Sec.
1026.55(b)(3)(ii) permits a card issuer that discloses an increased
rate pursuant to Sec. 1026.9(c) or (g) to apply that rate to
transactions that occur more than 14 days after provision of the
notice, the card issuer cannot begin to accrue interest at the
increased rate until that increase goes into effect, consistent with
Sec. 1026.9(c) or (g). For example, if on May 1 a card issuer
provides a notice pursuant to Sec. 1026.9(c) stating that a rate
will increase from 15% to 18% on June 15, Sec. 1026.55(b)(3)(ii)
permits the card issuer to apply the 18% rate to transactions that
occur on or after May 16. However, neither Sec. 1026.55 nor Sec.
1026.9(c) permits the card issuer to begin accruing interest at the
18% rate on those transactions until June 15. See additional
examples in comment 55(b)(3)-4.
ii. Mid-cycle increases; application of balance computation
methods. Once an increased rate has gone into effect, the card
issuer cannot calculate interest charges based on that increased
rate for days prior to the effective date. Assume that, in the
example in paragraph i above, the billing cycles for the account
begin on the first day of the month and end on the last day of the
month. If, for example, the card issuer uses the average daily
balance computation method, it cannot apply the 18% rate to the
average daily balance for the entire June billing cycle because that
rate did not become effective until June 15. However, the card
issuer could apply the 15% rate to the average daily balance from
June 1 through June 14 and the 18% rate to the average daily balance
from June 15 through June 30. Similarly, if the card issuer that
uses the daily balance computation method, it could apply the 15%
rate to the daily balance for each day from June 1 through June 14
and the 18% rate to the daily balance for each day from June 15
through June 30.
iii. Mid-cycle increases; delayed implementation of increase. If
Sec. 1026.55(b) and Sec. 1026.9(b), (c), or (g) permit a card
issuer to apply an increased annual percentage rate, fee, or charge
on a date that is not the first day of a billing cycle, the card
issuer may delay application of the increased rate, fee, or charge
until the first day of the following billing cycle without
relinquishing the ability to apply that rate, fee, or charge. Thus,
in the example in paragraphs i and ii above, the card issuer could
delay application of the 18% rate until the start of the next
billing cycle (April 1) without relinquishing its ability to apply
that rate under Sec. 1026.55(b)(3). Similarly, assume that, at
account opening on January 1, a card issuer discloses that a non-
variable annual percentage rate of 10% will apply to purchases for
six months and a non-variable rate of 15% will apply thereafter. The
first day of each billing cycle for the account is the fifteenth of
the month. If the six-month period expires on July 1, the card
issuer may delay application of the 15% rate until the start of the
next billing cycle (July 15) without relinquishing its ability to
apply that rate under Sec. 1026.55(b)(1).
3. Application of a lower rate, fee, or charge. Nothing in Sec.
1026.55 prohibits a card issuer from lowering an annual percentage
rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii). However, a card
issuer that does so cannot subsequently increase the rate, fee, or
charge unless permitted by one of the exceptions in Sec.
1026.55(b). The following examples illustrate the application of the
rule:
i. Application of lower rate during first year. Assume that a
card issuer discloses at account opening on January 1 of year one
that a non-variable annual percentage rate of 15% will apply to
purchases. The card issuer also discloses that, to the extent
consistent with Sec. 1026.55 and other applicable law, a non-
variable penalty rate of 30% may apply if the consumer's required
minimum periodic payment is received after the payment due date,
which is the tenth of the month. The required minimum periodic
payments are applied to accrued interest and fees but do not reduce
the purchase balance.
A. Temporary rate returns to standard rate at expiration. On
September 30 of year one, the account has a purchase balance of
$1,400 at the 15% rate. On October 1, the card issuer provides a
notice pursuant to Sec. 1026.9(c) informing the consumer that the
rate for new purchases will decrease to a non-variable rate of 5%
for six months (from October 1 through March 31 of year two) and
that, beginning on April 1 of year two, the rate for purchases will
increase to the 15% non-variable rate disclosed at account opening.
The card issuer does not apply the 5% rate to the $1,400 purchase
balance. On October 14 of year one, the consumer makes a $300
purchase at the 5% rate. On January 15 of year two, the consumer
makes a $150 purchase at the 5% rate. On April 1 of year two, the
card issuer may begin accruing interest on the $300 purchase and the
$150 purchase at 15% as disclosed in the Sec. 1026.9(c) notice
(pursuant to Sec. 1026.55(b)(1)).
B. Penalty rate increase. Same facts as above except that the
required minimum periodic payment due on November 10 of year one is
not received until November 15. Section 1026.55 does not permit the
card issuer to increase any annual percentage rate on the account at
this time. The card issuer may apply the 30% penalty rate to new
transactions beginning on April 1 of year two pursuant to Sec.
1026.55(b)(3) by providing a Sec. 1026.9(g) notice informing the
consumer of this increase no later than February 14 of year two. The
card issuer may not, however, apply the 30% penalty rate to the
$1,400 purchase balance as of September 30 of year one, the $300
purchase on October 15 of year one, or the $150 purchase on January
15 of year two.
ii. Application of lower rate at end of first year. Assume that,
at account opening on January 1 of year one, a card issuer discloses
that a non-variable annual percentage rate of 15% will apply to
purchases for one year and discloses that, after the first year, the
card issuer will apply a variable rate that is currently 20% and is
determined by adding a margin of 10 percentage points to a publicly-
available index not under the card issuer's control. On December 31
of year one, the account has a purchase balance of $3,000.
A. Notice of extension of existing temporary rate provided
consistent with Sec. 1026.55(b)(1)(i). On December 15 of year one,
the card issuer provides a notice pursuant to Sec. 1026.9(c)
informing the consumer that the existing 15% rate will continue to
apply until July 1 of year two. The notice further states that, on
July 1 of year two, the variable rate disclosed at account opening
will apply. On July 1 of year two, Sec. 1026.55(b)(1) permits the
card issuer to apply that variable rate to any remaining portion of
the $3,000 balance and to new transactions.
B. Notice of new temporary rate provided consistent with Sec.
1026.55(b)(1)(i). On December 15 of year one, the card issuer
provides a notice pursuant to Sec. 1026.9(c) informing the consumer
of a new variable rate that will apply on January 1 of year two that
is lower than the variable rate disclosed at account opening. The
new variable rate is calculated using the same index and a reduced
margin of 8 percentage points. The
[[Page 80050]]
notice further states that, on July 1 of year two, the margin will
increase to the margin disclosed at account opening (10 percentage
points). On July 1 of year two, Sec. 1026.55(b)(1) permits the card
issuer to increase the margin used to determine the variable rate
that applies to new purchases to 10 percentage points and to apply
that rate to any remaining portion of the $3,000 purchase balance.
C. No notice provided. Same facts as in paragraph ii.B above
except that the card issuer does not send a notice on December 15 of
year one. Instead, on January 1 of year two, the card issuer lowers
the margin used to determine the variable rate to 8 percentage
points and applies that rate to the $3,000 purchase balance and to
new purchases. Section 1026.9 does not require advance notice in
these circumstances. However, unless the account becomes more than
60 days' delinquent, Sec. 1026.55 does not permit the card issuer
to subsequently increase the rate that applies to the $3,000
purchase balance except due to increases in the index (pursuant to
Sec. 1026.55(b)(2)).
iii. Application of lower rate after first year. Assume that a
card issuer discloses at account opening on January 1 of year one
that a non-variable annual percentage rate of 10% will apply to
purchases for one year, after which that rate will increase to a
non-variable rate of 15%. The card issuer also discloses that, to
the extent consistent with Sec. 1026.55 and other applicable law, a
non-variable penalty rate of 30% may apply if the consumer's
required minimum periodic payment is received after the payment due
date, which is the tenth of the month. The required minimum periodic
payments are applied to accrued interest and fees but do not reduce
the purchase balance.
A. Effect of 14-day period. On June 30 of year two, the account
has a purchase balance of $1,000 at the 15% rate. On July 1, the
card issuer provides a notice pursuant to Sec. 1026.9(c) informing
the consumer that the rate for new purchases will decrease to a non-
variable rate of 5% for six months (from July 1 through December 31
of year two) and that, beginning on January 1 of year three, the
rate for purchases will increase to a non-variable rate of 17%. On
July 15 of year two, the consumer makes a $200 purchase. On July 16,
the consumer makes a $100 purchase. On January 1 of year three, the
card issuer may begin accruing interest on the $100 purchase at 17%
(pursuant to Sec. 1026.55(b)(1)). However, Sec.
1026.55(b)(1)(ii)(B) does not permit the card issuer to apply the
17% rate to the $200 purchase because that transaction occurred
within 14 days after provision of the Sec. 1026.9(c) notice.
Instead, the card issuer may apply the 15% rate that applied to
purchases prior to provision of the Sec. 1026.9(c) notice. In
addition, if the card issuer applied the 5% rate to the $1,000
purchase balance, Sec. 1026.55(b)(ii)(A) would not permit the card
issuer to increase the rate that applies to that balance on January
1 of year three to a rate that is higher than 15% that previously
applied to the balance.
B. Penalty rate increase. Same facts as above except that the
required minimum periodic payment due on August 25 is received on
August 30. At this time, Sec. 1026.55 does not permit the card
issuer to increase the annual percentage rates that apply to the
$1,000 purchase balance, the $200 purchase, or the $100 purchase.
Instead, those rates can only be increased as discussed in paragraph
iii.A above. However, if the card issuer provides a notice pursuant
to Sec. 1026.9(c) or (g) on September 1, Sec. 1026.55(b)(3)
permits the card issuer to apply an increased rate (such as the 17%
purchase rate or the 30% penalty rate) to transactions that occur on
or after September 16 beginning on October 16.
C. Application of lower temporary rate during specified period.
Same facts as in paragraph iii above. On June 30 of year two, the
account has a purchase balance of $1,000 at the 15% non-variable
rate. On July 1, the card issuer provides a notice pursuant to Sec.
1026.9(c) informing the consumer that the rate for the $1,000
balance and new purchases will decrease to a non-variable rate of
12% for six months (from July 1 through December 31 of year two) and
that, beginning on January 1 of year three, the rate for purchases
will increase to a variable rate that is currently 20% and is
determined by adding a margin of 10 percentage points to a publicly-
available index not under the card issuer's control. On August 15 of
year two, the consumer makes a $500 purchase. On October 1, the card
issuer provides another notice pursuant to Sec. 1026.9(c) informing
the consumer that the rate for the $1,000 balance, the $500
purchase, and new purchases will decrease to a non-variable rate of
5% for six months (from October 1 of year two through March 31 of
year three) and that, beginning on April 1 of year three, the rate
for purchases will increase to a variable rate that is currently 23%
and is determined by adding a margin of 13 percentage points to the
previously-disclosed index. On November 15 of year two, the consumer
makes a $300 purchase. On April 1 of year three, Sec. 1026.55
permits the card issuer to begin accruing interest using the
following rates for any remaining portion of the following balances:
The 15% non-variable rate for the $1,000 balance; the variable rate
determined using the 10-point margin for the $500 purchase; and the
variable rate determined using the 13-point margin for the $300
purchase.
4. Date on which transaction occurred. When a transaction
occurred for purposes of Sec. 1026.55 is generally determined by
the date of the transaction. However, if a transaction that occurred
within 14 days after provision of a Sec. 1026.9(c) or (g) notice is
not charged to the account prior to the effective date of the change
or increase, the card issuer may treat the transaction as occurring
more than 14 days after provision of the notice for purposes of
Sec. 1026.55. See example in comment 55(b)(3)-4.iii.B. In addition,
when a merchant places a ``hold'' on the available credit on an
account for an estimated transaction amount because the actual
transaction amount will not be known until a later date, the date of
the transaction for purposes of Sec. 1026.55 is the date on which
the card issuer receives the actual transaction amount from the
merchant. See example in comment 55(b)(3)-4.iii.A.
5. Category of transactions. For purposes of Sec. 1026.55, a
``category of transactions'' is a type or group of transactions to
which an annual percentage rate applies that is different than the
annual percentage rate that applies to other transactions.
Similarly, a type or group of transactions is a ``category of
transactions'' for purposes of Sec. 1026.55 if a fee or charge
required to be disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii),
or (b)(2)(xii) applies to those transactions that is different than
the fee or charge that applies to other transactions. For example,
purchase transactions, cash advance transactions, and balance
transfer transactions are separate categories of transactions for
purposes of Sec. 1026.55 if a card issuer applies different annual
percentage rates to each. Furthermore, if, for example, the card
issuer applies different annual percentage rates to different types
of purchase transactions (such as one rate for purchases of gasoline
or purchases over $100 and a different rate for all other
purchases), each type constitutes a separate category of
transactions for purposes of Sec. 1026.55.
55(b)(1) Temporary rate, fee, or charge exception
1. Relationship to Sec. 1026.9(c)(2)(v)(B). A card issuer that
has complied with the disclosure requirements in Sec.
1026.9(c)(2)(v)(B) has also complied with the disclosure
requirements in Sec. 1026.55(b)(1)(i).
2. Period of six months or longer. A temporary annual percentage
rate, fee, or charge must apply for a specified period of six months
or longer before a card issuer can increase that rate, fee, or
charge pursuant to Sec. 1026.55(b)(1). The specified period must
expire no less than six months after the date on which the card
issuer provides the consumer with the disclosures required by Sec.
1026.55(b)(1)(i) or, if later, the date on which the account can be
used for transactions to which the temporary rate, fee, or charge
applies. Section 1026.55(b)(1) does not prohibit a card issuer from
limiting the application of a temporary annual percentage rate, fee,
or charge to a particular category of transactions (such as to
balance transfers or to purchases over $100). However, in
circumstances where the card issuer limits application of the
temporary rate, fee, or charge to a single transaction, the
specified period must expire no less than six months after the date
on which that transaction occurred. The following examples
illustrate the application of Sec. 1026.55(b)(1):
i. Assume that on January 1 a card issuer offers a consumer a 5%
annual percentage rate on purchases made during the months of
January through June. A 15% rate will apply thereafter. On February
15, a $500 purchase is charged to the account. On June 15, a $200
purchase is charged to the account. On July 1, the card issuer may
begin accruing interest at the 15% rate on the $500 purchase and the
$200 purchase (pursuant to Sec. 1026.55(b)(1)).
ii. Same facts as above except that on January 1 the card issuer
offered the 5% rate on purchases beginning in the month of February.
Section 1026.55(b)(1) would not permit the card issuer to begin
accruing interest at the 15% rate on the $500 purchase and the $200
purchase until August 1.
[[Page 80051]]
iii. Assume that on October 31 of year one the annual percentage
rate for purchases is 17%. On November 1, the card issuer offers the
consumer a 0% rate for six months on purchases made during the
months of November and December. The 17% rate will apply thereafter.
On November 15, a $500 purchase is charged to the account. On
December 15, a $300 purchase is charged to the account. On January
15 of year two, a $150 purchase is charged to the account. Section
1026.55(b)(1) would not permit the card issuer to begin accruing
interest at the 17% rate on the $500 purchase and the $300 purchase
until May 1 of year two. However, the card issuer may accrue
interest at the 17% rate on the $150 purchase beginning on January
15 of year two.
iv. Assume that on June 1 of year one a card issuer offers a
consumer a 0% annual percentage rate for six months on the purchase
of an appliance. An 18% rate will apply thereafter. On September 1,
a $5,000 transaction is charged to the account for the purchase of
an appliance. Section 1026.55(b)(1) would not permit the card issuer
to begin accruing interest at the 18% rate on the $5,000 transaction
until March 1 of year two.
v. Assume that on May 31 of year one the annual percentage rate
for purchases is 15%. On June 1, the card issuer offers the consumer
a 5% rate for six months on a balance transfer of at least $1,000.
The 15% rate will apply thereafter. On June 15, a $3,000 balance is
transferred to the account. On July 15, a $200 purchase is charged
to the account. Section 1026.55(b)(1) would not permit the card
issuer to begin accruing interest at the 15% rate on the $3,000
transferred balance until December 15. However, the card issuer may
accrue interest at the 15% rate on the $200 purchase beginning on
July 15.
vi. Same facts as in paragraph v above except that the card
issuer offers the 5% rate for six months on all balance transfers of
at least $1,000 during the month of June and a $2,000 balance is
transferred to the account on June 30 (in addition to the $3,000
balance transfer on June 15). Because the 5% rate is not limited to
a particular transaction, Sec. 1026.55(b)(1) permits the card
issuer to begin accruing interest on the $3,000 and $2,000
transferred balances on December 1.
vii. Assume that a card issuer discloses at account opening on
January 1 of year one that the annual fee for the account is $0
until January 1 of year two, when the fee will increase to $50. On
January 1 of year two, the card issuer may impose the $50 annual
fee. However, the issuer must also comply with the notice
requirements in Sec. 1026.9(e).
viii. Assume that a card issuer discloses at account opening on
January 1 of year one that the monthly maintenance fee for the
account is $0 until July 1 of year one, when the fee will increase
to $10. Beginning on July 1 of year one, the card issuer may impose
the $10 monthly maintenance fee (to the extent consistent with Sec.
1026.52(a)).
3. Deferred interest and similar promotional programs. i.
Application of Sec. 1026.55. The general prohibition in Sec.
1026.55(a) applies to the imposition of accrued interest upon the
expiration of a deferred interest or similar promotional program
under which the consumer is not obligated to pay interest that
accrues on a balance if that balance is paid in full prior to the
expiration of a specified period of time. However, the exception in
Sec. 1026.55(b)(1) also applies to these programs, provided that
the specified period is six months or longer and that, prior to the
commencement of the period, the card issuer discloses the length of
the period and the rate at which interest will accrue on the balance
subject to the deferred interest or similar program if that balance
is not paid in full prior to expiration of the period. See comment
9(c)(2)(v)-9. For purposes of Sec. 1026.55, ``deferred interest''
has the same meaning as in Sec. 1026.16(h)(2) and associated
commentary.
ii. Examples. A. Deferred interest offer at account opening.
Assume that, at account opening on January 1 of year one, the card
issuer discloses the following with respect to a deferred interest
program: ``No interest on purchases made in January of year one if
paid in full by December 31 of year one. If the balance is not paid
in full by that date, interest will be imposed from the transaction
date at a rate of 20%.'' On January 15 of year one, the consumer
makes a purchase of $2,000. No other transactions are made on the
account. The terms of the deferred interest program require the
consumer to make minimum periodic payments with respect to the
deferred interest balance, and the payment due on April 1 is not
received until April 10. Section 1026.55 does not permit the card
issuer to charge to the account interest that has accrued on the
$2,000 purchase at this time. Furthermore, if the consumer pays the
$2,000 purchase in full on or before December 31 of year one, Sec.
1026.55 does not permit the card issuer to charge to the account any
interest that has accrued on that purchase. If, however, the $2,000
purchase has not been paid in full by January 1 of year two, Sec.
1026.55(b)(1) permits the card issuer to charge to the account the
interest accrued on that purchase at the 20% rate during year one
(to the extent consistent with other applicable law).
B. Deferred interest offer after account opening. Assume that a
card issuer discloses at account opening on January 1 of year one
that the rate that applies to purchases is a variable annual
percentage rate that is currently 18% and will be adjusted quarterly
by adding a margin of 8 percentage points to a publicly-available
index not under the card issuer's control. The card issuer also
discloses that, to the extent consistent with Sec. 1026.55 and
other applicable law, a non-variable penalty rate of 30% may apply
if the consumer's required minimum periodic payment is received
after the payment due date, which is the first of the month. On June
30 of year two, the consumer uses the account for a $1,000 purchase
in response to an offer of a deferred interest program. Under the
terms of this program, interest on the purchase will accrue at the
variable rate for purchases but the consumer will not be obligated
to pay that interest if the purchase is paid in full by December 31
of year three. The terms of the deferred interest program require
the consumer to make minimum periodic payments with respect to the
deferred interest balance, and the payment due on September 1 of
year two is not received until September 6. Section 1026.55 does not
permit the card issuer to charge to the account interest that has
accrued on the $1,000 purchase at this time. Furthermore, if the
consumer pays the $1,000 purchase in full on or before December 31
of year three, Sec. 1026.55 does not permit the card issuer to
charge to the account any interest that has accrued on that
purchase. On December 31 of year three, the $1,000 purchase has been
paid in full. Under these circumstances, the card issuer may not
charge any interest accrued on the $1,000 purchase.
C. Application of Sec. 1026.55(b)(4) to deferred interest
programs. Same facts as in paragraph ii.B above except that, on
November 2 of year two, the card issuer has not received the
required minimum periodic payments due on September 1, October 1, or
November 1 of year two and sends a Sec. 1026.9(c) or (g) notice
stating that interest accrued on the $1,000 purchase since June 30
of year two will be charged to the account on December 17 of year
two and thereafter interest will be charged on the $1,000 purchase
consistent with the variable rate for purchases. On December 17 of
year two, Sec. 1026.55(b)(4) permits the card issuer to charge to
the account interest accrued on the $1,000 purchase since June 30 of
year two and Sec. 1026.55(b)(3) permits the card issuer to begin
charging interest on the $1,000 purchase consistent with the
variable rate for purchases. However, if the card issuer receives
the required minimum periodic payments due on January 1, February 1,
March 1, April 1, May 1, and June 1 of year three, Sec.
1026.55(b)(4)(ii) requires the card issuer to cease charging the
account for interest on the $1,000 purchase no later than the first
day of the next billing cycle. See comment 55(b)(4)-3.iii. However,
Sec. 1026.55(b)(4)(ii) does not require the card issuer to waive or
credit the account for interest accrued on the $1,000 purchase since
June 30 of year two. If the $1,000 purchase is paid in full on
December 31 of year three, the card issuer is not permitted to
charge to the account interest accrued on the $1,000 purchase after
June 1 of year three.
4. Contingent or discretionary increases. Section 1026.55(b)(1)
permits a card issuer to increase a temporary annual percentage
rate, fee, or charge upon the expiration of a specified period of
time. However, Sec. 1026.55(b)(1) does not permit a card issuer to
apply an increased rate, fee, or charge that is contingent on a
particular event or occurrence or that may be applied at the card
issuer's discretion. The following examples illustrate rate
increases that are not permitted by Sec. 1026.55:
i. Assume that a card issuer discloses at account opening on
January 1 of year one that a non-variable annual percentage rate of
15% applies to purchases but that all rates on an account may be
increased to a non-variable penalty rate of 30% if a consumer's
required minimum periodic payment is received after the payment due
date, which is the fifteenth of the month. On March 1, the account
has a $2,000 purchase balance. The payment due on March 15 is not
received
[[Page 80052]]
until March 20. Section 1026.55 does not permit the card issuer to
apply the 30% penalty rate to the $2,000 purchase balance. However,
pursuant to Sec. 1026.55(b)(3), the card issuer could provide a
Sec. 1026.9(c) or (g) notice on or before November 16 informing the
consumer that, on January 1 of year two, the 30% rate (or a
different rate) will apply to new transactions.
ii. Assume that a card issuer discloses at account opening on
January 1 of year one that a non-variable annual percentage rate of
5% applies to transferred balances but that this rate will increase
to a non-variable rate of 18% if the consumer does not use the
account for at least $200 in purchases each billing cycle. On July
1, the consumer transfers a balance of $4,000 to the account. During
the October billing cycle, the consumer uses the account for $150 in
purchases. Section 1026.55 does not permit the card issuer to apply
the 18% rate to the $4,000 transferred balance or the $150 in
purchases. However, pursuant to Sec. 1026.55(b)(3), the card issuer
could provide a Sec. 1026.9(c) or (g) notice on or before November
16 informing the consumer that, on January 1 of year two, the 18%
rate (or a different rate) will apply to new transactions.
iii. Assume that a card issuer discloses at account opening on
January 1 of year one that the annual fee for the account is $10 but
may be increased to $50 if a consumer's required minimum periodic
payment is received after the payment due date, which is the
fifteenth of the month. The payment due on July 15 is not received
until July 23. Section 1026.55 does not permit the card issuer to
impose the $50 annual fee at this time. Furthermore, Sec.
1026.55(b)(3) does not permit the card issuer to increase the $10
annual fee during the first year after account opening. However,
Sec. 1026.55(b)(3) does permit the card issuer to impose the $50
fee (or a different fee) on January 1 of year two if, on or before
November 16 of year one, the issuer informs the consumer of the
increased fee consistent with Sec. 1026.9(c) and the consumer does
not reject that increase pursuant to Sec. 1026.9(h).
iv. Assume that a card issuer discloses at account opening on
January 1 of year one that the annual fee for a credit card account
under an open-end (not home-secured) consumer credit plan is $0 but
may be increased to $100 if the consumer's balance in a deposit
account provided by the card issuer or its affiliate or subsidiary
falls below $5,000. On June 1 of year one, the balance on the
deposit account is $4,500. Section 1026.55 does not permit the card
issuer to impose the $100 annual fee at this time. Furthermore,
Sec. 1026.55(b)(3) does not permit the card issuer to increase the
$0 annual fee during the first year after account opening. However,
Sec. 1026.55(b)(3) does permit the card issuer to impose the $100
fee (or a different fee) on January 1 of year two if, on or before
November 16 of year one, the issuer informs the consumer of the
increased fee consistent with Sec. 1026.9(c) and the consumer does
not reject that increase pursuant to Sec. 1026.9(h).
5. Application of increased fees and charges. Section
1026.55(b)(1)(ii) limits the ability of a card issuer to apply an
increased fee or charge to certain transactions. However, to the
extent consistent with Sec. 1026.55(b)(3), (c), and (d), a card
issuer generally is not prohibited from increasing a fee or charge
that applies to the account as a whole. See comments 55(c)(1)-3 and
55(d)-1.
55(b)(2) Variable rate exception
1. Increases due to increase in index. Section 1026.55(b)(2)
provides that an annual percentage rate that varies according to an
index that is not under the card issuer's control and is available
to the general public may be increased due to an increase in the
index. This section does not permit a card issuer to increase the
rate by changing the method used to determine a rate that varies
with an index (such as by increasing the margin), even if that
change will not result in an immediate increase. However, from time
to time, a card issuer may change the day on which index values are
measured to determine changes to the rate.
2. Index not under card issuer's control. A card issuer may
increase a variable annual percentage rate pursuant to Sec.
1026.55(b)(2) only if the increase is based on an index or indices
outside the card issuer's control. For purposes of Sec.
1026.55(b)(2), an index is under the card issuer's control if:
i. The index is the card issuer's own prime rate or cost of
funds. A card issuer is permitted, however, to use a published prime
rate, such as that in the Wall Street Journal, even if the card
issuer's own prime rate is one of several rates used to establish
the published rate.
ii. The variable rate is subject to a fixed minimum rate or
similar requirement that does not permit the variable rate to
decrease consistent with reductions in the index. A card issuer is
permitted, however, to establish a fixed maximum rate that does not
permit the variable rate to increase consistent with increases in an
index. For example, assume that, under the terms of an account, a
variable rate will be adjusted monthly by adding a margin of 5
percentage points to a publicly-available index. When the account is
opened, the index is 10% and therefore the variable rate is 15%. If
the terms of the account provide that the variable rate will not
decrease below 15% even if the index decreases below 10%, the card
issuer cannot increase that rate pursuant to Sec. 1026.55(b)(2).
However, Sec. 1026.55(b)(2) does not prohibit the card issuer from
providing in the terms of the account that the variable rate will
not increase above a certain amount (such as 20%).
iii. The variable rate can be calculated based on any index
value during a period of time (such as the 90 days preceding the
last day of a billing cycle). A card issuer is permitted, however,
to provide in the terms of the account that the variable rate will
be calculated based on the average index value during a specified
period. In the alternative, the card issuer is permitted to provide
in the terms of the account that the variable rate will be
calculated based on the index value on a specific day (such as the
last day of a billing cycle). For example, assume that the terms of
an account provide that a variable rate will be adjusted at the
beginning of each quarter by adding a margin of 7 percentage points
to a publicly-available index. At account opening at the beginning
of the first quarter, the variable rate is 17% (based on an index
value of 10%). During the first quarter, the index varies between
9.8% and 10.5% with an average value of 10.1%. On the last day of
the first quarter, the index value is 10.2%. At the beginning of the
second quarter, Sec. 1026.55(b)(2) does not permit the card issuer
to increase the variable rate to 17.5% based on the first quarter's
maximum index value of 10.5%. However, if the terms of the account
provide that the variable rate will be calculated based on the
average index value during the prior quarter, Sec. 1026.55(b)(2)
permits the card issuer to increase the variable rate to 17.1%
(based on the average index value of 10.1% during the first
quarter). In the alternative, if the terms of the account provide
that the variable rate will be calculated based on the index value
on the last day of the prior quarter, Sec. 1026.55(b)(2) permits
the card issuer to increase the variable rate to 17.2% (based on the
index value of 10.2% on the last day of the first quarter).
3. Publicly available. The index or indices must be available to
the public. A publicly-available index need not be published in a
newspaper, but it must be one the consumer can independently obtain
(by telephone, for example) and use to verify the annual percentage
rate applied to the account.
4. Changing a non-variable rate to a variable rate. Section
1026.55 generally prohibits a card issuer from changing a non-
variable annual percentage rate to a variable annual percentage rate
because such a change can result in an increase. However, a card
issuer may change a non-variable rate to a variable rate to the
extent permitted by one of the exceptions in Sec. 1026.55(b). For
example, Sec. 1026.55(b)(1) permits a card issuer to change a non-
variable rate to a variable rate upon expiration of a specified
period of time. Similarly, following the first year after the
account is opened, Sec. 1026.55(b)(3) permits a card issuer to
change a non-variable rate to a variable rate with respect to new
transactions (after complying with the notice requirements in Sec.
1026.9(b), (c) or (g)).
5. Changing a variable rate to a non-variable rate. Nothing in
Sec. 1026.55 prohibits a card issuer from changing a variable
annual percentage rate to an equal or lower non-variable rate.
Whether the non-variable rate is equal to or lower than the variable
rate is determined at the time the card issuer provides the notice
required by Sec. 1026.9(c). For example, assume that on March 1 a
variable annual percentage rate that is currently 15% applies to a
balance of $2,000 and the card issuer sends a notice pursuant to
Sec. 1026.9(c) informing the consumer that the variable rate will
be converted to a non-variable rate of 14% effective April 15. On
April 15, the card issuer may apply the 14% non-variable rate to the
$2,000 balance and to new transactions even if the variable rate on
March 2 or a later date was less than 14%.
6. Substitution of index. A card issuer may change the index and
margin used to determine the annual percentage rate under Sec.
1026.55(b)(2) if the original index becomes
[[Page 80053]]
unavailable, as long as historical fluctuations in the original and
replacement indices were substantially similar, and as long as the
replacement index and margin will produce a rate similar to the rate
that was in effect at the time the original index became
unavailable. If the replacement index is newly established and
therefore does not have any rate history, it may be used if it
produces a rate substantially similar to the rate in effect when the
original index became unavailable.
55(b)(3) Advance notice exception
1. Relationship to Sec. 1026.9(h). A card issuer may not
increase a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to Sec.
1026.55(b)(3) if the consumer has rejected the increased fee or
charge pursuant to Sec. 1026.9(h).
2. Notice provided pursuant to Sec. 1026.9(b) and (c). If an
increased annual percentage rate, fee, or charge is disclosed
pursuant to both Sec. 1026.9(b) and (c), that rate, fee, or charge
may only be applied to transactions that occur more than 14 days
after provision of the Sec. 1026.9(c) notice as provided in Sec.
1026.55(b)(3)(ii).
3. Account opening. i. Multiple accounts with same card issuer.
When a consumer has a credit card account with a card issuer and the
consumer opens a new credit card account with the same card issuer
(or its affiliate or subsidiary), the opening of the new account
constitutes the opening of a credit card account for purposes of
Sec. 1026.55(b)(3)(iii) if, more than 30 days after the new account
is opened, the consumer has the option to obtain additional
extensions of credit on each account. For example, assume that, on
January 1 of year one, a consumer opens a credit card account with a
card issuer. On July 1 of year one, the consumer opens a second
credit card account with that card issuer. On July 15, a $1,000
balance is transferred from the first account to the second account.
The opening of the second account constitutes the opening of a
credit card account for purposes of Sec. 1026.55(b)(3)(iii) so long
as, on August 1, the consumer has the option to engage in
transactions using either account. Under these circumstances, the
card issuer could not increase an annual percentage rate or a fee or
charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) on the second account pursuant to Sec.
1026.55(b)(3) until July 1 of year two (which is one year after the
second account was opened).
ii. Substitution, replacement or consolidation. A. Generally. A
credit card account has not been opened for purposes of Sec.
1026.55(b)(3)(iii) when a credit card account issued by a card
issuer is substituted, replaced, or consolidated with another credit
card account issued by the same card issuer (or its affiliate or
subsidiary). Circumstances in which a credit card account has not
been opened for purposes of Sec. 1026.55(b)(3)(iii) include when:
1. A retail credit card account is replaced with a cobranded
general purpose credit card account that can be used at a wider
number of merchants;
2. A credit card account is replaced with another credit card
account offering different features;
3. A credit card account is consolidated or combined with one or
more other credit card accounts into a single credit card account;
or
4. A credit card account acquired through merger or acquisition
is replaced with a credit card account issued by the acquiring card
issuer.
B. Limitation. A card issuer that replaces or consolidates a
credit card account with another credit card account issued by the
card issuer (or its affiliate or subsidiary) may not increase an
annual percentage rate or a fee or charge required to be disclosed
under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) in a
manner otherwise prohibited by Sec. 1026.55. For example, assume
that, on January 1 of year one, a consumer opens a credit card
account with an annual percentage rate of 15% for purchases. On July
1 of year one, the account is replaced with a credit card account
that offers different features (such as rewards on purchases). Under
these circumstances, Sec. 1026.55(b)(3)(iii) prohibits the card
issuer from increasing the annual percentage rate for new purchases
to a rate that is higher than 15% pursuant to Sec. 1026.55(b)(3)
until January 1 of year two (which is one year after the first
account was opened).
4. Examples. i. Change-in-terms rate increase; temporary rate
increase; 14-day period. Assume that an account is opened on January
1 of year one. On March 14 of year two, the account has a purchase
balance of $2,000 at a non-variable annual percentage rate of 15%.
On March 15, the card issuer provides a notice pursuant to Sec.
1026.9(c) informing the consumer that the rate for new purchases
will increase to a non-variable rate of 18% on May 1. The notice
further states that the 18% rate will apply for six months (until
November 1) and that thereafter the card issuer will apply a
variable rate that is currently 22% and is determined by adding a
margin of 12 percentage points to a publicly-available index that is
not under the card issuer's control. The fourteenth day after
provision of the notice is March 29 and, on that date, the consumer
makes a $200 purchase. On March 30, the consumer makes a $1,000
purchase. On May 1, the card issuer may begin accruing interest at
18% on the $1,000 purchase made on March 30 (pursuant to Sec.
1026.55(b)(3)). Section 1026.55(b)(3)(ii) does not permit the card
issuer to apply the 18% rate to the $2,200 purchase balance as of
March 29 because that balance reflects transactions that occurred
prior to or within 14 days after the provision of the Sec.
1026.9(c) notice. After six months (November 2), the card issuer may
begin accruing interest on any remaining portion of the $1,000
purchase at the previously-disclosed variable rate determined using
the 12-point margin (pursuant to Sec. 1026.55(b)(1) and (b)(3)).
ii. Checks that access an account. Assume that a card issuer
discloses at account opening on January 1 of year one that the
annual percentage rate that applies to cash advances is a variable
rate that is currently 24% and will be adjusted quarterly by adding
a margin of 14 percentage points to a publicly available index not
under the card issuer's control. On July 1 of year two, the card
issuer provides checks that access the account and, pursuant to
Sec. 1026.9(b)(3)(i)(A), discloses that a promotional rate of 15%
will apply to credit extended by use of the checks until January 1
of year three, after which the cash advance rate determined using
the 14-point margin will apply. On July 9 of year two, the consumer
uses one of the checks to pay for a $500 transaction. Beginning on
January 1 of year three, the card issuer may apply the cash advance
rate determined using the 14-point margin to any remaining portion
of the $500 transaction (pursuant to Sec. 1026.55(b)(1) and
(b)(3)).
iii. Hold on available credit; 14-day period. Assume that an
account is opened on January 1 of year one. On September 14 of year
two, the account has a purchase balance of $2,000 at a non-variable
annual percentage rate of 17%. On September 15, the card issuer
provides a notice pursuant to Sec. 1026.9(c) informing the consumer
that the rate for new purchases will increase to a non-variable rate
of 20% on October 30. The fourteenth day after provision of the
notice is September 29. On September 28, the consumer uses the
credit card to check into a hotel and the hotel obtains
authorization for a $1,000 hold on the account to ensure there is
adequate available credit to cover the anticipated cost of the stay.
A. The consumer checks out of the hotel on October 2. The actual
cost of the stay is $1,100 because of additional incidental costs.
On October 2, the hotel charges the $1,100 transaction to the
account. For purposes of Sec. 1026.55(b)(3), the transaction
occurred on October 2. Therefore, on October 30, Sec. 1026.55(b)(3)
permits the card issuer to apply the 20% rate to new purchases and
to the $1,100 transaction. However, Sec. 1026.55(b)(3)(ii) does not
permit the card issuer to apply the 20% rate to any remaining
portion of the $2,000 purchase balance.
B. Same facts as above except that the consumer checks out of
the hotel on September 29. The actual cost of the stay is $250, but
the hotel does not charge this amount to the account until November
1. For purposes of Sec. 1026.55(b)(3), the card issuer may treat
the transaction as occurring more than 14 days after provision of
the Sec. 1026.9(c) notice (i.e., after September 29). Accordingly,
the card issuer may apply the 20% rate to the $250 transaction.
5. Application of increased fees and charges. See comment
55(c)(1)-3.
6. Delayed implementation of increase. Section
1026.55(b)(3)(iii) does not prohibit a card issuer from notifying a
consumer of an increase in an annual percentage rate, fee, or charge
consistent with Sec. 1026.9(b), (c), or (g). However, Sec.
1026.55(b)(3)(iii) does prohibit application of an increased rate,
fee, or charge during the first year after the account is opened,
while the account is closed, or while the card issuer does not
permit the consumer to use the account for new transactions. If
Sec. 1026.9(b), (c), or (g) permits a card issuer to apply an
increased rate, fee, or charge on a particular date and the account
is closed on that date or the card issuer does not permit the
consumer to use the account for new transactions on that date,
[[Page 80054]]
the card issuer may delay application of the increased rate, fee, or
charge until the first day of the following billing cycle without
relinquishing the ability to apply that rate, fee, or charge
(assuming the increase is otherwise consistent with Sec. 1026.55).
See examples in comment 55(b)-2.iii. However, if the account is
closed or the card issuer does not permit the consumer to use the
account for new transactions on the first day of the following
billing cycle, then the card issuer must provide a new notice of the
increased rate, fee, or charge consistent with Sec. 1026.9(b), (c),
or (g).
7. Date on which account may first be used by consumer to engage
in transactions. For purposes of Sec. 1026.55(b)(3)(iii), an
account is considered open no earlier than the date on which the
account may first be used by the consumer to engage in transactions.
An account is considered open for purposes of Sec.
1026.55(b)(3)(iii) on any date that the card issuer may consider the
account open for purposes of Sec. 1026.52(a)(1). See comment
52(a)(1)-4.
55(b)(4) Delinquency exception
1. Receipt of required minimum periodic payment within 60 days
of due date. Section 1026.55(b)(4) applies when a card issuer has
not received the consumer's required minimum periodic payment within
60 days after the due date for that payment. In order to satisfy
this condition, a card issuer that requires monthly minimum payments
generally must not have received two consecutive required minimum
periodic payments. Whether a required minimum periodic payment has
been received for purposes of Sec. 1026.55(b)(4) depends on whether
the amount received is equal to or more than the first outstanding
required minimum periodic payment. For example, assume that the
required minimum periodic payments for a credit card account are due
on the fifteenth day of the month. On May 13, the card issuer has
not received the $50 required minimum periodic payment due on March
15 or the $150 required minimum periodic payment due on April 15.
The sixtieth day after the March 15 payment due date is May 14. If
the card issuer receives a $50 payment on May 14, Sec.
1026.55(b)(4) does not apply because the payment is equal to the
required minimum periodic payment due on March 15 and therefore the
account is not more than 60 days delinquent. However, if the card
issuer instead received a $40 payment on May 14, Sec. 1026.55(b)(4)
would apply beginning on May 15 because the payment is less than the
required minimum periodic payment due on March 15. Furthermore, if
the card issuer received the $50 payment on May 15, Sec.
1026.55(b)(4) would apply because the card issuer did not receive
the required minimum periodic payment due on March 15 within 60 days
after the due date for that payment.
2. Relationship to Sec. 1026.9(g)(3)(i)(B). A card issuer that
has complied with the disclosure requirements in Sec.
1026.9(g)(3)(i)(B) has also complied with the disclosure
requirements in Sec. 1026.55(b)(4)(i).
3. Reduction in rate pursuant to Sec. 1026.55(b)(4)(ii).
Section 1026.55(b)(4)(ii) provides that, if the card issuer receives
six consecutive required minimum periodic payments on or before the
payment due date beginning with the first payment due following the
effective date of the increase, the card issuer must reduce any
annual percentage rate, fee, or charge increased pursuant to Sec.
1026.55(b)(4) to the annual percentage rate, fee, or charge that
applied prior to the increase with respect to transactions that
occurred prior to or within 14 days after provision of the Sec.
1026.9(c) or (g) notice.
i. Six consecutive payments immediately following effective date
of increase. Section 1026.55(b)(4)(ii) does not apply if the card
issuer does not receive six consecutive required minimum periodic
payments on or before the payment due date beginning with the
payment due immediately following the effective date of the
increase, even if, at some later point in time, the card issuer
receives six consecutive required minimum periodic payments on or
before the payment due date.
ii. Rate, fee, or charge that does not exceed rate, fee, or
charge that applied before increase. Although Sec.
1026.55(b)(4)(ii) requires the card issuer to reduce an annual
percentage rate, fee, or charge increased pursuant to Sec.
1026.55(b)(4) to the annual percentage rate, fee, or charge that
applied prior to the increase, this provision does not prohibit the
card issuer from applying an increased annual percentage rate, fee,
or charge consistent with any of the other exceptions in Sec.
1026.55(b). For example, if a temporary rate applied prior to the
Sec. 1026.55(b)(4) increase and the temporary rate expired before a
reduction in rate pursuant to Sec. 1026.55(b)(4)(ii), the card
issuer may apply an increased rate to the extent consistent with
Sec. 1026.55(b)(1). Similarly, if a variable rate applied prior to
the Sec. 1026.55(b)(4) increase, the card issuer may apply any
increase in that variable rate to the extent consistent with Sec.
1026.55(b)(2).
iii. Delayed implementation of reduction. If Sec.
1026.55(b)(4)(ii) requires a card issuer to reduce an annual
percentage rate, fee, or charge on a date that is not the first day
of a billing cycle, the card issuer may delay application of the
reduced rate, fee, or charge until the first day of the following
billing cycle.
iv. Examples. The following examples illustrate the application
of Sec. 1026.55(b)(4)(ii):
A. Assume that the billing cycles for an account begin on the
first day of the month and end on the last day of the month and that
the required minimum periodic payments are due on the fifteenth day
of the month. Assume also that the account has a $5,000 purchase
balance to which a non-variable annual percentage rate of 15%
applies. On May 16 of year one, the card issuer has not received the
required minimum periodic payments due on the fifteenth day of
March, April, or May and sends a Sec. 1026.9(c) or (g) notice
stating that the annual percentage rate applicable to the $5,000
balance and to new transactions will increase to 28% effective July
1. On July 1, Sec. 1026.55(b)(4) permits the card issuer to apply
the 28% rate to the $5,000 balance and to new transactions. The card
issuer receives the required minimum periodic payments due on the
fifteenth day of July, August, September, October, November, and
December. On January 1 of year two, Sec. 1026.55(b)(4)(ii) requires
the card issuer to reduce the rate that applies to any remaining
portion of the $5,000 balance to 15%. The card issuer is not
required to reduce the rate that applies to any transactions that
occurred on or after May 31 (which is the fifteenth day after
provision of the Sec. 1026.9(c) or (g) notice).
B. Same facts as paragraph iv.A above except that the 15% rate
that applied to the $5,000 balance prior to the Sec. 1026.55(b)(4)
increase was scheduled to increase to 20% on August 1 of year one
(pursuant to Sec. 1026.55(b)(1)). On January 1 of year two, Sec.
1026.55(b)(4)(ii) requires the card issuer to reduce the rate that
applies to any remaining portion of the $5,000 balance to 20%.
C. Same facts as paragraph iv.A above except that the 15% rate
that applied to the $5,000 balance prior to the Sec. 1026.55(b)(4)
increase was scheduled to increase to 20% on March 1 of year two
(pursuant to Sec. 1026.55(b)(1)). On January 1 of year two, Sec.
1026.55(b)(4)(ii) requires the card issuer to reduce the rate that
applies to any remaining portion of the $5,000 balance to 15%.
D. Same facts as paragraph iv.A above except that the 15% rate
that applied to the $5,000 balance prior to the Sec. 1026.55(b)(4)
increase was a variable rate that was determined by adding a margin
of 10 percentage points to a publicly-available index not under the
card issuer's control (consistent with Sec. 1026.55(b)(2)). On
January 1 of year two, Sec. 1026.55(b)(4)(ii) requires the card
issuer to reduce the rate that applies to any remaining portion of
the $5,000 balance to the variable rate determined using the 10-
point margin.
E. For an example of the application of Sec. 1026.55(b)(4)(ii)
to deferred interest or similar programs, see comment 55(b)(1)-
3.ii.C.
55(b)(5) Workout and temporary hardship arrangement exception
1. Scope of exception. Nothing in Sec. 1026.55(b)(5) permits a
card issuer to alter the requirements of Sec. 1026.55 pursuant to a
workout or temporary hardship arrangement. For example, a card
issuer cannot increase an annual percentage rate or a fee or charge
required to be disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii),
or (b)(2)(xii) pursuant to a workout or temporary hardship
arrangement unless otherwise permitted by Sec. 1026.55. In
addition, a card issuer cannot require the consumer to make payments
with respect to a protected balance that exceed the payments
permitted under Sec. 1026.55(c).
2. Relationship to Sec. 1026.9(c)(2)(v)(D). A card issuer that
has complied with the disclosure requirements in Sec.
1026.9(c)(2)(v)(D) has also complied with the disclosure
requirements in Sec. 1026.55(b)(5)(i). See comment 9(c)(2)(v)-10.
Thus, although the disclosures required by Sec. 1026.55(b)(5)(i)
must generally be provided in writing prior to commencement of the
arrangement, a card issuer may comply with Sec. 1026.55(b)(5)(i) by
complying with Sec. 1026.9(c)(2)(v)(D), which states that the
disclosure of the terms of the arrangement may be made orally by
telephone, provided that the card issuer mails or delivers a
[[Page 80055]]
written disclosure of the terms of the arrangement to the consumer
as soon as reasonably practicable after the oral disclosure is
provided.
3. Rate, fee, or charge that does not exceed rate, fee, or
charge that applied before workout or temporary hardship
arrangement. Upon the completion or failure of a workout or
temporary hardship arrangement, Sec. 1026.55(b)(5)(ii) prohibits
the card issuer from applying to any transactions that occurred
prior to commencement of the arrangement an annual percentage rate,
fee, or charge that exceeds the annual percentage rate, fee, or
charge that applied to those transactions prior to commencement of
the arrangement. However, this provision does not prohibit the card
issuer from applying an increased annual percentage rate, fee, or
charge upon completion or failure of the arrangement, to the extent
consistent with any of the other exceptions in Sec. 1026.55(b). For
example, if a temporary rate applied prior to the arrangement and
that rate expired during the arrangement, the card issuer may apply
an increased rate upon completion or failure of the arrangement to
the extent consistent with Sec. 1026.55(b)(1). Similarly, if a
variable rate applied prior to the arrangement, the card issuer may
apply any increase in that variable rate upon completion or failure
of the arrangement to the extent consistent with Sec.
1026.55(b)(2).
4. Examples. i. Assume that an account is subject to a $50
annual fee and that, consistent with Sec. 1026.55(b)(4), the margin
used to determine a variable annual percentage rate that applies to
a $5,000 balance is increased from 5 percentage points to 15
percentage points. Assume also that the card issuer and the consumer
subsequently agree to a workout arrangement that reduces the annual
fee to $0 and reduces the margin back to 5 points on the condition
that the consumer pay a specified amount by the payment due date
each month. If the consumer does not pay the agreed-upon amount by
the payment due date, Sec. 1026.55(b)(5) permits the card issuer to
increase the annual fee to $50 and increase the margin for the
variable rate that applies to the $5,000 balance up to 15 percentage
points.
ii. Assume that a consumer fails to make four consecutive
monthly minimum payments totaling $480 on a consumer credit card
account with a balance of $6,000 and that, consistent with Sec.
1026.55(b)(4), the annual percentage rate that applies to that
balance is increased from a non-variable rate of 15% to a non-
variable penalty rate of 30%. Assume also that the card issuer and
the consumer subsequently agree to a temporary hardship arrangement
that reduces all rates on the account to 0% on the condition that
the consumer pay an amount by the payment due date each month that
is sufficient to cure the $480 delinquency within six months. If the
consumer pays the agreed-upon amount by the payment due date during
the six-month period and cures the delinquency, Sec. 1026.55(b)(5)
permits the card issuer to increase the rate that applies to any
remaining portion of the $6,000 balance to 15% or any other rate up
to the 30% penalty rate.
55(b)(6) Servicemembers Civil Relief Act exception
1. Rate, fee, or charge that does not exceed rate, fee, or
charge that applied before decrease. When a rate or a fee or charge
subject to Sec. 1026.55 has been decreased pursuant to 50 U.S.C.
app. 527 or a similar Federal or state statute or regulation, Sec.
1026.55(b)(6) permits the card issuer to increase the rate, fee, or
charge once 50 U.S.C. app. 527 or the similar statute or regulation
no longer applies. However, Sec. 1026.55(b)(6) prohibits the card
issuer from applying to any transactions that occurred prior to the
decrease a rate, fee, or charge that exceeds the rate, fee, or
charge that applied to those transactions prior to the decrease
(except to the extent permitted by one of the other exceptions in
Sec. 1026.55(b)). For example, if a temporary rate applied prior to
a decrease in rate pursuant to 50 U.S.C. app. 527 and the temporary
rate expired during the period that 50 U.S.C. app. 527 applied to
the account, the card issuer may apply an increased rate once 50
U.S.C. app. 527 no longer applies to the extent consistent with
Sec. 1026.55(b)(1). Similarly, if a variable rate applied prior to
a decrease in rate pursuant to 50 U.S.C. app. 527, the card issuer
may apply any increase in that variable rate once 50 U.S.C. app. 527
no longer applies to the extent consistent with Sec. 1026.55(b)(2).
2. Decreases in rates, fees, and charges to amounts consistent
with 50 U.S.C. app. 527 or similar statute or regulation. If a card
issuer deceases an annual percentage rate or a fee or charge subject
to Sec. 1026.55 pursuant to 50 U.S.C. app. 527 or a similar Federal
or state statute or regulation and if the card issuer also decreases
other rates, fees, or charges (such as the rate that applies to new
transactions) to amounts that are consistent with 50 U.S.C. app. 527
or a similar Federal or state statute or regulation, the card issuer
may increase those rates, fees, and charges consistent with Sec.
1026.55(b)(6).
3. Example. Assume that on December 31 of year one the annual
percentage rate that applies to a $5,000 balance on a credit card
account is a variable rate that is determined by adding a margin of
10 percentage points to a publicly-available index that is not under
the card issuer's control. The account is also subject to a monthly
maintenance fee of $10. On January 1 of year two, the card issuer
reduces the rate that applies to the $5,000 balance to a non-
variable rate of 6% and ceases to impose the $10 monthly maintenance
fee and other fees (including late payment fees) pursuant to 50
U.S.C. app. 527. The card issuer also decreases the rate that
applies to new transactions to 6%. During year two, the consumer
uses the account for $1,000 in new transactions. On January 1 of
year three, 50 U.S.C. app. 527 ceases to apply and the card issuer
provides a notice pursuant to Sec. 1026.9(c) informing the consumer
that on February 15 of year three the variable rate determined using
the 10-point margin will apply to any remaining portion of the
$5,000 balance and to any remaining portion of the $1,000 balance.
The notice also states that the $10 monthly maintenance fee and
other fees (including late payment fees) will resume on February 15
of year three. Consistent with Sec. 1026.9(c)(2)(iv)(B), the card
issuer is not required to provide a right to reject in these
circumstances. On February 15 of year three, Sec. 1026.55(b)(6)
permits the card issuer to begin accruing interest on any remaining
portion of the $5,000 and $1,000 balances at the variable rate
determined using the 10-point margin and to resume imposing the $10
monthly maintenance fee and other fees (including late payment
fees).
55(c) Treatment of protected balances
55(c)(1) Definition of protected balance
1. Example of protected balance. Assume that, on March 15 of
year two, an account has a purchase balance of $1,000 at a non-
variable annual percentage rate of 12% and that, on March 16, the
card issuer sends a notice pursuant to Sec. 1026.9(c) informing the
consumer that the annual percentage rate for new purchases will
increase to a non-variable rate of 15% on May 1. The fourteenth day
after provision of the notice is March 29. On March 29, the consumer
makes a $100 purchase. On March 30, the consumer makes a $150
purchase. On May 1, Sec. 1026.55(b)(3)(ii) permits the card issuer
to begin accruing interest at 15% on the $150 purchase made on March
30 but does not permit the card issuer to apply that 15% rate to the
$1,100 purchase balance as of March 29. Accordingly, the protected
balance for purposes of Sec. 1026.55(c) is the $1,100 purchase
balance as of March 29. The $150 purchase made on March 30 is not
part of the protected balance.
2. First year after account opening. Section 1026.55(c) applies
to amounts owed for a category of transactions to which an increased
annual percentage rate or an increased fee or charge cannot be
applied after the rate, fee, or charge for that category of
transactions has been increased pursuant to Sec. 1026.55(b)(3).
Because Sec. 1026.55(b)(3)(iii) does not permit a card issuer to
increase an annual percentage rate or a fee or charge required to be
disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
during the first year after account opening, Sec. 1026.55(c) does
not apply to balances during the first year after account opening.
3. Increased fees and charges. Except as provided in Sec.
1026.55(b)(3)(iii), Sec. 1026.55(b)(3) permits a card issuer to
increase a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) after complying with
the applicable notice requirements in Sec. 1026.9(b) or (c),
provided that the increased fee or charge is not applied to a
protected balance. To the extent consistent with Sec.
1026.55(b)(3)(iii), a card issuer is not prohibited from increasing
a fee or charge that applies to the account as a whole or to
balances other than the protected balance. For example, after the
first year following account opening, a card issuer generally may
add or increase an annual or a monthly maintenance fee for an
account after complying with the notice requirements in Sec.
1026.9(c), including notifying the consumer of the right to reject
the new or increased fee under Sec. 1026.9(h). However, except as
otherwise provided in Sec. 1026.55(b), an increased fee or charge
cannot be applied to an account while the account is closed or
[[Page 80056]]
while the card issuer does not permit the consumer to use the
account for new transactions. See Sec. 1026.55(b)(3)(iii); see also
Sec. Sec. 1026.52(b)(2)(i)(B)(3) and 1026.55(d)(1). Furthermore, if
the consumer rejects an increase in a fee or charge pursuant to
Sec. 1026.9(h), the card issuer is prohibited from applying the
increased fee or charge to the account and from imposing any other
fee or charge solely as a result of the rejection. See Sec.
1026.9(h)(2)(i) and (ii); comment 9(h)(2)(ii)-2.
4. Changing balance computation method. Nothing in Sec. 1026.55
prohibits a card issuer from changing the balance computation method
that applies to new transactions as well as protected balances.
55(c)(2) Repayment of protected balance
1. No less beneficial to the consumer. A card issuer may provide
a method of repaying the protected balance that is different from
the methods listed in Sec. 1026.55(c)(2) so long as the method used
is no less beneficial to the consumer than one of the listed
methods. A method is no less beneficial to the consumer if the
method results in a required minimum periodic payment that is equal
to or less than a minimum payment calculated using the method for
the account before the effective date of the increase. Similarly, a
method is no less beneficial to the consumer if the method amortizes
the balance in five years or longer or if the method results in a
required minimum periodic payment that is equal to or less than a
minimum payment calculated consistent with Sec. 1026.55(c)(2)(iii).
For example:
i. If at account opening the cardholder agreement stated that
the required minimum periodic payment would be either the total of
fees and interest charges plus 1% of the total amount owed or $20
(whichever is greater), the card issuer may require the consumer to
make a minimum payment of $20 even if doing so would pay off the
balance in less than five years or constitute more than 2% of the
balance plus fees and interest charges.
ii. A card issuer could increase the percentage of the balance
included in the required minimum periodic payment from 2% to 5% so
long as doing so would not result in amortization of the balance in
less than five years.
iii. A card issuer could require the consumer to make a required
minimum periodic payment that amortizes the balance in four years so
long as doing so would not more than double the percentage of the
balance included in the minimum payment prior to the date on which
the increased annual percentage rate, fee, or charge became
effective.
Paragraph 55(c)(2)(ii)
1. Amortization period starting from effective date of increase.
Section 1026.55(c)(2)(ii) provides for an amortization period for
the protected balance of no less than five years, starting from the
date on which the increased annual percentage rate or fee or charge
required to be disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii),
or (b)(2)(xii) became effective. A card issuer is not required to
recalculate the required minimum periodic payment for the protected
balance if, during the amortization period, that balance is reduced
as a result of the allocation of payments by the consumer in excess
of that minimum payment consistent with Sec. 1026.53 or any other
practice permitted by these rules and other applicable law.
2. Amortization when applicable rate is variable. If the annual
percentage rate that applies to the protected balance varies with an
index, the card issuer may adjust the interest charges included in
the required minimum periodic payment for that balance accordingly
in order to ensure that the balance is amortized in five years. For
example, assume that a variable rate that is currently 15% applies
to a protected balance and that, in order to amortize that balance
in five years, the required minimum periodic payment must include a
specific amount of principal plus all accrued interest charges. If
the 15% variable rate increases due to an increase in the index, the
creditor may increase the required minimum periodic payment to
include the additional interest charges.
Paragraph 55(c)(2)(iii)
1. Portion of required minimum periodic payment on other
balances. Section 1026.55(c)(2)(iii) addresses the portion of the
required minimum periodic payment based on the protected balance.
Section 1026.55(c)(2)(iii) does not limit or otherwise address the
card issuer's ability to determine the portion of the required
minimum periodic payment based on other balances on the account or
the card issuer's ability to apply that portion of the minimum
payment to the balances on the account.
2. Example. Assume that the method used by a card issuer to
calculate the required minimum periodic payment for a credit card
account requires the consumer to pay either the total of fees and
accrued interest charges plus 2% of the total amount owed or $50,
whichever is greater. Assume also that the account has a purchase
balance of $2,000 at an annual percentage rate of 15% and a cash
advance balance of $500 at an annual percentage rate of 20% and that
the card issuer increases the rate for purchases to 18% but does not
increase the rate for cash advances. Under Sec. 1026.55(c)(2)(iii),
the card issuer may require the consumer to pay fees and interest
plus 4% of the $2,000 purchase balance. Section 1026.55(c)(2)(iii)
does not limit the card issuer's ability to increase the portion of
the required minimum periodic payment that is based on the cash
advance balance.
55(d) Continuing application
1. Closed accounts. If a credit card account under an open-end
(not home-secured) consumer credit plan with a balance is closed,
Sec. 1026.55 continues to apply to that balance. For example, if a
card issuer or a consumer closes a credit card account with a
balance, Sec. 1026.55(d)(1) prohibits the card issuer from
increasing the annual percentage rate that applies to that balance
or imposing a periodic fee based solely on that balance that was not
charged before the account was closed (such as a closed account fee)
unless permitted by one of the exceptions in Sec. 1026.55(b).
2. Acquired accounts. If, through merger or acquisition (for
example), a card issuer acquires a credit card account under an
open-end (not home-secured) consumer credit plan with a balance,
Sec. 1026.55 continues to apply to that balance. For example, if a
credit card account has a $1,000 purchase balance with an annual
percentage rate of 15% and the card issuer that acquires that
account applies an 18% rate to purchases, Sec. 1026.55(d)(1)
prohibits the card issuer from applying the 18% rate to the $1,000
balance unless permitted by one of the exceptions in Sec.
1026.55(b).
3. Balance transfers. i. Between accounts issued by the same
creditor. If a balance is transferred from a credit card account
under an open-end (not home-secured) consumer credit plan issued by
a creditor to another credit account issued by the same creditor or
its affiliate or subsidiary, Sec. 1026.55 continues to apply to
that balance. For example, if a credit card account has a $2,000
purchase balance with an annual percentage rate of 15% and that
balance is transferred to another credit card account issued by the
same creditor that applies an 18% rate to purchases, Sec.
1026.55(d)(2) prohibits the creditor from applying the 18% rate to
the $2,000 balance unless permitted by one of the exceptions in
Sec. 1026.55(b). However, the creditor would not generally be
prohibited from charging a new periodic fee (such as an annual fee)
on the second account so long as the fee is not based solely on the
$2,000 balance and the creditor has notified the consumer of the fee
either by providing written notice 45 days before imposing the fee
pursuant to Sec. 1026.9(c) or by providing account-opening
disclosures pursuant to Sec. 1026.6(b). See also Sec.
1026.55(b)(3)(iii); comment 55(b)(3)-3; comment 5(b)(1)(i)-6.
Additional circumstances in which a balance is considered
transferred for purposes of Sec. 1026.55(d)(2) include when:
A. A retail credit card account with a balance is replaced or
substituted with a cobranded general purpose credit card account
that can be used with a broader merchant base;
B. A credit card account with a balance is replaced or
substituted with another credit card account offering different
features;
C. A credit card account with a balance is consolidated or
combined with one or more other credit card accounts into a single
credit card account; and
D. A credit card account is replaced or substituted with a line
of credit that can be accessed solely by an account number.
ii. Between accounts issued by different creditors. If a balance
is transferred to a credit card account under an open-end (not home-
secured) consumer credit plan issued by a creditor from a credit
card account issued by a different creditor or an institution that
is not an affiliate or subsidiary of the creditor that issued the
account to which the balance is transferred, Sec. 1026.55(d)(2)
does not prohibit the creditor to which the balance is transferred
from applying its account terms to that balance, provided that those
terms comply with this part. For example, if a credit card account
issued by creditor A has a $1,000 purchase balance at an annual
percentage rate of 15% and the consumer
[[Page 80057]]
transfers that balance to a credit card account with a purchase rate
of 17% issued by creditor B, creditor B may apply the 17% rate to
the $1,000 balance. However, creditor B may not subsequently
increase the rate on that balance unless permitted by one of the
exceptions in Sec. 1026.55(b).
55(e) Promotional waivers or rebates of interest, fees, and other
charges
1. Generally. Nothing in Sec. 1026.55 prohibits a card issuer
from waiving or rebating finance charges due to a periodic interest
rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii). However, if a card
issuer promotes and applies the waiver or rebate to an account, the
card issuer cannot temporarily or permanently cease or terminate any
portion of the waiver or rebate on that account unless permitted by
one of the exceptions in Sec. 1026.55(b). For example:
i. A card issuer applies an annual percentage rate of 15% to
balance transfers but promotes a program under which all of the
interest accrued on transferred balances will be waived or rebated
for one year. If, prior to the commencement of the one-year period,
the card issuer discloses the length of the period and the annual
percentage rate that will apply to transferred balances after
expiration of that period consistent with Sec. 1026.55(b)(1)(i),
Sec. 1026.55(b)(1) permits the card issuer to begin imposing
interest charges on transferred balances after one year.
Furthermore, if, during the one-year period, a required minimum
periodic payment is not received within 60 days of the payment due
date, Sec. 1026.55(b)(4) permits the card issuer to begin imposing
interest charges on transferred balances (after providing a notice
consistent with Sec. 1026.9(g) and Sec. 1026.55(b)(4)(i)).
However, if a required minimum periodic payment is not more than 60
days delinquent or if the consumer otherwise violates the terms or
other requirements of the account, Sec. 1026.55 does not permit the
card issuer to begin imposing interest charges on transferred
balances until the expiration of the one-year period.
ii. A card issuer imposes a monthly maintenance fee of $10 but
promotes a program under which the fee will be waived or rebated for
the six months following account opening. If, prior to account
opening, the card issuer discloses the length of the period and the
monthly maintenance fee that will be imposed after expiration of
that period consistent with Sec. 1026.55(b)(1)(i), Sec.
1026.55(b)(1) permits the card issuer to begin imposing the monthly
maintenance fee six months after account opening. Furthermore, if,
during the six-month period, a required minimum periodic payment is
not received within 60 days of the payment due date, Sec.
1026.55(b)(4) permits the card issuer to begin imposing the monthly
maintenance fee (after providing a notice consistent with Sec.
1026.9(c) and Sec. 1026.55(b)(4)(i)). However, if a required
minimum periodic payment is not more than 60 days delinquent or if
the consumer otherwise violates the terms or other requirements of
the account, Sec. 1026.55 does not permit the card issuer to begin
imposing the monthly maintenance fee until the expiration of the
six-month period.
2. Promotion of waiver or rebate. For purposes of Sec.
1026.55(e), a card issuer generally promotes a waiver or rebate if
the card issuer discloses the waiver or rebate in an advertisement
(as defined in Sec. 1026.2(a)(2)). See comment 2(a)(2)-1. In
addition, a card issuer generally promotes a waiver or rebate for
purposes of Sec. 1026.55(e) if the card issuer discloses the waiver
or rebate in communications regarding existing accounts (such as
communications regarding a promotion that encourages additional or
different uses of an existing account). However, a card issuer does
not promote a waiver or rebate for purposes of Sec. 1026.55(e) if
the advertisement or communication relates to an inquiry or dispute
about a specific charge or to interest, fees, or charges that have
already been waived or rebated.
i. Examples of promotional communications. The following are
examples of circumstances in which a card issuer is promoting a
waiver or rebate for purposes of Sec. 1026.55(e):
A. A card issuer discloses the waiver or rebate in a newspaper,
magazine, leaflet, promotional flyer, catalog, sign, or point-of-
sale display, unless the disclosure relates to interest, fees, or
charges that have already been waived.
B. A card issuer discloses the waiver or rebate on radio or
television or through electronic advertisements (such as on the
Internet), unless the disclosure relates to interest, fees, or
charges that have already been waived or rebated.
C. A card issuer discloses a waiver or rebate to individual
consumers, such as by telephone, letter, or electronic
communication, through direct mail literature, or on or with account
statements, unless the disclosure relates to an inquiry or dispute
about a specific charge or to interest, fees, or charges that have
already been waived or rebated.
ii. Examples of non-promotional communications. The following
are examples of circumstances in which a card issuer is not
promoting a waiver or rebate for purposes of Sec. 1026.55(e):
A. After a card issuer has waived or rebated interest, fees, or
other charges subject to Sec. 1026.55 with respect to an account,
the issuer discloses the waiver or rebate to the accountholder on
the periodic statement or by telephone, letter, or electronic
communication. However, if the card issuer also discloses
prospective waivers or rebates in the same communication, the issuer
is promoting a waiver or rebate for purposes of Sec. 1026.55(e).
B. A card issuer communicates with a consumer about a waiver or
rebate of interest, fees, or other charges subject to Sec. 1026.55
in relation to an inquiry or dispute about a specific charge,
including a dispute under Sec. Sec. 1026.12 or 1026.13.
C. A card issuer waives or rebates interest, fees, or other
charges subject to Sec. 1026.55 in order to comply with a legal
requirement (such as the limitations in Sec. 1026.52(a)).
D. A card issuer discloses a grace period, as defined in Sec.
1026.5(b)(2)(ii)(3).
E. A card issuer provides a period after the payment due date
during which interest, fees, or other charges subject to Sec.
1026.55 are waived or rebated even if a payment has not been
received.
F. A card issuer provides benefits (such as rewards points or
cash back on purchases or finance charges) that can be applied to
the account as credits, provided that the benefits are not promoted
as reducing interest, fees, or other charges subject to Sec.
1026.55.
3. Relationship of Sec. 1026.55(e) to grace period. Section
1026.55(e) does not apply to the waiver of finance charges due to a
periodic rate consistent with a grace period, as defined in Sec.
1026.5(b)(2)(ii)(3).
Section 1026.56--Requirements for Over-the-Limit Transactions
56(b) Opt-in requirement.
1. Policy and practice of declining over-the-limit transactions.
Section 1026.56(b)(1)(i)-(v), including the requirements to provide
notice and obtain consumer consent, do not apply to any card issuer
that has a policy and practice of declining to pay any over-the-
limit transactions for the consumer's credit card account when the
card issuer has a reasonable belief that completing a transaction
will cause the consumer to exceed the consumer's credit limit for
that account. For example, if a card issuer only authorizes those
transactions which, at the time of authorization, would not cause
the consumer to exceed a credit limit, it is not subject to the
requirement to provide consumers notice and an opportunity to
affirmatively consent to the card issuer's payment of over-the-limit
transactions. However, if an over-the-limit transaction is paid
without the consumer providing affirmative consent, the card issuer
may not charge a fee for paying the transaction.
2. Over-the-limit transactions not required to be authorized or
paid. Section 1026.56 does not require a card issuer to authorize or
pay an over-the-limit transaction even if the consumer has
affirmatively consented to the card issuer's over-the-limit service.
3. Examples of reasonable opportunity to provide affirmative
consent. A card issuer provides a reasonable opportunity for the
consumer to provide affirmative consent to the card issuer's payment
of over-the-limit transactions when, among other things, it provides
reasonable methods by which the consumer may affirmatively consent.
A card issuer provides such reasonable methods if:
i. On the application. The card issuer provides the notice on
the application form that the consumer can fill out to request the
service as part of the application;
ii. By mail. The card issuer provides a form with the account-
opening disclosures or the periodic statement for the consumer to
fill out and mail to affirmatively request the service;
iii. By telephone. The card issuer provides a readily available
telephone line that consumers may call to provide affirmative
consent.
iv. By electronic means. The card issuer provides an electronic
means for the consumer to affirmatively consent. For example, a card
issuer could provide a form that can be accessed and processed at
its Web site, where the consumer can check a box to opt in and
confirm that choice by clicking on a button that affirms the
consumer's consent.
[[Page 80058]]
4. Separate consent required. A consumer's affirmative consent,
or opt-in, to a card issuer's payment of over-the-limit transactions
must be obtained separately from other consents or acknowledgments
obtained by the card issuer. For example, a consumer's signature on
a credit application to request a credit card would not by itself
sufficiently evidence the consumer's consent to the card issuer's
payment of over-the-limit transactions. However, a card issuer may
obtain a consumer's affirmative consent by providing a blank
signature line or a check box on the application that the consumer
can sign or select to request the over-the-limit service, provided
that the signature line or check box is used solely for purposes of
evidencing the choice and not for any other purpose, such as to also
obtain consumer consents for other account services or features or
to receive disclosures electronically.
5. Written confirmation. A card issuer may comply with the
requirement in Sec. 1026.56(b)(1)(iv) to provide written
confirmation of the consumer's decision to affirmatively consent, or
opt in, to the card issuer's payment of over-the-limit transactions
by providing the consumer a copy of the consumer's completed opt-in
form or by sending a letter or notice to the consumer acknowledging
that the consumer has elected to opt into the card issuer's service.
A card issuer may also satisfy the written confirmation requirement
by providing the confirmation on the first periodic statement sent
after the consumer has opted in. For example, a card issuer could
provide a written notice consistent with Sec. 1026.56(e)(2) on the
periodic statement. A card issuer may not, however, assess any over-
the-limit fees or charges on the consumer's credit card account
unless and until the card issuer has sent the written confirmation.
Thus, if a card issuer elects to provide written confirmation on the
first periodic statement after the consumer has opted in, it would
not be permitted to assess any over-the-limit fees or charges until
the next statement cycle.
56(b)(2) Completion of over-the-limit transactions without consumer
consent
1. Examples of over-the-limit transactions paid without consumer
consent. Section 1026.56(b)(2) provides that a card issuer may pay
an over-the-limit transaction even if the consumer has not provided
affirmative consent, so long as the card issuer does not impose a
fee or charge for paying the transaction. The prohibition on
imposing fees for paying an over-the-limit transaction applies even
in circumstances where the card issuer is unable to avoid paying a
transaction that exceeds the consumer's credit limit.
i. Transactions not submitted for authorization. A consumer has
not affirmatively consented to a card issuer's payment of over-the-
limit transactions. The consumer purchases a $3 cup of coffee using
his credit card. Because of the small dollar amount of the
transaction, the merchant does not submit the transaction to the
card issuer for authorization. The transaction causes the consumer
to exceed the credit limit. Under these circumstances, the card
issuer is prohibited from imposing a fee or charge on the consumer's
credit card account for paying the over-the-limit transaction
because the consumer has not opted in to the card issuer's over-the-
limit service.
ii. Settlement amount exceeds authorization amount. A consumer
has not affirmatively consented to a card issuer's payment of over-
the-limit transactions. The consumer uses his credit card at a pay-
at-the-pump fuel dispenser to purchase $50 of fuel. Before
permitting the consumer to use the fuel pump, the merchant verifies
the validity of the card by requesting an authorization hold of $1.
The subsequent $50 transaction amount causes the consumer to exceed
his credit limit. Under these circumstances, the card issuer is
prohibited from imposing a fee or charge on the consumer's credit
card account for paying the over-the-limit transaction because the
consumer has not opted in to the card issuer's over-the-limit
service.
iii. Intervening charges. A consumer has not affirmatively
consented to a card issuer's payment of over-the-limit transactions.
The consumer makes a $50 purchase using his credit card. However,
before the $50 transaction is charged to the consumer's account, a
separate recurring charge is posted to the account. The $50 purchase
then causes the consumer to exceed his credit limit. Under these
circumstances, the card issuer is prohibited from imposing a fee or
charge on the consumer's credit card account for paying the over-
the-limit transaction because the consumer has not opted in to the
card issuer's over-the-limit service.
2. Permissible fees or charges when a consumer has not
consented. Section 1026.56(b)(2) does not preclude a card issuer
from assessing fees or charges other than over-the-limit fees when
an over-the-limit transaction is completed. For example, if a
consumer has not opted in, the card issuer may assess a balance
transfer fee in connection with a balance transfer, provided such a
fee is assessed whether or not the transfer exceeds the credit
limit. Section 1026.56(b)(2) does not limit the card issuer's
ability to debit the consumer's account for the amount of the over-
the-limit transaction if the card issuer is permitted to do so under
applicable law. The card issuer may also assess interest charges in
connection with the over-the-limit transaction.
56(c) Method of election
1. Card issuer-determined methods. A card issuer may determine
the means available to consumers to affirmatively consent, or opt
in, to the card issuer's payment of over-the-limit transactions. For
example, a card issuer may decide to obtain consents in writing,
electronically, or orally, or through some combination of these
methods. Section 1026.56(c) further requires, however, that such
methods must be made equally available for consumers to revoke a
prior consent. Thus, for example, if a card issuer allows a consumer
to consent in writing or electronically, it must also allow the
consumer to revoke that consent in writing or electronically.
2. Electronic requests. A consumer consent or revocation request
submitted electronically is not considered a consumer disclosure for
purposes of the E-Sign Act.
56(d) Timing and placement of notices
1. Contemporaneous notice for oral or electronic consent. Under
Sec. 1026.56(d)(1)(ii), if a card issuer seeks to obtain consent
from the consumer orally or by electronic means, the card issuer
must provide a notice containing the disclosures in Sec.
1026.56(e)(1) prior to and as part of the process of obtaining the
consumer's consent.
56(e) Content
1. Amount of over-the-limit fee. See Model Forms G-25(A) and G-
25(B) for guidance on how to disclose the amount of the over-the-
limit fee.
2. Notice content. In describing the consumer's right to
affirmatively consent to a card issuer's payment of over-the-limit
transactions, the card issuer may explain that any transactions that
exceed the consumer's credit limit will be declined if the consumer
does not consent to the service. In addition, the card issuer should
explain that even if a consumer consents, the payment of over-the-
limit transactions is at the discretion of the card issuer. For
example, the card issuer may indicate that it may decline a
transaction for any reason, such as if the consumer is past due or
significantly over the limit. The card issuer may also disclose the
consumer's right to revoke consent.
56(f) Joint relationships
1. Authorized users. Section 1026.56(f) does not permit a card
issuer to treat a request to opt in to or to revoke a prior request
for the card issuer's payment of over-the-limit transactions from an
authorized user that is not jointly liable on a credit card account
as a consent or revocation request for that account.
56(g) Continuing right to opt in or revoke opt-in
1. Fees or charges for over-the-limit transactions incurred
prior to revocation. Section 1026.56(g) provides that a consumer may
revoke his or her prior consent at any time. If a consumer does so,
this provision does not require the card issuer to waive or reverse
any over-the-limit fees or charges assessed to the consumer's
account for transactions that occurred prior to the card issuer's
implementation of the consumer's revocation request. Nor does this
requirement prevent the card issuer from assessing over-the-limit
fees in subsequent cycles if the consumer's account balance
continues to exceed the credit limit after the payment due date as a
result of an over-the-limit transaction that occurred prior to the
consumer's revocation of consent.
56(h) Duration of opt-in
1. Card issuer ability to stop paying over-the-limit
transactions after consumer consent. A card issuer may cease paying
over-the-limit transactions for consumers that have previously opted
in at any time and for any reason. For example, a card issuer may
stop paying over-the-limit transactions for a consumer to respond to
changes in the credit risk presented by the consumer.
56(j) Prohibited practices
1. Periodic fees or charges. A card issuer may charge an over-
the-limit fee or charge only if the consumer has exceeded the credit
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limit during the billing cycle. Thus, a card issuer may not impose
any recurring or periodic fees for paying over-the-limit
transactions (for example, a monthly ``over-the-limit protection''
service fee), even if the consumer has affirmatively consented to or
opted in to the service, unless the consumer has in fact exceeded
the credit limit during that cycle.
2. Examples of limits on fees or charges imposed per billing
cycle. Section 1026.56(j)(1) generally prohibits a card issuer from
assessing a fee or charge due to the same over-the-limit transaction
for more than three billing cycles. The following examples
illustrate the prohibition.
i. Assume that a consumer has opted into a card issuer's payment
of over-the-limit transactions. The consumer exceeds the credit
limit during the December billing cycle and does not make sufficient
payment to bring the account balance back under the limit for four
consecutive cycles. The consumer does not engage in any additional
transactions during this period. In this case, Sec. 1026.56(j)(1)
would permit the card issuer to charge a maximum of three over-the-
limit fees for the December over-the-limit transaction.
ii. Assume the same facts as above except that the consumer
makes sufficient payment to reduce his account balance by the
payment due date during the February billing cycle. The card issuer
may charge over-the-limit fees for the December and January billing
cycles. However, because the consumer's account balance was below
the credit limit by the payment due date for the February billing
cycle, the card issuer may not charge an over-the-limit fee for the
February billing cycle.
iii. Assume the same facts as in paragraph i, except that the
consumer engages in another over-the-limit transaction during the
February billing cycle. Because the consumer has obtained an
additional extension of credit which causes the consumer to exceed
his credit limit, the card issuer may charge over-the-limit fees for
the December transaction on the January, February and March billing
statements, and additional over-the-limit fees for the February
transaction on the April and May billing statements. The card issuer
may not charge an over-the-limit fee for each of the December and
the February transactions on the March billing statement because it
is prohibited from imposing more than one over-the-limit fee during
a billing cycle.
3. Replenishment of credit line. Section 1026.56(j)(2) does not
prevent a card issuer from delaying replenishment of a consumer's
available credit where appropriate, for example, where the card
issuer may suspect fraud on the credit card account. However, a card
issuer may not assess an over-the-limit fee or charge if the over-
the-limit transaction is caused by the card issuer's decision not to
promptly replenish the available credit after the consumer's payment
is credited to the consumer's account.
4. Examples of conditioning. Section 1026.56(j)(3) prohibits a
card issuer from conditioning or otherwise tying the amount of a
consumer's credit limit on the consumer affirmatively consenting to
the card issuer's payment of over-the-limit transactions where the
card issuer assesses an over-the-limit fee for the transaction. The
following examples illustrate the prohibition.
i. Amount of credit limit. Assume that a card issuer offers a
credit card with a credit limit of $1,000. The consumer is informed
that if the consumer opts in to the payment of the card issuer's
payment of over-the-limit transactions, the initial credit limit
would be increased to $1,300. If the card issuer would have offered
the credit card with the $1,300 credit limit but for the fact that
the consumer did not consent to the card issuer's payment of over-
the-limit transactions, the card issuer would not be in compliance
with Sec. 1026.56(j)(3). Section 1026.56(j)(3) prohibits the card
issuer from tying the consumer's opt-in to the card issuer's payment
of over-the-limit transactions as a condition of obtaining the
credit card with the $1,300 credit limit.
ii. Access to credit. Assume the same facts as above, except
that the card issuer declines the consumer's application altogether
because the consumer has not affirmatively consented or opted in to
the card issuer's payment of over-the-limit transactions. The card
issuer is not in compliance with Sec. 1026.56(j)(3) because the
card issuer has required the consumer's consent as a condition of
obtaining credit.
5. Over-the-limit fees caused by accrued fees or interest.
Section 1026.56(j)(4) prohibits a card issuer from imposing any
over-the-limit fees or charges on a consumer's account if the
consumer has exceeded the credit limit solely because charges
imposed as part of the plan as described in Sec. 1026.6(b)(3) were
charged to the consumer's account during the billing cycle. For
example, a card issuer may not assess an over-the-limit fee or
charge even if the credit limit was exceeded due to fees for
services requested by the consumer if such fees would constitute
charges imposed as part of the plan (such as fees for voluntary debt
cancellation or suspension coverage). Section 1026.56(j)(4) does
not, however, restrict card issuers from assessing over-the-limit
fees or charges due to accrued finance charges or fees from prior
cycles that have subsequently been added to the account balance. The
following examples illustrate the prohibition.
i. Assume that a consumer has opted in to a card issuer's
payment of over-the-limit transactions. The consumer's account has a
credit limit of $500. The billing cycles for the account begin on
the first day of the month and end on the last day of the month. The
account is not eligible for a grace period as defined in Sec.
1026.5(b)(2)(ii)(B)(3). On December 31, the only balance on the
account is a purchase balance of $475. On that same date, $50 in
fees charged as part of the plan under Sec. 1026.6(b)(3)(i) and
interest charges are imposed on the account, increasing the total
balance at the end of the December billing cycle to $525. Although
the total balance exceeds the $500 credit limit, Sec. 1026.56(j)(4)
prohibits the card issuer from imposing an over-the-limit fee or
charge for the December billing cycle in these circumstances because
the consumer's credit limit was exceeded solely because of the
imposition of fees and interest charges during that cycle.
ii. Same facts as above except that, on December 31, the only
balance on the account is a purchase balance of $400. On that same
date, $50 in fees imposed as part of the plan under Sec.
1026.6(b)(3)(i), including interest charges, are imposed on the
account, increasing the total balance at the end of the December
billing cycle to $450. The consumer makes a $25 payment by the
January payment due date and the remaining $25 in fees imposed as
part of the plan in December is added to the outstanding balance. On
January 25, an $80 purchase is charged to the account. At the close
of the cycle on January 31, an additional $20 in fees imposed as
part of the plan are imposed on the account, increasing the total
balance to $525. Because Sec. 1026.56(j)(4) does not require the
issuer to consider fees imposed as part of the plan for the prior
cycle in determining whether an over-the-limit fee may be properly
assessed for the current cycle, the issuer need not take into
account the remaining $25 in fees and interest charges from the
December cycle in determining whether fees imposed as part of the
plan caused the consumer to exceed the credit limit during the
January cycle. Thus, under these circumstances, Sec. 1026.56(j)(4)
does not prohibit the card issuer from imposing an over-the-limit
fee or charge for the January billing cycle because the $20 in fees
imposed as part of the plan for the January billing cycle did not
cause the consumer to exceed the credit limit during that cycle.
6. Additional restrictions on over-the-limit fees. See Sec.
1026.52(b).
Section 1026.57--Reporting and Marketing Rules for College Student
Open-End Credit
57(a) Definitions
57(a)(1) College student credit card
1. Definition. The definition of college student credit card
excludes home-equity lines of credit accessed by credit cards and
overdraft lines of credit accessed by debit cards. A college student
credit card includes a college affinity card within the meaning of
TILA section 127(r)(1)(A). In addition, a card may fall within the
scope of the definition regardless of the fact that it is not
intentionally targeted at or marketed to college students. For
example, an agreement between a college and a card issuer may
provide for marketing of credit cards to alumni, faculty, staff, and
other non-student consumers who have a relationship with the
college, but also contain provisions that contemplate the issuance
of cards to students. A credit card issued to a student at the
college in connection with such an agreement qualifies as a college
student credit card.
57(a)(5) College credit card agreement
1. Definition. Section 1026.57(a)(5) defines ``college credit
card agreement'' to include any business, marketing or promotional
agreement between a card issuer and a college or university (or an
affiliated organization, such as an alumni club or a foundation) if
the agreement provides for the issuance of credit cards to full-time
or part-time students. Business, marketing or
[[Page 80060]]
promotional agreements may include a broad range of arrangements
between a card issuer and an institution of higher education or
affiliated organization, including arrangements that do not meet the
criteria to be considered college affinity card agreements as
discussed in TILA section 127(r)(1)(A). For example, TILA section
127(r)(1)(A) specifies that under a college affinity card agreement,
the card issuer has agreed to make a donation to the institution or
affiliated organization, the card issuer has agreed to offer
discounted terms to the consumer, or the credit card will display
pictures, symbols, or words identified with the institution or
affiliated organization; even if these conditions are not met, an
agreement may qualify as a college credit card agreement, if the
agreement is a business, marketing or promotional agreement that
contemplates the issuance of college student credit cards to college
students currently enrolled (either full-time or part-time) at the
institution. An agreement may qualify as a college credit card
agreement even if marketing of cards under the agreement is targeted
at alumni, faculty, staff, and other non-student consumers, as long
as cards may also be issued to students in connection with the
agreement.
57(b) Public disclosure of agreements
1. Public disclosure. Section 1026.57(b) requires an institution
of higher education to publicly disclose any contract or other
agreement made with a card issuer or creditor for the purpose of
marketing a credit card. Examples of publicly disclosing such
contracts or agreements include, but are not limited to, posting
such contracts or agreements on the institution's Web site or making
such contracts or agreements available upon request, provided the
procedures for requesting the documents are reasonable and free of
cost to the requestor, and the requested contracts or agreements are
provided within a reasonable time frame.
2. Redaction prohibited. An institution of higher education must
publicly disclose any contract or other agreement made with a card
issuer for the purpose of marketing a credit card in its entirety
and may not redact any portion of such contract or agreement. Any
clause existing in such contracts or agreements, providing for the
confidentiality of any portion of the contract or agreement, would
be invalid to the extent it restricts the ability of the institution
of higher education to publicly disclose the contract or agreement
in its entirety.
57(c) Prohibited inducements
1. Tangible item clarified. A tangible item includes any
physical item, such as a gift card, a t-shirt, or a magazine
subscription, that a card issuer or creditor offers to induce a
college student to apply for or open an open-end consumer credit
plan offered by such card issuer or creditor. Tangible items do not
include non-physical inducements such as discounts, rewards points,
or promotional credit terms.
2. Inducement clarified. If a tangible item is offered to a
person whether or not that person applies for or opens an open-end
consumer credit plan, the tangible item has not been offered to
induce the person to apply for or open the plan. For example,
refreshments offered to a college student on campus that are not
conditioned on whether the student has applied for or agreed to open
an open-end consumer credit plan would not violate Sec. 1026.57(c).
3. Near campus clarified. A location that is within 1,000 feet
of the border of the campus of an institution of higher education,
as defined by the institution of higher education, is considered
near the campus of an institution of higher education.
4. Mailings included. The prohibition in Sec. 1026.57(c) on
offering a tangible item to a college student to induce such student
to apply for or open an open-end consumer credit plan offered by
such card issuer or creditor applies to any solicitation or
application mailed to a college student at an address on or near the
campus of an institution of higher education.
5. Related event clarified. An event is related to an
institution of higher education if the marketing of such event uses
the name, emblem, mascot, or logo of an institution of higher
education, or other words, pictures, symbols identified with an
institution of higher education in a way that implies that the
institution of higher education endorses or otherwise sponsors the
event.
6. Reasonable procedures for determining if applicant is a
student. Section 1026.57(c) applies solely to offering a tangible
item to a college student. Therefore, a card issuer or creditor may
offer any person who is not a college student a tangible item to
induce such person to apply for or open an open-end consumer credit
plan offered by such card issuer or creditor, on campus, near
campus, or at an event sponsored by or related to an institution of
higher education. The card issuer or creditor must have reasonable
procedures for determining whether an applicant is a college student
before giving the applicant the tangible item. For example, a card
issuer or creditor may ask whether the applicant is a college
student as part of the application process. The card issuer or
creditor may rely on the representations made by the applicant.
57(d) Annual report to the Bureau
57(d)(2) Contents of report
1. Memorandum of understanding. Section 1026.57(d)(2) requires
that the report to the Bureau include, among other items, a copy of
any memorandum of understanding between the card issuer and the
institution (or affiliated organization) that ``directly or
indirectly relates to the college credit card agreement or that
controls or directs any obligations or distribution of benefits
between any such entities.'' Such a memorandum of understanding
includes any document that amends the college credit card agreement,
or that constitutes a further agreement between the parties as to
the interpretation or administration of the agreement. For example,
a memorandum of understanding required to be included in the report
would include a document that provides details on the dollar amounts
of payments from the card issuer to the university, to supplement
the original agreement which only provided for payments in general
terms (e.g., as a percentage). A memorandum of understanding for
these purposes would not include email (or other) messages that
merely discuss matters such as the addresses to which payments
should be sent or the names of contact persons for carrying out the
agreement.
Section 1026.58--Internet Posting of Credit Card Agreements
58(b) Definitions
58(b)(1) Agreement
1. Inclusion of pricing information. For purposes of this
section, a credit card agreement is deemed to include certain
information, such as annual percentage rates and fees, even if the
issuer does not otherwise include this information in the basic
credit contract. This information is listed under the defined term
``pricing information'' in Sec. 1026.58(b)(7). For example, the
basic credit contract may not specify rates, fees and other
information that constitutes pricing information as defined in Sec.
1026.58(b)(7); instead, such information may be provided to the
cardholder in a separate document sent along with the card. However,
this information nevertheless constitutes part of the agreement for
purposes of Sec. 1026.58.
2. Provisions contained in separate documents included. A credit
card agreement is defined as the written document or documents
evidencing the terms of the legal obligation, or the prospective
legal obligation, between a card issuer and a consumer for a credit
card account under an open-end (not home-secured) consumer credit
plan. An agreement therefore may consist of several documents that,
taken together, define the legal obligation between the issuer and
consumer. For example, provisions that mandate arbitration or allow
an issuer to unilaterally alter the terms of the card issuer's or
consumer's obligation are part of the agreement even if they are
provided to the consumer in a document separate from the basic
credit contract.
58(b)(2) Amends
1. Substantive changes. A change to an agreement is substantive,
and therefore is deemed an amendment of the agreement, if it alters
the rights or obligations of the parties. Section 1026.58(b)(2)
provides that any change in the pricing information, as defined in
Sec. 1026.58(b)(7), is deemed to be substantive. Examples of other
changes that generally would be considered substantive include:
i. Addition or deletion of a provision giving the issuer or
consumer a right under the agreement, such as a clause that allows
an issuer to unilaterally change the terms of an agreement.
ii. Addition or deletion of a provision giving the issuer or
consumer an obligation under the agreement, such as a clause
requiring the consumer to pay an additional fee.
iii. Changes that may affect the cost of credit to the consumer,
such as changes in a provision describing how the minimum payment
will be calculated.
iv. Changes that may affect how the terms of the agreement are
construed or applied, such as changes in a choice-of-law provision.
[[Page 80061]]
v. Changes that may affect the parties to whom the agreement may
apply, such as provisions regarding authorized users or assignment
of the agreement.
2. Non-substantive changes. Changes that generally would not be
considered substantive include, for example:
i. Correction of typographical errors that do not affect the
meaning of any terms of the agreement.
ii. Changes to the card issuer's corporate name, logo, or
tagline.
iii. Changes to the format of the agreement, such as conversion
to a booklet from a full-sheet format, changes in font, or changes
in margins.
iv. Changes to the name of the credit card to which the program
applies.
v. Reordering sections of the agreement without affecting the
meaning of any terms of the agreement.
vi. Adding, removing, or modifying a table of contents or index.
vii. Changes to titles, headings, section numbers, or captions.
58(b)(4) Card issuer
1. Card issuer clarified. Section 1026.58(b)(4) provides that,
for purposes of Sec. 1026.58, card issuer or issuer means the
entity to which a consumer is legally obligated, or would be legally
obligated, under the terms of a credit card agreement. For example,
Bank X and Bank Y work together to issue credit cards. A consumer
that obtains a credit card issued pursuant to this arrangement
between Bank X and Bank Y is subject to an agreement that states
``This is an agreement between you, the consumer, and Bank X that
governs the terms of your Bank Y Credit Card.'' The card issuer in
this example is Bank X, because the agreement creates a legally
enforceable obligation between the consumer and Bank X. Bank X is
the issuer even if the consumer applied for the card through a link
on Bank Y's Web site and the cards prominently feature the Bank Y
logo on the front of the card.
2. Use of third-party service providers. An institution that is
the card issuer as defined in Sec. 1026.58(b)(4) has a legal
obligation to comply with the requirements of Sec. 1026.58.
However, a card issuer generally may use a third-party service
provider to satisfy its obligations under Sec. 1026.58, provided
that the issuer acts in accordance with regulatory guidance
regarding use of third-party service providers and other applicable
regulatory guidance. In some cases, an issuer may wish to arrange
for the institution with which it partners to issue credit cards to
fulfill the requirements of Sec. 1026.58 on the issuer's behalf.
For example, Retailer and Bank work together to issue credit cards.
Under the Sec. 1026.58(b)(4) definition, Bank is the issuer of
these credit cards for purposes of Sec. 1026.58. However, Retailer
services the credit card accounts, including mailing account opening
materials and periodic statements to cardholders. While Bank is
responsible for ensuring compliance with Sec. 1026.58, Bank may
arrange for Retailer (or another appropriate third-party service
provider) to submit credit card agreements to the Bureau under Sec.
1026.58 on Bank's behalf. Bank must comply with regulatory guidance
regarding use of third-party service providers and other applicable
regulatory guidance.
3. Partner institution Web sites. i. As explained in comments
58(d)-2 and 58(e)-3, if an issuer provides cardholders with access
to specific information about their individual accounts, such as
balance information or copies of statements, through a third-party
Web site, the issuer is deemed to maintain that Web site for
purposes of Sec. 1026.58. Such a Web site is deemed to be
maintained by the issuer for purposes of Sec. 1026.58 even where,
for example, an unaffiliated entity designs the Web site and owns
and maintains the information technology infrastructure that
supports the Web site, cardholders with credit cards from multiple
issuers can access individual account information through the same
Web site, and the Web site is not labeled, branded, or otherwise
held out to the public as belonging to the issuer. A partner
institution's Web site is an example of a third-party Web site that
may be deemed to be maintained by the issuer for purposes of Sec.
1026.58. For example, Retailer and Bank work together to issue
credit cards. Under the Sec. 1026.58(b)(4) definition, Bank is the
issuer of these credit cards for purposes of Sec. 1026.58. Bank
does not have a Web site. However, cardholders can access
information about their individual accounts, such as balance
information and copies of statements, through a Web site maintained
by Retailer. Retailer designs the Web site and owns and maintains
the information technology infrastructure that supports the Web
site. The Web site is branded and held out to the public as
belonging to Retailer. Because cardholders can access information
about their individual accounts through this Web site, the Web site
is deemed to be maintained by Bank for purposes of Sec. 1026.58.
Bank therefore may comply with Sec. 1026.58(d) by ensuring that
agreements offered to the public are posted on Retailer's Web site
in accordance with Sec. 1026.58(d). Bank may comply with Sec.
1026.58(e) by ensuring that cardholders can request copies of their
individual agreements through Retailer's Web site in accordance with
Sec. 1026.58(e)(1). Bank need not create and maintain a Web site
branded and held out to the public as belonging to Bank in order to
comply with Sec. Sec. 1026.58(d) and (e) as long as Bank ensures
that Retailer's Web site complies with these sections.
ii. In addition, Sec. 1026.58(d)(1) provides that, with respect
to an agreement offered solely for accounts under one or more
private label credit card plans, an issuer may comply with Sec.
1026.58(d) by posting the agreement on the publicly available Web
site of at least one of the merchants at which credit cards issued
under each private label credit card plan with 10,000 or more open
accounts may be used. This rule is not conditioned on cardholders'
ability to access account-specific information through the
merchant's Web site.
58(b)(5) Offers
1. Cards offered to limited groups. A card issuer is deemed to
offer a credit card agreement to the public even if the issuer
solicits, or accepts applications from, only a limited group of
persons. For example, a card issuer may market affinity cards to
students and alumni of a particular educational institution, or may
solicit only high-net-worth individuals for a particular card; in
these cases, the agreement would be considered to be offered to the
public. Similarly, agreements for credit cards issued by a credit
union are considered to be offered to the public even though such
cards are available only to credit union members.
2. Individualized agreements. A card issuer is deemed to offer a
credit card agreement to the public even if the terms of the
agreement are changed immediately upon opening of an account to
terms not offered to the public.
58(b)(6) Open account
1. Open account clarified. The definition of open account
includes a credit card account under an open-end (not home-secured)
consumer credit plan if either (i) the cardholder can obtain
extensions of credit on the account; or (ii) there is an outstanding
balance on the account that has not been charged off. Under this
definition, an account that meets either of these criteria is
considered to be open even if the account is inactive. Similarly, if
an account has been closed for new activity (for example, due to
default by the cardholder), but the cardholder is still making
payments to pay off the outstanding balance, the account is
considered open.
58(b)(8) Private Label Credit Card Account and Private Label Credit
Card Plan
1. Private label credit card account. The term private label
credit card account means a credit card account under an open-end
(not home-secured) consumer credit plan with a credit card that can
be used to make purchases only at a single merchant or an affiliated
group of merchants. This term applies to any such credit card
account, regardless of whether it is issued by the merchant or its
affiliate or by an unaffiliated third party.
2. Co-branded credit cards. The term private label credit card
account does not include accounts with so-called co-branded credit
cards. Credit cards that display the name, mark, or logo of a
merchant or affiliated group of merchants as well as the mark, logo,
or brand of payment network are generally referred to as co-branded
cards. While these credit cards may display the brand of the
merchant or affiliated group of merchants as the dominant brand on
the card, such credit cards are usable at any merchant that
participates in the payment network. Because these credit cards can
be used at multiple unaffiliated merchants, accounts with such
credit cards are not considered private label credit card accounts
under Sec. 1026.58(b)(8).
3. Affiliated group of merchants. The term ``affiliated group of
merchants'' means two or more affiliated merchants or other persons
that are related by common ownership or common corporate control.
For example, the term would include franchisees that are subject to
a common set of corporate policies or practices under the terms of
their franchise licenses. The term also applies to two or more
merchants or other persons that agree among each other, by contract
or otherwise, to accept a credit card bearing the same name, mark,
or logo (other than the mark,
[[Page 80062]]
logo, or brand of a payment network), for the purchase of goods or
services solely at such merchants or persons. For example, several
local clothing retailers jointly agree to issue credit cards called
the ``Main Street Fashion Card'' that can be used to make purchases
only at those retailers. For purposes of this section, these
retailers would be considered an affiliated group of merchants.
4. Private label credit card plan. i. Which credit card accounts
issued by a particular issuer constitute a private label credit card
plan is determined by where the credit cards can be used. All of the
private label credit card accounts issued by a particular card
issuer with credit cards usable at the same merchant or affiliated
group of merchants constitute a single private label credit card
plan, regardless of whether the rates, fees, or other terms
applicable to the individual credit card accounts differ. For
example, a card issuer has 3,000 open private label credit card
accounts with credit cards usable only at Merchant A and 5,000 open
private label credit card accounts with credit cards usable only at
Merchant B and its affiliates. The card issuer has two separate
private label credit card plans, as defined by Sec. 1026.58(b)(8)--
one plan consisting of 3,000 open accounts with credit cards usable
only at Merchant A and another plan consisting of 5,000 open
accounts with credit cards usable only at Merchant B and its
affiliates.
ii. The example above remains the same regardless of whether (or
the extent to which) the terms applicable to the individual open
accounts differ. For example, assume that, with respect to the card
issuer's 3,000 open accounts with credit cards usable only at
Merchant A in the example above, 1,000 of the open accounts have a
purchase APR of 12 percent, 1,000 of the open accounts have a
purchase APR of 15 percent, and 1,000 of the open accounts have a
purchase APR of 18 percent. All of the 5,000 open accounts with
credit cards usable only at Merchant B and Merchant B's affiliates
have the same 15 percent purchase APR. The card issuer still has
only two separate private label credit card plans, as defined by
Sec. 1026.58(b)(8). The open accounts with credit cards usable only
at Merchant A do not constitute three separate private label credit
card plans under Sec. 1026.58(b)(8), even though the accounts are
subject to different terms.
58(c) Submission of Agreements to Bureau
58(c)(1) Quarterly Submissions
1. Quarterly submission requirement. Section 1026.58(c)(1)
requires card issuers to send quarterly submissions to the Bureau no
later than the first business day on or after January 31, April 30,
July 31, and October 31 of each year. For example, a card issuer has
already submitted three credit card agreements to the Bureau. On
October 15, the card issuer stops offering agreement A. On November
20, the card issuer amends agreement B. On December 1, the issuer
starts offering a new agreement D. The card issuer must submit to
the Bureau no later than the first business day on or after January
31 (i) notification that the card issuer is withdrawing agreement A,
because it is no longer offered to the public; (ii) the amended
version of agreement B; and (iii) agreement D.
2. No quarterly submission required. i. Under Sec.
1026.58(c)(1), a card issuer is not required to make any submission
to the Bureau at a particular quarterly submission deadline if,
during the previous calendar quarter, the card issuer did not take
any of the following actions:
A. Offering a new credit card agreement that was not submitted
to the Bureau previously.
B. Amending an agreement previously submitted to the Bureau.
C. Ceasing to offer an agreement previously submitted to the
Bureau.
ii. For example, a card issuer offers five agreements to the
public as of September 30 and submits these to the Bureau by October
31, as required by Sec. 1026.58(c)(1). Between September 30 and
December 31, the card issuer continues to offer all five of these
agreements to the public without amending them and does not begin
offering any new agreements. The card issuer is not required to make
any submission to the Bureau by the following January 31.
3. Quarterly submission of complete set of updated agreements.
Section 1026.58(c)(1) permits a card issuer to submit to the Bureau
on a quarterly basis a complete, updated set of the credit card
agreements the card issuer offers to the public. For example, a card
issuer offers agreements A, B, and C to the public as of March 31.
The card issuer submits each of these agreements to the Bureau by
April 30 as required by Sec. 1026.58(c)(1). On May 15, the card
issuer amends agreement A, but does not make any changes to
agreements B or C. As of June 30, the card issuer continues to offer
amended agreement A and agreements B and C to the public. At the
next quarterly submission deadline, July 31, the card issuer must
submit the entire amended agreement A and is not required to make
any submission with respect to agreements B and C. The card issuer
may either: (i) Submit the entire amended agreement A and make no
submission with respect to agreements B and C; or (ii) submit the
entire amended agreement A and also resubmit agreements B and C. A
card issuer may choose to resubmit to the Bureau all of the
agreements it offered to the public as of a particular quarterly
submission deadline even if the card issuer has not introduced any
new agreements or amended any agreements since its last submission
and continues to offer all previously submitted agreements.
58(c)(3) Amended Agreements
1. No requirement to resubmit agreements not amended. Under
Sec. 1026.58(c)(3), if a credit card agreement has been submitted
to the Bureau, the agreement has not been amended, and the card
issuer continues to offer the agreement to the public, no additional
submission regarding that agreement is required. For example, a
credit card issuer begins offering an agreement in October and
submits the agreement to the Bureau the following January 31, as
required by Sec. 1026.58(c)(1). As of March 31, the card issuer has
not amended the agreement and is still offering the agreement to the
public. The card issuer is not required to submit anything to the
Bureau regarding that agreement by April 30.
2. Submission of amended agreements. If a card issuer amends a
credit card agreement previously submitted to the Bureau, Sec.
1026.58(c)(3) requires the card issuer to submit the entire amended
agreement to the Bureau. The issuer must submit the amended
agreement to the Bureau by the first quarterly submission deadline
after the last day of the calendar quarter in which the change
became effective. However, the issuer is required to submit the
amended agreement to the Bureau only if the issuer offered the
amended agreement to the public as of the last business day of the
calendar quarter in which the change became effective. For example,
a card issuer submits an agreement to the Bureau on October 31. On
November 15, the issuer changes the balance computation method used
under the agreement. Because an element of the pricing information
has changed, the agreement has been amended for purposes of Sec.
1026.58(c)(3). On December 31, the last business day of the calendar
quarter in which the change in the balance computation method became
effective, the issuer still offers the agreement to the public as
amended on November 15. The issuer must submit the entire amended
agreement to the Bureau no later than January 31.
3. Agreements amended but no longer offered to the public. A
card issuer should submit an amended agreement to the Bureau under
Sec. 1026.58(c)(3) only if the issuer offered the amended agreement
to the public as of the last business day of the calendar quarter in
which the amendment became effective. Agreements that are not
offered to the public as of the last day of the calendar quarter
should not be submitted to the Bureau. For example, on December 31 a
card issuer offers two agreements, Agreement A and Agreement B. The
issuer submits these agreements to the Bureau by January 31 as
required by Sec. 1026.58. On February 15, the issuer amends both
Agreement A and Agreement B. On February 28, the issuer stops
offering Agreement A to the public. On March 15, the issuer amends
Agreement B a second time. As a result, on March 31, the last
business day of the calendar quarter, the issuer offers to the
public one agreement--Agreement B as amended on March 15. By the
April 30 quarterly submission deadline, the issuer must (i) notify
the Bureau that it is withdrawing Agreement A because Agreement A is
no longer offered to the public; and (ii) submit to the Bureau
Agreement B as amended on March 15. The issuer should not submit to
the Bureau either Agreement A as amended on February 15 or the
earlier version of Agreement B (as amended on February 15), as
neither was offered to the public on March 31, the last business day
of the calendar quarter.
4. Change-in-terms notices not permissible. Section
1026.58(c)(3) requires that if an agreement previously submitted to
the Bureau is amended, the card issuer must submit the entire
revised agreement to the Bureau. A card issuer may not fulfill this
requirement by submitting a change-in-terms or similar notice
covering only the terms that have changed. In addition, amendments
must be integrated into the text of the agreement (or the addenda
described in Sec. 1026.58(c)(8)), not provided as separate riders.
For example,
[[Page 80063]]
a card issuer changes the purchase APR associated with an agreement
the issuer has previously submitted to the Bureau. The purchase APR
for that agreement was included in the addendum of pricing
information, as required by Sec. 1026.58(c)(8). The card issuer may
not submit a change-in-terms or similar notice reflecting the change
in APR, either alone or accompanied by the original text of the
agreement and original pricing information addendum. Instead, the
card issuer must revise the pricing information addendum to reflect
the change in APR and submit to the Bureau the entire text of the
agreement and the entire revised addendum, even though no changes
have been made to the provisions of the agreement and only one item
on the pricing information addendum has changed.
58(c)(4) Withdrawal of Agreements
1. Notice of withdrawal of agreement. Section 1026.58(c)(4)
requires a card issuer to notify the Bureau if any agreement
previously submitted to the Bureau by that issuer is no longer
offered to the public by the first quarterly submission deadline
after the last day of the calendar quarter in which the card issuer
ceased to offer the agreement. For example, on January 5 a card
issuer stops offering to the public an agreement it previously
submitted to the Bureau. The card issuer must notify the Bureau that
the agreement is being withdrawn by April 30, the first quarterly
submission deadline after March 31, the last day of the calendar
quarter in which the card issuer stopped offering the agreement.
58(c)(5) De Minimis Exception
1. Relationship to other exceptions. The de minimis exception is
distinct from the private label credit card exception under Sec.
1026.58(c)(6) and the product testing exception under Sec.
1026.58(c)(7). The de minimis exception provides that a card issuer
with fewer than 10,000 open credit card accounts is not required to
submit any agreements to the Bureau, regardless of whether those
agreements qualify for the private label credit card exception or
the product testing exception. In contrast, the private label credit
card exception and the product testing exception provide that a card
issuer is not required to submit to the Bureau agreements offered
solely in connection with certain types of credit card plans with
fewer than 10,000 open accounts, regardless of the card issuer's
total number of open accounts.
2. De minimis exception. Under Sec. 1026.58(c)(5), a card
issuer is not required to submit any credit card agreements to the
Bureau under Sec. 1026.58(c)(1) if the card issuer has fewer than
10,000 open credit card accounts as of the last business day of the
calendar quarter. For example, a card issuer offers five credit card
agreements to the public as of September 30. However, the card
issuer has only 2,000 open credit card accounts as of September 30.
The card issuer is not required to submit any agreements to the
Bureau by October 31 because the issuer qualifies for the de minimis
exception.
3. Date for determining whether card issuer qualifies clarified.
Whether a card issuer qualifies for the de minimis exception is
determined as of the last business day of each calendar quarter. For
example, as of December 31, a card issuer offers three agreements to
the public and has 9,500 open credit card accounts. As of January
30, the card issuer still offers three agreements, but has 10,100
open accounts. As of March 31, the card issuer still offers three
agreements, but has only 9,700 open accounts. Even though the card
issuer had 10,100 open accounts at one time during the calendar
quarter, the card issuer qualifies for the de minimis exception
because the number of open accounts was less than 10,000 as of March
31. The card issuer therefore is not required to submit any
agreements to the Bureau under Sec. 1026.58(c)(1) by April 30.
4. Date for determining whether card issuer ceases to qualify
clarified. Whether a card issuer has ceased to qualify for the de
minimis exception under Sec. 1026.58(c)(5) is determined as of the
last business day of the calendar quarter, For example, as of June
30, a card issuer offers three agreements to the public and has
9,500 open credit card accounts. The card issuer is not required to
submit any agreements to the Bureau under Sec. 1026.58(c)(1)
because the card issuer qualifies for the de minimis exception. As
of July 15, the card issuer still offers the same three agreements,
but now has 10,000 open accounts. The card issuer is not required to
take any action at this time, because whether a card issuer
qualifies for the de minimis exception under Sec. 1026.58(c)(5) is
determined as of the last business day of the calendar quarter. As
of September 30, the card issuer still offers the same three
agreements and still has 10,000 open accounts. Because the card
issuer had 10,000 open accounts as of September 30, the card issuer
ceased to qualify for the de minimis exception and must submit the
three agreements it offers to the Bureau by October 31, the next
quarterly submission deadline.
5. Option to withdraw agreements clarified. Section
1026.58(c)(5) provides that if a card issuer that did not previously
qualify for the de minimis exception qualifies for the de minimis
exception, the card issuer must continue to make quarterly
submissions to the Bureau as required by Sec. 1026.58(c)(1) until
the card issuer notifies the Bureau that the issuer is withdrawing
all agreements it previously submitted to the Bureau. For example, a
card issuer has 10,001 open accounts and offers three agreements to
the public as of December 31. The card issuer has submitted each of
the three agreements to the Bureau as required under Sec.
1026.58(c)(1). As of March 31, the card issuer has only 9,999 open
accounts. The card issuer has two options. First, the card issuer
may notify the Bureau that the card issuer is withdrawing each of
the three agreements it previously submitted. Once the card issuer
has notified the Bureau, the card issuer is no longer required to
make quarterly submissions to the Bureau under Sec. 1026.58(c)(1).
Alternatively, the card issuer may choose not to notify the Bureau
that it is withdrawing its agreements. In this case, the card issuer
must continue making quarterly submissions to the Bureau as required
by Sec. 1026.58(c)(1). The card issuer might choose not to withdraw
its agreements if, for example, the card issuer believes that it
likely will cease to qualify for the de minimis exception again in
the near future.
58(c)(6) Private Label Credit Card Exception
1. Private label credit card exception. i. Under Sec.
1026.58(c)(6)(i), a card issuer is not required to submit to the
Bureau a credit card agreement if, as of the last business day of
the calendar quarter, the agreement (A) is offered for accounts
under one or more private label credit card plans each of which has
fewer than 10,000 open accounts; and (B) is not offered to the
public other than for accounts under such a plan. For example, a
card issuer offers to the public a credit card agreement offered
solely for private label credit card accounts with credit cards that
can be used only at Merchant A. The card issuer has 8,000 open
accounts with such credit cards usable only at Merchant A. The card
issuer is not required to submit this agreement to the Bureau under
Sec. 1026.58(c)(1) because the agreement is offered for a private
label credit card plan with fewer than 10,000 open accounts, and the
credit card agreement is not offered to the public other than for
accounts under that private label credit card plan.
ii. In contrast, assume the same card issuer also offers to the
public a different credit card agreement that is offered solely for
private label credit card accounts with credit cards usable only at
Merchant B. The card issuer has 12,000 open accounts with such
credit cards usable only at Merchant B. The private label credit
card exception does not apply. Although this agreement is offered
for a private label credit card plan (i.e., the 12,000 private label
credit card accounts with credit cards usable only at Merchant B),
and the agreement is not offered to the public other than for
accounts under that private label credit card plan, the private
label credit card plan has more than 10,000 open accounts. (The card
issuer still is not required to submit to the Bureau the agreement
offered in connection with credit cards usable only at Merchant A,
as each agreement is evaluated separately under the private label
credit card exception.)
2. Card issuers with small private label and other credit card
plans. Whether the private label credit card exception applies is
determined on an agreement-by-agreement basis. Therefore, some
agreements offered by a card issuer may qualify for the private
label credit card exception even though the card issuer also offers
other agreements that do not qualify, such as agreements offered for
accounts with cards usable at multiple unaffiliated merchants or
agreements offered for accounts under private label plans with
10,000 or more open accounts.
3. De minimis exception distinguished. The private label credit
card exception under Sec. 1026.58(c)(6) is distinct from the de
minimis exception under Sec. 1026.58(c)(5). The private label
credit card exception exempts card issuers from submitting certain
agreements to the Bureau regardless of the card issuer's overall
size as measured by total number of open accounts. In contrast, the
de minimis exception exempts a particular card issuer from
submitting any credit card agreements to the Bureau if the card
issuer has fewer than 10,000 total open accounts. For example, a
card issuer offers to the public
[[Page 80064]]
two credit card agreements. Agreement A is offered solely for
private label credit card accounts with credit cards usable only at
Merchant A. The card issuer has 5,000 open credit card accounts with
such credit cards usable only at Merchant A. Agreement B is offered
solely for credit card accounts with cards usable at multiple
unaffiliated merchants that participate in a major payment network.
The card issuer has 40,000 open credit card accounts with such
payment network cards. The card issuer is not required to submit
agreement A to the Bureau under Sec. 1026.58(c)(1) because
agreement A qualifies for the private label credit card exception
under Sec. 1026.58(c)(6). Agreement A is offered for accounts under
a private label credit card plan with fewer than 10,000 open
accounts (i.e., the 5,000 accounts with credit cards usable only at
Merchant A) and is not otherwise offered to the public. The card
issuer is required to submit agreement B to the Bureau under Sec.
1026.58(c)(1). The card issuer does not qualify for the de minimis
exception under Sec. 1026.58(c)(5) because it has more than 10,000
open accounts, and agreement B does not qualify for the private
label credit card exception under Sec. 1026.58(c)(6) because it is
not offered solely for accounts under a private label credit card
plan with fewer than 10,000 open accounts.
4. Agreement otherwise offered to the public. i. An agreement
qualifies for the private label exception only if it is offered for
accounts under one or more private label credit card plans with
fewer than 10,000 open accounts and is not offered to the public
other than for accounts under such a plan. For example, a card
issuer offers a single agreement to the public. The agreement is
offered for private label credit card accounts with credit cards
usable only at Merchant A. The card issuer has 9,000 such open
accounts with credit cards usable only at Merchant A. The agreement
also is offered for credit card accounts with credit cards usable at
multiple unaffiliated merchants that participate in a major payment
network. The agreement does not qualify for the private label credit
card exception. The agreement is offered for accounts under a
private label credit card plan with fewer than 10,000 open accounts.
However, the agreement also is offered to the public for accounts
that are not part of a private label credit card plan and therefore
does not qualify for the private label credit card exception.
ii. Similarly, an agreement does not qualify for the private
label credit card exception if it is offered in connection with one
private label credit card plan with fewer than 10,000 open accounts
and one private label credit card plan with 10,000 or more open
accounts. For example, a card issuer offers a single credit card
agreement to the public. The agreement is offered for two types of
accounts. The first type of account is a private label credit card
account with a credit card usable only at Merchant A. The second
type of account is a private label credit card account with a credit
card usable only at Merchant B. The card issuer has 10,000 such open
accounts with credit cards usable only at Merchant A and 5,000 such
open accounts with credit cards usable only at Merchant B. The
agreement does not qualify for the private label credit card
exception. While the agreement is offered for accounts under a
private label credit card plan with fewer than 10,000 open accounts
(i.e., the 5,000 open accounts with credit cards usable only at
Merchant B), the agreement is also offered for accounts not under
such a plan (i.e., the 10,000 open accounts with credit cards usable
only at Merchant A).
5. Agreement used for multiple small private label plans. The
private label exception applies even if the same agreement is used
for more than one private label credit card plan with fewer than
10,000 open accounts. For example, a card issuer has 15,000 total
open private label credit card accounts. Of these, 7,000 accounts
have credit cards usable only at Merchant A, 5,000 accounts have
credit cards usable only at Merchant B, and 3,000 accounts have
credit cards usable only at Merchant C. The card issuer offers to
the public a single credit card agreement that is offered for all
three types of accounts and is not offered for any other type of
account. The card issuer is not required to submit the agreement to
the Bureau under Sec. 1026.58(c)(1). The agreement is used for
three different private label credit card plans (i.e., the accounts
with credit cards usable at Merchant A, the accounts with credit
cards usable at Merchant B, and the accounts with credit cards
usable at Merchant C), each of which has fewer than 10,000 open
accounts, and the card issuer does not offer the agreement for any
other type of account. The agreement therefore qualifies for the
private label credit card exception under Sec. 1026.58(c)(6).
6. Multiple agreements used for one private label credit card
plan. The private label credit card exception applies even if a card
issuer offers more than one agreement in connection with a
particular private label credit card plan. For example, a card
issuer has 5,000 open private label credit card accounts with credit
cards usable only at Merchant A. The card issuer offers to the
public three different agreements each of which may be used in
connection with private label credit card accounts with credit cards
usable only at Merchant A. The agreements are not offered for any
other type of credit card account. The card issuer is not required
to submit any of the three agreements to the Bureau under Sec.
1026.58(c)(1) because each of the agreements is used for a private
label credit card plan which has fewer than 10,000 open accounts and
none of the three is offered to the public other than for accounts
under such a plan.
58(c)(8) Form and content of agreements submitted to the Bureau
1. ``As of'' date clarified. Agreements submitted to the Bureau
must contain the provisions of the agreement and pricing information
in effect as of the last business day of the preceding calendar
quarter. For example, on June 1, a card issuer decides to decrease
the purchase APR associated with one of the agreements it offers to
the public. The change in the APR will become effective on August 1.
If the card issuer submits the agreement to the Bureau on July 31
(for example, because the agreement has been otherwise amended), the
agreement submitted should not include the new lower APR because
that APR was not in effect on June 30, the last business day of the
preceding calendar quarter.
2. Pricing agreement addendum. Pricing information must be set
forth in the separate addendum described in Sec.
1026.58(c)(8)(ii)(A) even if it is also stated elsewhere in the
agreement.
3. Pricing agreement variations do not constitute separate
agreements. Pricing information that may vary from one cardholder to
another depending on the cardholder's creditworthiness or state of
residence or other factors must be disclosed by setting forth all
the possible variations or by providing a range of possible
variations. Two agreements that differ only with respect to
variations in the pricing information do not constitute separate
agreements for purposes of this section. For example, a card issuer
offers two types of credit card accounts that differ only with
respect to the purchase APR. The purchase APR for one type of
account is 15 percent, while the purchase APR for the other type of
account is 18 percent. The provisions of the agreement and pricing
information for the two types of accounts are otherwise identical.
The card issuer should not submit to the Bureau one agreement with a
pricing information addendum listing a 15 percent purchase APR and
another agreement with a pricing information addendum listing an 18
percent purchase APR. Instead, the card issuer should submit to the
Bureau one agreement with a pricing information addendum listing
possible purchase APRs of 15 or 18 percent.
4. Optional variable terms addendum. Examples of provisions that
might be included in the variable terms addendum include a clause
that is required by law to be included in credit card agreements in
a particular state but not in other states (unless, for example, a
clause is included in the agreement used for all cardholders under a
heading such as ``For State X Residents''), the name of the credit
card plan to which the agreement applies (if this information is
included in the agreement), or the name of a charitable organization
to which donations will be made in connection with a particular card
(if this information is included in the agreement).
5. Integrated agreement requirement. Card issuers may not
provide provisions of the agreement or pricing information in the
form of change-in-terms notices or riders. The only two addenda that
may be submitted as part of an agreement are the pricing information
addendum and optional variable terms addendum described in Sec.
1026.58(c)(8). Changes in provisions or pricing information must be
integrated into the body of the agreement, pricing information
addendum, or optional variable terms addendum described in Sec.
1026.58(c)(8). For example, it would be impermissible for a card
issuer to submit to the Bureau an agreement in the form of a terms
and conditions document dated January 1, 2005, four subsequent
change in terms notices, and 2 addenda showing variations in pricing
information. Instead, the card issuer must submit a document that
integrates the changes made by each of the
[[Page 80065]]
change in terms notices into the body of the original terms and
conditions document and a single addendum displaying variations in
pricing information.
58(d) Posting of Agreements Offered to the Public
1. Requirement applies only to agreements submitted to the
Bureau. Card issuers are only required to post and maintain on their
publicly available Web site the credit card agreements that the card
issuer must submit to the Bureau under Sec. 1026.58(c). If, for
example, a card issuer is not required to submit any agreements to
the Bureau because the card issuer qualifies for the de minimis
exception under Sec. 1026.58(c)(5), the card issuer is not required
to post and maintain any agreements on its Web site under Sec.
1026.58(d). Similarly, if a card issuer is not required to submit a
specific agreement to the Bureau, such as an agreement that
qualifies for the private label exception under Sec. 1026.58(c)(6),
the card issuer is not required to post and maintain that agreement
under Sec. 1026.58(d) (either on the card issuer's publicly
available Web site or on the publicly available Web sites of
merchants at which private label credit cards can be used). (The
card issuer in both of these cases is still required to provide each
individual cardholder with access to his or her specific credit card
agreement under Sec. 1026.58(e) by posting and maintaining the
agreement on the card issuer's Web site or by providing a copy of
the agreement upon the cardholder's request.)
2. Card issuers that do not otherwise maintain Web sites. Unlike
Sec. 1026.58(e), Sec. 1026.58(d) does not include a special rule
for card issuers that do not otherwise maintain a Web site. If a
card issuer is required to submit one or more agreements to the
Bureau under Sec. 1026.58(c), that card issuer must post those
agreements on a publicly available Web site it maintains (or, with
respect to an agreement for a private label credit card, on the
publicly available Web site of at least one of the merchants at
which the card may be used, as provided in Sec. 1026.58(d)(1)). If
an issuer provides cardholders with access to specific information
about their individual accounts, such as balance information or
copies of statements, through a third-party Web site, the issuer is
considered to maintain that Web site for purposes of Sec. 1026.58.
Such a third-party Web site is deemed to be maintained by the issuer
for purposes of Sec. 1026.58(d) even where, for example, an
unaffiliated entity designs the Web site and owns and maintains the
information technology infrastructure that supports the Web site,
cardholders with credit cards from multiple issuers can access
individual account information through the same Web site, and the
Web site is not labeled, branded, or otherwise held out to the
public as belonging to the issuer. Therefore, issuers that provide
cardholders with access to account-specific information through a
third-party Web site can comply with Sec. 1026.58(d) by ensuring
that the agreements the issuer submits to the Bureau are posted on
the third-party Web site in accordance with Sec. 1026.58(d). (In
contrast, the Sec. 1026.58(d)(1) rule regarding agreements for
private label credit cards is not conditioned on cardholders'
ability to access account-specific information through the
merchant's Web site.)
3. Private label credit card plans. i. Section 1026.58(d)
provides that, with respect to an agreement offered solely for
accounts under one or more private label credit card plans, a card
issuer may comply by posting and maintaining the agreement on the
Web site of at least one of the merchants at which the cards issued
under each private label credit card plan with 10,000 or more open
accounts may be used. For example, a card issuer has 100,000 open
private label credit card accounts. Of these, 75,000 open accounts
have credit cards usable only at Merchant A and 25,000 open accounts
have credit cards usable only at Merchant B and Merchant B's
affiliates, Merchants C and D. The card issuer offers to the public
a single credit card agreement that is offered for both of these
types of accounts and is not offered for any other type of account.
ii. The card issuer is required to submit the agreement to the
Bureau under Sec. 1026.58(c)(1). (The card issuer has more than
10,000 open accounts, so the Sec. 1026.58(c)(5) de minimis
exception does not apply. The agreement is offered solely for two
different private label credit card plans (i.e., one plan consisting
of the accounts with credit cards usable at Merchant A and one plan
consisting of the accounts with credit cards usable at Merchant B
and its affiliates, Merchants C and D), but both of these plans have
more than 10,000 open accounts, so the Sec. 1026.58(c)(6) private
label credit card exception does not apply. Finally, the agreement
is not offered solely in connection with a product test by the card
issuer, so the Sec. 1026.58(c)(7) product test exception does not
apply.)
iii. Because the card issuer is required to submit the agreement
to the Bureau under Sec. 1026.58(c)(1), the card issuer is required
to post and maintain the agreement on the card issuer's publicly
available Web site under Sec. 1026.58(d). However, because the
agreement is offered solely for accounts under one or more private
label credit card plans, the card issuer may comply with Sec.
1026.58(d) in either of two ways. First, the card issuer may comply
by posting and maintaining the agreement on the card issuer's own
publicly available Web site. Alternatively, the card issuer may
comply by posting and maintaining the agreement on the publicly
available Web site of Merchant A and the publicly available Web site
of at least one of Merchants B, C and D. It would not be sufficient
for the card issuer to post the agreement on Merchant A's Web site
alone because Sec. 1026.58(d) requires the card issuer to post the
agreement on the publicly available Web site of ``at least one of
the merchants at which cards issued under each private label credit
card plan may be used'' (emphasis added).
iv. In contrast, assume that a card issuer has 100,000 open
private label credit card accounts. Of these, 5,000 open accounts
have credit cards usable only at Merchant A and 95,000 open accounts
have credit cards usable only at Merchant B and Merchant B's
affiliates, Merchants C and D. The card issuer offers to the public
a single credit card agreement that is offered for both of these
types of accounts and is not offered for any other type of account.
v. The card issuer is required to submit the agreement to the
Bureau under Sec. 1026.58(c)(1). (The card issuer has more than
10,000 open accounts, so the Sec. 1026.58(c)(5) de minimis
exception does not apply. The agreement is offered solely for two
different private label credit card plans (i.e., one plan consisting
of the accounts with credit cards usable at Merchant A and one plan
consisting of the accounts with credit cards usable at Merchant B
and its affiliates, Merchants C and D), but one of these plans has
more than 10,000 open accounts, so the Sec. 1026.58(c)(6) private
label credit card exception does not apply. Finally, the agreement
is not offered solely in connection with a product test by the card
issuer, so the Sec. 1026.58(c)(7) product test exception does not
apply.)
vi. Because the card issuer is required to submit the agreement
to the Bureau under Sec. 1026.58(c)(1), the card issuer is required
to post and maintain the agreement on the card issuer's publicly
available Web site under Sec. 1026.58(d). However, because the
agreement is offered solely for accounts under one or more private
label credit card plans, the card issuer may comply with Sec.
1026.58(d) in either of two ways. First, the card issuer may comply
by posting and maintaining the agreement on the card issuer's own
publicly available Web site. Alternatively, the card issuer may
comply by posting and maintaining the agreement on the publicly
available Web site of at least one of Merchants B, C and D. The card
issuer is not required to post and maintain the agreement on the
publicly available Web site of Merchant A because the card issuer's
private label credit card plan consisting of accounts with cards
usable only at Merchant A has fewer than 10,000 open accounts.
58(e) Agreements for All Open Accounts
1. Requirement applies to all open accounts. The requirement to
provide access to credit card agreements under Sec. 1026.58(e)
applies to all open credit card accounts, regardless of whether such
agreements are required to be submitted to the Bureau pursuant to
Sec. 1026.58(c) (or posted on the card issuer's Web site pursuant
to Sec. 1026.58(d)). For example, a card issuer that is not
required to submit agreements to the Bureau because it qualifies for
the de minimis exception under Sec. 1026.58(c)(5)) would still be
required to provide cardholders with access to their specific
agreements under Sec. 1026.58(e). Similarly, an agreement that is
no longer offered to the public would not be required to be
submitted to the Bureau under Sec. 1026.58(c), but would still need
to be provided to the cardholder to whom it applies under Sec.
1026.58(e).
2. Readily available telephone line. Section 1026.58(e) provides
that card issuers that provide copies of cardholder agreements upon
request must provide the cardholder with the ability to request a
copy of their agreement by calling a readily available telephone
line. To satisfy the readily available standard, the financial
institution must provide enough telephone lines so that consumers
get a reasonably prompt response.
[[Page 80066]]
The institution need only provide telephone service during normal
business hours. Within its primary service area, an institution must
provide a local or toll-free telephone number. It need not provide a
toll-free number or accept collect long-distance calls from outside
the area where it normally conducts business.
3. Issuers without interactive Web sites. Section 1026.58(e)(2)
provides that a card issuer that does not maintain a Web site from
which cardholders can access specific information about their
individual accounts is not required to provide a cardholder with the
ability to request a copy of the agreement by using the card
issuer's Web site. A card issuer without a Web site of any kind
could comply by disclosing the telephone number on each periodic
statement; a card issuer with a non-interactive Web site could
comply in the same way, or alternatively could comply by displaying
the telephone number on the card issuer's Web site. An issuer is
considered to maintain an interactive Web site for purposes of the
Sec. 1026.58(e)(2) special rule if the issuer provide cardholders
with access to specific information about their individual accounts,
such as balance information or copies of statements, through a
third-party interactive Web site. Such a Web site is deemed to be
maintained by the issuer for purposes of Sec. 1026.58(e)(2) even
where, for example, an unaffiliated entity designs the Web site and
owns and maintains the information technology infrastructure that
supports the Web site, cardholders with credit cards from multiple
issuers can access individual account information through the same
Web site, and the Web site is not labeled, branded, or otherwise
held out to the public as belonging to the issuer. An issuer that
provides cardholders with access to specific information about their
individual accounts through such a Web site is not permitted to
comply with the special rule in Sec. 1026.58(e)(2). Instead, such
an issuer must comply with Sec. 1026.58(e)(1).
4. Deadline for providing requested agreements clarified.
Sections 1026.58(e)(1)(ii) and (e)(2) require that credit card
agreements provided upon request must be sent to the cardholder or
otherwise made available to the cardholder in electronic or paper
form no later than 30 days after the cardholder's request is
received. For example, if a card issuer chooses to respond to a
cardholder's request by mailing a paper copy of the cardholder's
agreement, the card issuer must mail the agreement no later than 30
days after receipt of the cardholder's request. Alternatively, if a
card issuer chooses to respond to a cardholder's request by posting
the cardholder's agreement on the card issuer's Web site, the card
issuer must post the agreement on its Web site no later than 30 days
after receipt of the cardholder's request. Section 1026.58(e)(3)(v)
provides that a card issuer may provide cardholder agreements in
either electronic or paper form regardless of the form of the
cardholder's request.
Section 1026.59--Reevaluation of Rate Increases
59(a) General Rule
59(a)(1) Evaluation of Increased Rate
1. Types of rate increases covered. Section 1026.59(a) applies
both to increases in annual percentage rates imposed on a consumer's
account based on that consumer's credit risk or other circumstances
specific to that consumer and to increases in annual percentage
rates imposed based on factors that are not specific to the
consumer, such as changes in market conditions or the issuer's cost
of funds.
2. Rate increases actually imposed. Under Sec. 1026.59(a), a
card issuer must review changes in factors only if the increased
rate is actually imposed on the consumer's account. For example, if
a card issuer increases the penalty rate for a credit card account
under an open-end (not home-secured) consumer credit plan and the
consumer's account has no balances that are currently subject to the
penalty rate, the card issuer is required to provide a notice
pursuant to Sec. 1026.9(c) of the change in terms, but the
requirements of Sec. 1026.59 do not apply. However, if the
consumer's account later becomes subject to the penalty rate, the
card issuer is required to provide a notice pursuant to Sec.
1026.9(g) and the requirements of Sec. 1026.59 begin to apply upon
imposition of the penalty rate. Similarly, if a card issuer raises
the cash advance rate applicable to a consumer's account but the
consumer engages in no cash advance transactions to which that
increased rate is applied, the card issuer is required to provide a
notice pursuant to Sec. 1026.9(c) of the change in terms, but the
requirements of Sec. 1026.59 do not apply. If the consumer
subsequently engages in a cash advance transaction, the requirements
of Sec. 1026.59 begin to apply at that time.
3. Change in type of rate. i. Generally. A change from a
variable rate to a non-variable rate or from a non-variable rate to
a variable rate is not a rate increase for purposes of Sec.
1026.59, if the rate in effect immediately prior to the change in
type of rate is equal to or greater than the rate in effect
immediately after the change. For example, a change from a variable
rate of 15.99% to a non-variable rate of 15.99% is not a rate
increase for purposes of Sec. 1026.59 at the time of the change.
See Sec. 1026.55 for limitations on the permissibility of changing
from a non-variable rate to a variable rate.
ii. Change from non-variable rate to variable rate. A change
from a non-variable to a variable rate constitutes a rate increase
for purposes of Sec. 1026.59 if the variable rate exceeds the non-
variable rate that would have applied if the change in type of rate
had not occurred. For example, assume a new credit card account
under an open-end (not home-secured) consumer credit plan is opened
on January 1 of year 1 and that a non-variable annual percentage
rate of 12% applies to all transactions on the account. On January 1
of year 2, upon 45 days' advance notice pursuant to Sec.
1026.9(c)(2), the rate on all new transactions is changed to a
variable rate that is currently 12% and is determined by adding a
margin of 10 percentage points to a publicly-available index not
under the card issuer's control. The change from the 12% non-
variable rate to the 12% variable rate on January 1 of year 2 is not
a rate increase for purposes of Sec. 1026.59(a). On April 1 of year
2, the value of the variable rate increases to 12.5%. The increase
in the rate from 12% to 12.5% is a rate increase for purposes of
Sec. 1026.59, and the card issuer must begin periodically
conducting reviews of the account pursuant to Sec. 1026.59. The
increase that must be evaluated for purposes of Sec. 1026.59 is the
increase from a non-variable rate of 12% to a variable rate of
12.5%.
iii. Change from variable rate to non-variable rate. A change
from a variable to a non-variable rate constitutes a rate increase
for purposes of Sec. 1026.59 if the non-variable rate exceeds the
variable rate that would have applied if the change in type of rate
had not occurred. For example, assume a new credit card account
under an open-end (not home-secured) consumer credit plan is opened
on January 1 of year 1 and that a variable annual percentage rate
that is currently 15% and is determined by adding a margin of 10
percentage points to a publicly-available index not under the card
issuer's control applies to all transactions on the account. On
January 1 of year 2, upon 45 days' advance notice pursuant to Sec.
1026.9(c)(2), the rate on all existing balances and new transactions
is changed to a non-variable rate that is currently 15%. The change
from the 15% variable rate to the 15% non-variable rate on January 1
of year 2 is not a rate increase for purposes of Sec. 1026.59(a).
On April 1 of year 2, the value of the variable rate that would have
applied to the account decreases to 12.5%. Accordingly, on April 1
of year 2, the non-variable rate of 15% exceeds the 12.5% variable
rate that would have applied but for the change in type of rate. At
this time, the change to the non-variable rate of 15% constitutes a
rate increase for purposes of Sec. 1026.59, and the card issuer
must begin periodically conducting reviews of the account pursuant
to Sec. 1026.59. The increase that must be evaluated for purposes
of Sec. 1026.59 is the increase from a variable rate of 12.5% to a
non-variable rate of 15%.
4. Rate increases prior to effective date of rule. For increases
in annual percentage rates made on or after January 1, 2009, and
prior to August 22, 2010, Sec. 1026.59(a) requires the card issuer
to review the factors described in Sec. 1026.59(d) and reduce the
rate, as appropriate, if the rate increase is of a type for which 45
days' advance notice would currently be required under Sec.
1026.9(c)(2) or (g). For example, 45 days' notice is not required
under Sec. 1026.9(c)(2) if the rate increase results from the
increase in the index by which a properly-disclosed variable rate is
determined in accordance with Sec. 1026.9(c)(2)(v)(C) or if the
increase occurs upon expiration of a specified period of time and
disclosures complying with Sec. 1026.9(c)(2)(v)(B) have been
provided. The requirements of Sec. 1026.59 do not apply to such
rate increases.
5. Amount of rate decrease. i. General. Even in circumstances
where a rate reduction is required, Sec. 1026.59 does not require
that a card issuer decrease the rate that applies to
[[Page 80067]]
a credit card account to the rate that was in effect prior to the
rate increase subject to Sec. 1026.59(a). The amount of the rate
decrease that is required must be determined based upon the card
issuer's reasonable policies and procedures under Sec. 1026.59(b)
for consideration of factors described in Sec. 1026.59(a) and (d).
For example, assume a consumer's rate on new purchases is increased
from a variable rate of 15.99% to a variable rate of 23.99% based on
the consumer's making a required minimum periodic payment five days
late. The consumer makes all of the payments required on the account
on time for the six months following the rate increase. Assume that
the card issuer evaluates the account by reviewing the factors on
which the increase in an annual percentage rate was originally
based, in accordance with Sec. 1026.59(d)(1)(i). The card issuer is
not required to decrease the consumer's rate to the 15.99% that
applied prior to the rate increase. However, the card issuer's
policies and procedures for performing the review required by Sec.
1026.59(a) must be reasonable, as required by Sec. 1026.59(b), and
must take into account any reduction in the consumer's credit risk
based upon the consumer's timely payments.
ii. Change in type of rate. If the rate increase subject to
Sec. 1026.59 involves a change from a variable rate to a non-
variable rate or from a non-variable rate to a variable rate, Sec.
1026.59 does not require that the issuer reinstate the same type of
rate that applied prior to the change. However, the amount of any
rate decrease that is required must be determined based upon the
card issuer's reasonable policies and procedures under Sec.
1026.59(b) for consideration of factors described in Sec.
1026.59(a) and (d).
59(a)(2) Rate Reductions
59(a)(2)(ii) Applicability of Rate Reduction
1. Applicability of reduced rate to new transactions. Section
1026.59(a)(2)(ii) requires, in part, that any reduction in rate
required pursuant to Sec. 1026.59(a)(1) must apply to new
transactions that occur after the effective date of the rate
reduction, if those transactions would otherwise have been subject
to the increased rate described in Sec. 1026.59(a)(1). A credit
card account may have multiple types of balances, for example,
purchases, cash advances, and balance transfers, to which different
rates apply. For example, assume a new credit card account opened on
January 1 of year one has a rate applicable to purchases of 15% and
a rate applicable to cash advances and balance transfers of 20%.
Effective March 1 of year two, consistent with the limitations in
Sec. 1026.55 and upon giving notice required by Sec. 1026.9(c)(2),
the card issuer raises the rate applicable to new purchases to 18%
based on market conditions. The only transaction in which the
consumer engages in year two is a $1,000 purchase made on July 1.
The rate for cash advances and balance transfers remains at 20%.
Based on a subsequent review required by Sec. 1026.59(a)(1), the
card issuer determines that the rate on purchases must be reduced to
16%. Section 1026.59(a)(2)(ii) requires that the 16% rate be applied
to the $1,000 purchase made on July 1 and to all new purchases. The
rate for new cash advances and balance transfers may remain at 20%,
because there was no rate increase applicable to those types of
transactions and, therefore, the requirements of Sec. 1026.59(a) do
not apply.
59(c) Timing
1. In general. The issuer may review all of its accounts subject
to Sec. 1026.59(a) at the same time once every six months, may
review each account once each six months on a rolling basis based on
the date on which the rate was increased for that account, or may
otherwise review each account not less frequently than once every
six months.
2. Example. A card issuer increases the rates applicable to one
half of its credit card accounts on June 1, 2011. The card issuer
increases the rates applicable to the other half of its credit card
accounts on September 1, 2011. The card issuer may review the rate
increases for all of its credit card accounts on or before December
1, 2011, and at least every six months thereafter. In the
alternative, the card issuer may first review the rate increases for
the accounts that were repriced on June 1, 2011 on or before
December 1, 2011, and may first review the rate increases for the
accounts that were repriced on September 1, 2011 on or before March
1, 2012.
3. Rate increases prior to effective date of rule. For increases
in annual percentage rates applicable to a credit card account under
an open-end (not home-secured) consumer credit plan on or after
January 1, 2009 and prior to August 22, 2010, Sec. 1026.59(c)
requires that the first review for such rate increases be conducted
prior to February 22, 2011.
59(d) Factors
1. Change in factors. A creditor that complies with Sec.
1026.59(a) by reviewing the factors it currently considers in
determining the annual percentage rates applicable to similar new
credit card accounts may change those factors from time to time.
When a creditor changes the factors it considers in determining the
annual percentage rates applicable to similar new credit card
accounts from time to time, it may comply with Sec. 1026.59(a) by
reviewing the set of factors it considered immediately prior to the
change in factors for a brief transition period, or may consider the
new factors. For example, a creditor changes the factors it uses to
determine the rates applicable to similar new credit card accounts
on January 1, 2012. The creditor reviews the rates applicable to its
existing accounts that have been subject to a rate increase pursuant
to Sec. 1026.59(a) on January 25, 2012. The creditor complies with
Sec. 1026.59(a) by reviewing, at its option, either the factors
that it considered on December 31, 2011 when determining the rates
applicable to similar new credit card accounts or the factors that
it considers as of January 25, 2012. For purposes of compliance with
Sec. 1026.59(d), a transition period of 60 days from the change of
factors constitutes a brief transition period.
2. Comparison of existing account to factors used for similar
new accounts. Under Sec. 1026.59(a), if a creditor evaluates an
existing account using the same factors that it considers in
determining the rates applicable to similar new accounts, the review
of factors need not result in existing accounts being subject to
exactly the same rates and rate structure as a creditor imposes on
similar new accounts. For example, a creditor may offer variable
rates on similar new accounts that are computed by adding a margin
that depends on various factors to the value of the LIBOR index. The
account that the creditor is required to review pursuant to Sec.
1026.59(a) may have variable rates that were determined by adding a
different margin, depending on different factors, to a published
prime rate. In performing the review required by Sec. 1026.59(a),
the creditor may review the factors it uses to determine the rates
applicable to similar new accounts. If a rate reduction is required,
however, the creditor need not base the variable rate for the
existing account on the LIBOR index but may continue to use the
published prime rate. Section 1026.59(a) requires, however, that the
rate on the existing account after the reduction, as determined by
adding the published prime rate and margin, be comparable to the
rate, as determined by adding the margin and LIBOR, charged on a new
account for which the factors are comparable.
3. Similar new credit card accounts. A card issuer complying
with Sec. 1026.59(d)(1)(ii) is required to consider the factors
that the card issuer currently considers when determining the annual
percentage rates applicable to similar new credit card accounts
under an open-end (not home-secured) consumer credit plan. For
example, a card issuer may review different factors in determining
the annual percentage rate that applies to credit card plans for
which the consumer pays an annual fee and receives rewards points
than it reviews in determining the rates for credit card plans with
no annual fee and no rewards points. Similarly, a card issuer may
review different factors in determining the annual percentage rate
that applies to private label credit cards than it reviews in
determining the rates applicable to credit cards that can be used at
a wider variety of merchants. In addition, a card issuer may review
different factors in determining the annual percentage rate that
applies to private label credit cards usable only at Merchant A than
it may review for private label credit cards usable only at Merchant
B. However, Sec. 1026.59(d)(1)(ii) requires a card issuer to review
the factors it considers when determining the rates for new credit
card accounts with similar features that are offered for similar
purposes.
4. No similar new credit card accounts. In some circumstances, a
card issuer that complies with Sec. 1026.59(a) by reviewing the
factors that it currently considers in determining the annual
percentage rates applicable to similar new accounts may not be able
to identify a class of new accounts that are similar to the existing
accounts on which a rate increase has been imposed. For example,
consumers may have existing credit card accounts under an open-end
(not home-secured) consumer credit plan but the card issuer may no
longer offer a product to new consumers with similar
characteristics, such as the availability of rewards, size of credit
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line, or other features. Similarly, some consumers' accounts may
have been closed and therefore cannot be used for new transactions,
while all new accounts can be used for new transactions. In those
circumstances, Sec. 1026.59 requires that the card issuer
nonetheless perform a review of the rate increase on the existing
customers' accounts. A card issuer does not comply with Sec.
1026.59 by maintaining an increased rate without performing such an
evaluation. In such circumstances, Sec. 1026.59(d)(1)(ii) requires
that the card issuer compare the existing accounts to the most
closely comparable new accounts that it offers.
5. Consideration of consumer's conduct on existing account. A
card issuer that complies with Sec. 1026.59(a) by reviewing the
factors that it currently considers in determining the annual
percentage rates applicable to similar new accounts may consider the
consumer's payment or other account behavior on the existing account
only to the same extent and in the same manner that the issuer
considers such information when one of its current cardholders
applies for a new account with the card issuer. For example, a card
issuer might obtain consumer reports for all of its applicants. The
consumer reports contain certain information regarding the
applicant's past performance on existing credit card accounts.
However, the card issuer may have additional information about an
existing cardholder's payment history or account usage that does not
appear in the consumer report and that, accordingly, it would not
generally have for all new applicants. For example, a consumer may
have made a payment that is five days late on his or her account
with the card issuer, but this information does not appear on the
consumer report. The card issuer may consider this additional
information in performing its review under Sec. 1026.59(a), but
only to the extent and in the manner that it considers such
information if a current cardholder applies for a new account with
the issuer.
6. Multiple rate increases between January 1, 2009 and February
21, 2010. i. General. Section 1026.59(d)(2) applies if an issuer
increased the rate applicable to a credit card account under an
open-end (not home-secured) consumer credit plan between January 1,
2009 and February 21, 2010, and the increase was not based solely
upon factors specific to the consumer. In some cases, a credit card
account may have been subject to multiple rate increases during the
period from January 1, 2009 to February 21, 2010. Some such rate
increases may have been based solely upon factors specific to the
consumer, while others may have been based on factors not specific
to the consumer, such as the issuer's cost of funds or market
conditions. In such circumstances, when conducting the first two
reviews required under Sec. 1026.59, the card issuer may separately
review: (i) Rate increases imposed based on factors not specific to
the consumer, using the factors described in Sec. 1026.59(d)(1)(ii)
(as required by Sec. 1026.59(d)(2)); and (ii) rate increases
imposed based on consumer-specific factors, using the factors
described in Sec. 1026.59(d)(1)(i). If the review of factors
described in Sec. 1026.59(d)(1)(i) indicates that it is appropriate
to continue to apply a penalty or other increased rate to the
account as a result of the consumer's payment history or other
factors specific to the consumer, Sec. 1026.59 permits the card
issuer to continue to impose the penalty or other increased rate,
even if the review of the factors described in Sec.
1026.59(d)(1)(ii) would otherwise require a rate decrease.
ii. Example. Assume a credit card account was subject to a rate
of 15% on all transactions as of January 1, 2009. On May 1, 2009,
the issuer increased the rate on existing balances and new
transactions to 18%, based upon market conditions or other factors
not specific to the consumer or the consumer's account.
Subsequently, on September 1, 2009, based on a payment that was
received five days after the due date, the issuer increased the
applicable rate on existing balances and new transactions from 18%
to a penalty rate of 25%. When conducting the first review required
under Sec. 1026.59, the card issuer reviews the rate increase from
15% to 18% using the factors described in Sec. 1026.59(d)(1)(ii)
(as required by Sec. 1026.59(d)(2)), and separately but
concurrently reviews the rate increase from 18% to 25% using the
factors described in paragraph Sec. 1026.59(d)(1)(i). The review of
the rate increase from 15% to 18% based upon the factors described
in Sec. 1026.59(d)(1)(ii) indicates that a similarly situated new
consumer would receive a rate of 17%. The review of the rate
increase from 18% to 25% based upon the factors described in Sec.
1026.59(d)(1)(i) indicates that it is appropriate to continue to
apply the 25% penalty rate based upon the consumer's late payment.
Section 1026.59 permits the rate on the account to remain at 25%.
59(f) Termination of Obligation to Review Factors
1. Revocation of temporary rates. i. In general. If an annual
percentage rate is increased due to revocation of a temporary rate,
Sec. 1026.59(a) requires that the card issuer periodically review
the increased rate. In contrast, if the rate increase results from
the expiration of a temporary rate previously disclosed in
accordance with Sec. 1026.9(c)(2)(v)(B), the review requirements in
Sec. 1026.59(a) do not apply. If a temporary rate is revoked such
that the requirements of Sec. 1026.59(a) apply, Sec. 1026.59(f)
permits an issuer to terminate the review of the rate increase if
and when the applicable rate is the same as the rate that would have
applied if the increase had not occurred.
ii. Examples. Assume that on January 1, 2011, a consumer opens a
new credit card account under an open-end (not home-secured)
consumer credit plan. The annual percentage rate applicable to
purchases is 15%. The card issuer offers the consumer a 10% rate on
purchases made between February 1, 2012 and August 1, 2013 and
discloses pursuant to Sec. 1026.9(c)(2)(v)(B) that on August 1,
2013 the rate on purchases will revert to the original 15% rate. The
consumer makes a payment that is five days late in July 2012.
A. Upon providing 45 days' advance notice and to the extent
permitted under Sec. 1026.55, the card issuer increases the rate
applicable to new purchases to 15%, effective on September 1, 2012.
The card issuer must review that rate increase under Sec.
1026.59(a) at least once each six months during the period from
September 1, 2012 to August 1, 2013, unless and until the card
issuer reduces the rate to 10%. The card issuer performs reviews of
the rate increase on January 1, 2013 and July 1, 2013. Based on
those reviews, the rate applicable to purchases remains at 15%.
Beginning on August 1, 2013, the card issuer is not required to
continue periodically reviewing the rate increase, because if the
temporary rate had expired in accordance with its previously
disclosed terms, the 15% rate would have applied to purchase
balances as of August 1, 2013 even if the rate increase had not
occurred on September 1, 2012.
B. Same facts as above except that the review conducted on July
1, 2013 indicates that a reduction to the original temporary rate of
10% is appropriate. Section 1026.59(a)(2)(i) requires that the rate
be reduced no later than 45 days after completion of the review, or
no later than August 15, 2013. Because the temporary rate would have
expired prior to the date on which the rate decrease is required to
take effect, the card issuer may, at its option, reduce the rate to
10% for any portion of the period from July 1, 2013, to August 1,
2013, or may continue to impose the 15% rate for that entire period.
The card issuer is not required to conduct further reviews of the
15% rate on purchases.
C. Same facts as above except that on September 1, 2012 the card
issuer increases the rate applicable to new purchases to the penalty
rate on the consumer's account, which is 25%. The card issuer
conducts reviews of the increased rate in accordance with Sec.
1026.59 on January 1, 2013 and July 1, 2013. Based on those reviews,
the rate applicable to purchases remains at 25%. The card issuer's
obligation to review the rate increase continues to apply after
August 1, 2013, because the 25% penalty rate exceeds the 15% rate
that would have applied if the temporary rate expired in accordance
with its previously disclosed terms. The card issuer's obligation to
review the rate terminates if and when the annual percentage rate
applicable to purchases is reduced to the 15% rate.
2. Example--relationship to Sec. 1026.59(a). Assume that on
January 1, 2011, a consumer opens a new credit card account under an
open-end (not home-secured) consumer credit plan. The annual
percentage rate applicable to purchases is 15%. Upon providing 45
days' advance notice and to the extent permitted under Sec.
1026.55, the card issuer increases the rate applicable to new
purchases to 18%, effective on September 1, 2012. The card issuer
conducts reviews of the increased rate in accordance with Sec.
1026.59 on January 1, 2013 and July 1, 2013, based on the factors
described in Sec. 1026.59(d)(1)(ii). Based on the January 1, 2013
review, the rate applicable to purchases remains at 18%. In the
review conducted on July 1, 2013, the card issuer determines that,
based on the relevant factors, the rate it would offer on a
comparable new account would be 14%. Consistent with Sec.
1026.59(f), Sec. 1026.59(a) requires that the card issuer reduce
the rate on the existing account to the 15% rate that
[[Page 80069]]
was in effect prior to the September 1, 2012 rate increase.
59(g) Acquired Accounts
59(g)(1) General
1. Relationship to Sec. 1026.59(d)(2) for rate increases
imposed between January 1, 2009 and February 21, 2010. Section
1026.59(d)(2) applies to acquired accounts. Accordingly, if a card
issuer acquires accounts on which a rate increase was imposed
between January 1, 2009 and February 21, 2010 that was not based
solely upon consumer-specific factors, that acquiring card issuer
must consider the factors that it currently considers when
determining the annual percentage rates applicable to similar new
credit card accounts, if it conducts either or both of the first two
reviews of such accounts that are required after August 22, 2010
under Sec. 1026.59(a).
59(g)(2) Review of Acquired Portfolio
1. Example--general. A card issuer acquires a portfolio of
accounts that currently are subject to annual percentage rates of
12%, 15%, and 18%. Not later than six months after the acquisition
of such accounts, the card issuer reviews all of these accounts in
accordance with the factors that it currently uses in determining
the rates applicable to similar new credit card accounts. As a
result of that review, the card issuer decreases the rate on the
accounts that are currently subject to a 12% annual percentage rate
to 10%, leaves the rate applicable to the accounts currently subject
to a 15% annual percentage rate at 15%, and increases the rate
applicable to the accounts currently subject to a rate of 18% to
20%. Section 1026.59(g)(2) requires the card issuer to review, no
less frequently than once every six months, the accounts for which
the rate has been increased to 20%. The card issuer is not required
to review the accounts subject to 10% and 15% rates pursuant to
Sec. 1026.59(a), unless and until the card issuer makes a
subsequent rate increase applicable to those accounts.
2. Example--penalty rates. A card issuer acquires a portfolio of
accounts that currently are subject to standard annual percentage
rates of 12% and 15%. In addition, several acquired accounts are
subject to a penalty rate of 24%. Not later than six months after
the acquisition of such accounts, the card issuer reviews all of
these accounts in accordance with the factors that it currently uses
in determining the rates applicable to similar new credit card
accounts. As a result of that review, the card issuer leaves the
standard rates applicable to the accounts at 12% and 15%,
respectively. The card issuer decreases the rate applicable to the
accounts currently at 24% to its penalty rate of 23%. Section
1026.59(g)(2) requires the card issuer to review, no less frequently
than once every six months, the accounts that are subject to a
penalty rate of 23%. The card issuer is not required to review the
accounts subject to 12% and 15% rates pursuant to Sec. 1026.59(a),
unless and until the card issuer makes a subsequent rate increase
applicable to those accounts.
Section 1026.60--Credit and Charge Card Applications and
Solicitations
1. General. Section 1026.60 generally requires that credit
disclosures be contained in application forms and solicitations
initiated by a card issuer to open a credit or charge card account.
(See Sec. 1026.60(a)(5) and (e)(2) for exceptions; see Sec.
1026.60(a)(1) and accompanying commentary for the definition of
solicitation; see also Sec. 1026.2(a)(15) and accompanying
commentary for the definition of charge card.)
2. Substitution of account-opening summary table for the
disclosures required by Sec. 1026.60. In complying with Sec.
1026.60(c), (e)(1) or (f), a card issuer may provide the account-
opening summary table described in Sec. 1026.6(b)(1) in lieu of the
disclosures required by Sec. 1026.60, if the issuer provides the
disclosures required by Sec. 1026.6 on or with the application or
solicitation.
3. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 1026.60
disclosures.
60(a) General Rules
60(a)(1) Definition of Solicitation
1. Invitations to apply. A card issuer may contact a consumer
who has not been preapproved for a card account about opening an
account (whether by direct mail, telephone, or other means) and
invite the consumer to complete an application. Such a contact does
not meet the definition of solicitation, nor is it covered by this
section, unless the contact itself includes an application form in a
direct mailing, electronic communication or ``take-one''; an oral
application in a telephone contact initiated by the card issuer; or
an application in an in-person contact initiated by the card issuer.
60(a)(2) Form of Disclosures; Tabular Format
1. Location of table. i. General. Except for disclosures given
electronically, disclosures in Sec. 1026.60(b) that are required to
be provided in a table must be prominently located on or with the
application or solicitation. Disclosures are deemed to be
prominently located, for example, if the disclosures are on the same
page as an application or solicitation reply form. If the
disclosures appear elsewhere, they are deemed to be prominently
located if the application or solicitation reply form contains a
clear and conspicuous reference to the location of the disclosures
and indicates that they contain rate, fee, and other cost
information, as applicable.
ii. Electronic disclosures. If the table is provided
electronically, the table must be provided in close proximity to the
application or solicitation. Card issuers have flexibility in
satisfying this requirement. Methods card issuers could use to
satisfy the requirement include, but are not limited to, the
following examples (whatever method is used, a card issuer need not
confirm that the consumer has read the disclosures):
A. The disclosures could automatically appear on the screen when
the application or reply form appears;
B. The disclosures could be located on the same Web page as the
application or reply form (whether or not they appear on the initial
screen), if the application or reply form contains a clear and
conspicuous reference to the location of the disclosures and
indicates that the disclosures contain rate, fee, and other cost
information, as applicable;
C. Card issuers could provide a link to the electronic
disclosures on or with the application (or reply form) as long as
consumers cannot bypass the disclosures before submitting the
application or reply form. The link would take the consumer to the
disclosures, but the consumer need not be required to scroll
completely through the disclosures; or
D. The disclosures could be located on the same Web page as the
application or reply form without necessarily appearing on the
initial screen, immediately preceding the button that the consumer
will click to submit the application or reply.
2. Multiple accounts. If a tabular format is required to be
used, card issuers offering several types of accounts may disclose
the various terms for the accounts in a single table or may provide
a separate table for each account.
3. Information permitted in the table. See the commentary to
Sec. 1026.60(b), (d), and (e)(1) for guidance on additional
information permitted in the table.
4. Deletion of inapplicable disclosures. Generally, disclosures
need only be given as applicable. Card issuers may, therefore, omit
inapplicable headings and their corresponding boxes in the table.
For example, if no foreign transaction fee is imposed on the
account, the heading Foreign transaction and disclosure may be
deleted from the table or the disclosure form may contain the
heading Foreign transaction and a disclosure showing none. There is
an exception for the grace period disclosure; even if no grace
period exists, that fact must be stated.
5. Highlighting of annual percentage rates and fee amounts. i.
In general. See Samples G-10(B) and G-10(C) for guidance on
providing the disclosures described in Sec. 1026.60(a)(2)(iv) in
bold text. Other annual percentage rates or fee amounts disclosed in
the table may not be in bold text. Samples G-10(B) and G-10(C) also
provide guidance to issuers on how to disclose the rates and fees
described in Sec. 1026.60(a)(2)(iv) in a clear and conspicuous
manner, by including these rates and fees generally as the first
text in the applicable rows of the table so that the highlighted
rates and fees generally are aligned vertically in the table.
ii. Maximum limits on fees. Section 1026.60(a)(2)(iv) provides
that any maximum limits on fee amounts must be disclosed in bold
text. For example, assume that, consistent with Sec.
1026.52(b)(1)(ii), a card issuer's late payment fee will not exceed
$35. The maximum limit of $35 for the late payment fee must be
highlighted in bold. Similarly, assume an issuer will charge a cash
advance fee of $5 or 3 percent of the cash advance transaction
amount, whichever is greater, but the fee will not exceed $100. The
maximum limit of $100 for the cash advance fee must be highlighted
in bold.
iii. Periodic fees. Section 1026.60(a)(2)(iv) provides that any
periodic fee disclosed
[[Page 80070]]
pursuant to Sec. 1026.60(b)(2) that is not an annualized amount
must not be disclosed in bold. For example, if an issuer imposes a
$10 monthly maintenance fee for a card account, the issuer must
disclose in the table that there is a $10 monthly maintenance fee,
and that the fee is $120 on an annual basis. In this example, the
$10 fee disclosure would not be disclosed in bold, but the $120
annualized amount must be disclosed in bold. In addition, if an
issuer must disclose any annual fee in the table, the amount of the
annual fee must be disclosed in bold.
6. Form of disclosures. Whether disclosures must be in
electronic form depends upon the following:
i. If a consumer accesses a credit card application or
solicitation electronically (other than as described under ii.
below), such as online at a home computer, the card issuer must
provide the disclosures in electronic form (such as with the
application or solicitation on its Web site) in order to meet the
requirement to provide disclosures in a timely manner on or with the
application or solicitation. If the issuer instead mailed paper
disclosures to the consumer, this requirement would not be met.
ii. In contrast, if a consumer is physically present in the card
issuer's office, and accesses a credit card application or
solicitation electronically, such as via a terminal or kiosk (or if
the consumer uses a terminal or kiosk located on the premises of an
affiliate or third party that has arranged with the card issuer to
provide applications or solicitations to consumers), the issuer may
provide disclosures in either electronic or paper form, provided the
issuer complies with the timing and delivery (``on or with'')
requirements of the regulation.
7. Terminology. Section 1026.60(a)(2)(i) generally requires that
the headings, content and format of the tabular disclosures be
substantially similar, but need not be identical, to the applicable
tables in Appendix G-10 to part 1026; but see Sec. 1026.5(a)(2) for
terminology requirements applicable to Sec. 1026.60 disclosures.
60(a)(4) Fees That Vary by State
1. Manner of disclosing range. If the card issuer discloses a
range of fees instead of disclosing the amount of the specific fee
applicable to the consumer's account, the range may be stated as the
lowest authorized fee (zero, if there are one or more states where
no fee applies) to the highest authorized fee.
60(a)(5) Exceptions
1. Noncoverage of consumer-initiated requests. Applications
provided to a consumer upon request are not covered by Sec.
1026.60, even if the request is made in response to the card
issuer's invitation to apply for a card account. To illustrate, if a
card issuer invites consumers to call a toll-free number or to
return a response card to obtain an application, the application
sent in response to the consumer's request need not contain the
disclosures required under Sec. 1026.60. Similarly, if the card
issuer invites consumers to call and make an oral application on the
telephone, Sec. 1026.60 does not apply to the application made by
the consumer. If, however, the card issuer calls a consumer or
initiates a telephone discussion with a consumer about opening a
card account and contemporaneously takes an oral application, such
applications are subject to Sec. 1026.60, specifically Sec.
1026.60(d). Likewise, if the card issuer initiates an in-person
discussion with a consumer about opening a card account and
contemporaneously takes an application, such applications are
subject to Sec. 1026.60, specifically Sec. 1026.60(f).
60(b) Required Disclosures
1. Tabular format. Provisions in Sec. 1026.60(b) and its
commentary provide that certain information must appear or is
permitted to appear in a table. The tabular format is required for
Sec. 1026.60(b) disclosures given pursuant to Sec. 1026.60(c),
(d)(2), (e)(1) and (f). The tabular format does not apply to oral
disclosures given pursuant to Sec. 1026.60(d)(1). (See Sec.
1026.60(a)(2).)
2. Accuracy. Rules concerning accuracy of the disclosures
required by Sec. 1026.60(b), including variable rate disclosures,
are stated in Sec. 1026.60(c)(2), (d)(3), and (e)(4), as
applicable.
60(b)(1) Annual Percentage Rate
1. Variable-rate accounts--definition. For purposes of Sec.
1026.60(b)(1), a variable-rate account exists when rate changes are
part of the plan and are tied to an index or formula. (See the
commentary to Sec. 1026.6(b)(4)(ii) for examples of variable-rate
plans.)
2. Variable-rate accounts--fact that rate varies and how the
rate will be determined. In describing how the applicable rate will
be determined, the card issuer must identify in the table the type
of index or formula used, such as the prime rate. In describing the
index, the issuer may not include in the table details about the
index. For example, if the issuer uses a prime rate, the issuer must
disclose the rate as a ``prime rate'' and may not disclose in the
table other details about the prime rate, such as the fact that it
is the highest prime rate published in the Wall Street Journal two
business days before the closing date of the statement for each
billing period. The issuer may not disclose in the table the current
value of the index (such as that the prime rate is currently 7.5
percent) or the amount of the margin or spread added to the index or
formula in setting the applicable rate. A card issuer may not
disclose any applicable limitations on rate increases or decreases
in the table, such as describing that the rate will not go below a
certain rate or higher than a certain rate. (See Samples G-10(B) and
G-10(C) for guidance on how to disclose the fact that the applicable
rate varies and how it is determined.)
3. Discounted initial rates. i. Immediate proximity. If the term
``introductory'' is in the same phrase as the introductory rate, as
that term is defined in Sec. 1026.16(g)(2)(ii), it will be deemed
to be in immediate proximity of the listing. For example, an issuer
that uses the phrase ``introductory balance transfer APR X percent''
has used the word ``introductory'' within the same phrase as the
rate. (See Sample G-10(C) for guidance on how to disclose clearly
and conspicuously the expiration date of the introductory rate and
the rate that will apply after the introductory rate expires, if an
introductory rate is disclosed in the table.)
ii. Subsequent changes in terms. The fact that an issuer may
reserve the right to change a rate subsequent to account opening,
pursuant to the notice requirements of Sec. 1026.9(c) and the
limitations in Sec. 1026.55, does not, by itself, make that rate an
introductory rate. For example, assume an issuer discloses an annual
percentage rate for purchases of 12.99% but does not specify a time
period during which that rate will be in effect. Even if that issuer
subsequently increases the annual percentage rate for purchases to
15.99%, pursuant to a change-in-terms notice provided under Sec.
1026.9(c), the 12.99% is not an introductory rate.
iii. More than one introductory rate. If more than one
introductory rate may apply to a particular balance in succeeding
periods, the term ``introductory'' need only be used to describe the
first introductory rate. For example, if an issuer offers a rate of
8.99% on purchases for six months, 10.99% on purchases for the
following six months, and 14.99% on purchases after the first year,
the term ``introductory'' need only be used to describe the 8.99%
rate.
4. Premium initial rates--subsequent changes in terms. The fact
that an issuer may reserve the right to change a rate subsequent to
account opening, pursuant to the notice requirements of Sec.
1026.9(c) and the limitations in Sec. 1026.55 (as applicable), does
not, by itself, make that rate a premium initial rate. For example,
assume an issuer discloses an annual percentage rate for purchases
of 18.99% but does not specify a time period during which that rate
will be in effect. Even if that issuer subsequently reduces the
annual percentage rate for purchases to 15.99%, the 18.99% is not a
premium initial rate. If the rate decrease is the result of a change
from a non-variable rate to a variable rate or from a variable rate
to a non-variable rate, see comments 9(c)(2)(v)-3 and 9(c)(2)(v)-4
for guidance on the notice requirements under Sec. 1026.9(c).
5. Increased penalty rates. i. In general. For rates that are
not introductory rates or employee preferential rates, if a rate may
increase as a penalty for one or more events specified in the
account agreement, such as a late payment or an extension of credit
that exceeds the credit limit, the card issuer must disclose the
increased rate that would apply, a brief description of the event or
events that may result in the increased rate, and a brief
description of how long the increased rate will remain in effect.
The description of the specific event or events that may result in
an increased rate should be brief. For example, if an issuer may
increase a rate to the penalty rate because the consumer does not
make the minimum payment by 5 p.m., Eastern Time, on its payment due
date, the issuer should describe this circumstance in the table as
``make a late payment.'' Similarly, if an issuer may increase a rate
that applies to a particular balance because the account is more
than 60 days late, the issuer should describe this circumstance in
the table as ``make a late payment.'' An issuer may not distinguish
between the events that may result in an increased rate for existing
balances and the events that may result in an
[[Page 80071]]
increased rate for new transactions. (See Samples G-10(B) and G-
10(C) (in the row labeled ``Penalty APR and When it Applies'') for
additional guidance on the level of detail in which the specific
event or events should be described.) The description of how long
the increased rate will remain in effect also should be brief. If a
card issuer reserves the right to apply the increased rate to any
balances indefinitely, to the extent permitted by Sec. Sec.
1026.55(b)(4) and 1026.59, the issuer should disclose that the
penalty rate may apply indefinitely. The card issuer may not
disclose in the table any limitations imposed by Sec. Sec.
1026.55(b)(4) and 1026.59 on the duration of increased rates. For
example, if the issuer generally provides that the increased rate
will apply until the consumer makes twelve timely consecutive
required minimum periodic payments, except to the extent that
Sec. Sec. 1026.55(b)(4) and 1026.59 apply, the issuer should
disclose that the penalty rate will apply until the consumer makes
twelve consecutive timely minimum payments. (See Samples G-10(B) and
G-10(C) (in the row labeled ``Penalty APR and When it Applies'') for
additional guidance on the level of detail which the issuer should
use to describe how long the increased rate will remain in effect.)
A card issuer will be deemed to meet the standard to clearly and
conspicuously disclose the information required by Sec.
1026.60(b)(1)(iv)(A) if the issuer uses the format shown in Samples
G-10(B) and G-10(C) (in the row labeled ``Penalty APR and When it
Applies'') to disclose this information.
ii. Introductory rates--general. An issuer is required to
disclose directly beneath the table the circumstances under which an
introductory rate, as that term is defined in Sec.
1026.16(g)(2)(ii), may be revoked, and the rate that will apply
after the revocation. This information about revocation of an
introductory rate and the rate that will apply after revocation must
be provided even if the rate that will apply after the introductory
rate is revoked is the rate that would have applied at the end of
the promotional period. In a variable-rate account, the rate that
would have applied at the end of the promotional period is a rate
based on the applicable index or formula in accordance with the
accuracy requirements set forth in Sec. 1026.60(c)(2) or (e)(4). In
describing the rate that will apply after revocation of the
introductory rate, if the rate that will apply after revocation of
the introductory rate is already disclosed in the table, the issuer
is not required to repeat the rate, but may refer to that rate in a
clear and conspicuous manner. For example, if the rate that will
apply after revocation of an introductory rate is the standard rate
that applies to that type of transaction (such as a purchase or
balance transfer transaction), and the standard rates are labeled in
the table as ``standard APRs,'' the issuer may refer to the
``standard APR'' when describing the rate that will apply after
revocation of an introductory rate. (See Sample G-10(C) in the
disclosure labeled ``Loss of Introductory APR'' directly beneath the
table.) The description of the circumstances in which an
introductory rate could be revoked should be brief. For example, if
an issuer may increase an introductory rate because the account is
more than 60 days late, the issuer should describe this circumstance
directly beneath the table as ``make a late payment.'' In addition,
if the circumstances in which an introductory rate could be revoked
are already listed elsewhere in the table, the issuer is not
required to repeat the circumstances again, but may refer to those
circumstances in a clear and conspicuous manner. For example, if the
circumstances in which an introductory rate could be revoked are the
same as the event or events that may trigger a ``penalty rate'' as
described in Sec. 1026.60(b)(1)(iv)(A), the issuer may refer to the
actions listed in the Penalty APR row, in describing the
circumstances in which the introductory rate could be revoked. (See
Sample G-10(C) in the disclosure labeled ``Loss of Introductory
APR'' directly beneath the table for additional guidance on the
level of detail in which to describe the circumstances in which an
introductory rate could be revoked.) A card issuer will be deemed to
meet the standard to clearly and conspicuously disclose the
information required by Sec. 1026.60(b)(1)(iv)(B) if the issuer
uses the format shown in Sample G-10(C) to disclose this
information.
iii. Introductory rates--limitations on revocation. Issuers that
are disclosing an introductory rate are prohibited by Sec. 1026.55
from increasing or revoking the introductory rate before it expires
unless the consumer fails to make a required minimum periodic
payment within 60 days after the due date for the payment. In making
the required disclosure pursuant to Sec. 1026.60(b)(1)(iv)(B),
issuers should describe this circumstance directly beneath the table
as ``make a late payment.''
iv. Employee preferential rates. An issuer is required to
disclose directly beneath the table the circumstances under which an
employee preferential rate may be revoked, and the rate that will
apply after the revocation. In describing the rate that will apply
after revocation of the employee preferential rate, if the rate that
will apply after revocation of the employee preferential rate is
already disclosed in the table, the issuer is not required to repeat
the rate, but may refer to that rate in a clear and conspicuous
manner. For example, if the rate that will apply after revocation of
an employee preferential rate is the standard rate that applies to
that type of transaction (such as a purchase or balance transfer
transaction), and the standard rates are labeled in the table as
``standard APRs,'' the issuer may refer to the ``standard APR'' when
describing the rate that will apply after revocation of an employee
preferential rate. The description of the circumstances in which an
employee preferential rate could be revoked should be brief. For
example, if an issuer may increase an employee preferential rate
based upon termination of the employee's employment relationship
with the issuer or a third party, issuers may describe this
circumstance as ``if your employment with [issuer or third party]
ends.''
6. Rates that depend on consumer's creditworthiness. i. In
general. The card issuer, at its option, may disclose the possible
rates that may apply as either specific rates, or a range of rates.
For example, if there are three possible rates that may apply (9.99,
12.99 or 17.99 percent), an issuer may disclose specific rates
(9.99, 12.99 or 17.99 percent) or a range of rates (9.99 to 17.99
percent). The card issuer may not disclose only the lowest, highest
or median rate that could apply. (See Samples G-10(B) and G-10(C)
for guidance on how to disclose a range of rates.)
ii. Penalty rates. If the rate is a penalty rate, as described
in Sec. 1026.60(b)(1)(iv), the card issuer at its option may
disclose the highest rate that could apply, instead of disclosing
the specific rates or the range of rates that could apply. For
example, if the penalty rate could be up to 28.99 percent, but the
issuer may impose a penalty rate that is less than that rate
depending on factors at the time the penalty rate is imposed, the
issuer may disclose the penalty rate as ``up to'' 28.99 percent. The
issuer also must include a statement that the penalty rate for which
the consumer may qualify will depend on the consumer's
creditworthiness, and other factors if applicable.
iii. Other factors. Section 1026.60(b)(1)(v) applies even if
other factors are used in combination with a consumer's
creditworthiness to determine the rate for which a consumer may
qualify at account opening. For example, Sec. 1026.60(b)(1)(v)
would apply if the issuer considers the type of purchase the
consumer is making at the time the consumer opens the account, in
combination with the consumer's creditworthiness, to determine the
rate for which the consumer may qualify at account opening. If other
factors are considered, the issuer should amend the statement about
creditworthiness, to indicate that the rate for which the consumer
may qualify at account opening will depend on the consumer's
creditworthiness and other factors. Nonetheless, Sec.
1026.60(b)(1)(v) does not apply if a consumer's creditworthiness is
not one of the factors that will determine the rate for which the
consumer may qualify at account opening (for example, if the rate is
based solely on the type of purchase that the consumer is making at
the time the consumer opens the account, or is based solely on
whether the consumer has other banking relationships with the card
issuer).
7. Rate based on another rate on the account. In some cases, one
rate may be based on another rate on the account. For example,
assume that a penalty rate as described in Sec.
1026.60(b)(1)(iv)(A) is determined by adding 5 percentage points to
the current purchase rate, which is 10 percent. In this example, the
card issuer in disclosing the penalty rate must disclose 15 percent
as the current penalty rate. If the purchase rate is a variable
rate, then the penalty rate also is a variable rate. In that case,
the card issuer also must disclose the fact that the penalty rate
may vary and how the rate is determined, such as ``This APR may vary
with the market based on the Prime Rate.'' In describing the penalty
rate, the issuer shall not disclose in the table the amount of the
margin or spread added to the current purchase rate to determine the
penalty rate, such as describing that the penalty rate is determined
by adding 5
[[Page 80072]]
percentage points to the purchase rate. (See Sec. 1026.60(b)(1)(i)
and comment 60(b)(1)-2 for further guidance on describing a variable
rate.)
8. Rates. The only rates that shall be disclosed in the table
are annual percentage rates determined under Sec. 1026.14(b).
Periodic rates shall not be disclosed in the table.
9. Deferred interest or similar transactions. An issuer offering
a deferred interest or similar plan, such as a promotional program
that provides that a consumer will not be obligated to pay interest
that accrues on a balance if that balance is paid in full prior to
the expiration of a specified period of time, may not disclose a 0%
rate as the rate applicable to deferred interest or similar
transactions if there are any circumstances under which the consumer
will be obligated for interest on such transactions for the deferred
interest or similar period.
60(b)(2) Fees for Issuance or Availability
1. Membership fees. Membership fees for opening an account must
be disclosed under this paragraph. A membership fee to join an
organization that provides a credit or charge card as a privilege of
membership must be disclosed only if the card is issued
automatically upon membership. Such a fee shall not be disclosed in
the table if membership results merely in eligibility to apply for
an account.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account (for
example, travel insurance or card-registration services) shall not
be disclosed in the table if the basic account may be opened without
paying such fees. Issuing a card to each primary cardholder (not
authorized users) is considered a basic membership privilege and
fees for additional cards, beyond the first card on the account,
must be disclosed as a fee for issuance or availability. Thus, a fee
to obtain an additional card on the account beyond the first card
(so that each cardholder would have his or her own card) must be
disclosed in the table as a fee for issuance or availability under
Sec. 1026.60(b)(2). This fee must be disclosed even if the fee is
optional; that is, if the fee is charged only if the cardholder
requests one or more additional cards. (See the available credit
disclosure in Sec. 1026.60(b)(14).)
3. One-time fees. Disclosure of non-periodic fees is limited to
fees related to opening the account, such as one-time membership or
participation fees, or an application fee that is excludable from
the finance charge under Sec. 1026.4(c)(1). The following are
examples of fees that shall not be disclosed in the table:
i. Fees for reissuing a lost or stolen card.
ii. Statement reproduction fees.
4. Waived or reduced fees. If fees required to be disclosed are
waived or reduced for a limited time, the introductory fees or the
fact of fee waivers may be disclosed in the table in addition to the
required fees if the card issuer also discloses how long the reduced
fees or waivers will remain in effect in accordance with the
requirements of Sec. Sec. 1026.9(c)(2)(v)(B) and 1026.55(b)(1).
5. Periodic fees and one-time fees. A card issuer disclosing a
periodic fee must disclose the amount of the fee, how frequently it
will be imposed, and the annualized amount of the fee. A card issuer
disclosing a non-periodic fee must disclose that the fee is a one-
time fee. (See Sample G-10(C) for guidance on how to meet these
requirements.)
60(b)(3) Fixed Finance Charge; Minimum Interest Charge
1. Example of brief statement. See Samples G-10(B) and G-10(C)
for guidance on how to provide a brief description of a minimum
interest charge.
2. Adjustment of $1.00 threshold amount. Consistent with Sec.
1026.60(b)(3), the Bureau will publish adjustments to the $1.00
threshold amount, as appropriate.
60(b)(4) Transaction Charges
1. Charges imposed by person other than card issuer. Charges
imposed by a third party, such as a seller of goods, shall not be
disclosed in the table under this section; the third party would be
responsible for disclosing the charge under Sec. 1026.9(d)(1).
2. Foreign transaction fees. A transaction charge imposed by the
card issuer for the use of the card for purchases includes any fee
imposed by the issuer for purchases in a foreign currency or that
take place outside the United States or with a foreign merchant.
(See comment 4(a)-4 for guidance on when a foreign transaction fee
is considered charged by the card issuer.) If an issuer charges the
same foreign transaction fee for purchases and cash advances in a
foreign currency, or that take place outside the United States or
with a foreign merchant, the issuer may disclose this foreign
transaction fee as shown in Samples G-10(B) and G-10(C). Otherwise,
the issuer must revise the foreign transaction fee language shown in
Samples G-10(B) and G-10(C) to disclose clearly and conspicuously
the amount of the foreign transaction fee that applies to purchases
and the amount of the foreign transaction fee that applies to cash
advances.
60(b)(5) Grace Period
1. How grace period disclosure is made. The card issuer must
state any conditions on the applicability of the grace period. An
issuer, however, may not disclose under Sec. 1026.60(b)(5) the
limitations on the imposition of finance charges as a result of a
loss of a grace period in Sec. 1026.54, or the impact of payment
allocation on whether interest is charged on purchases as a result
of a loss of a grace period. Some issuers may offer a grace period
on all purchases under which interest will not be charged on
purchases if the consumer pays the outstanding balance shown on a
periodic statement in full by the due date shown on that statement
for one or more billing cycles. In these circumstances, Sec.
1026.60(b)(5) requires that the issuer disclose the grace period and
the conditions for its applicability using the following language,
or substantially similar language, as applicable: ``Your due date is
[at least] ---- days after the close of each billing cycle. We will
not charge you any interest on purchases if you pay your entire
balance by the due date each month.'' However, other issuers may
offer a grace period on all purchases under which interest may be
charged on purchases even if the consumer pays the outstanding
balance shown on a periodic statement in full by the due date shown
on that statement each billing cycle. In these circumstances, Sec.
1026.60(b)(5) requires the issuer to amend the above disclosure
language to describe accurately the conditions on the applicability
of the grace period.
2. No grace period. The issuer may use the following language to
describe that no grace period on any purchases is offered, as
applicable: ``We will begin charging interest on purchases on the
transaction date.''
3. Grace period on some purchases. If the issuer provides a
grace period on some types of purchases but no grace period on
others, the issuer may combine and revise the language in comments
60(b)(5)-1 and -2 as appropriate to describe to which types of
purchases a grace period applies and to which types of purchases no
grace period is offered.
60(b)(6) Balance Computation Method
1. Form of disclosure. In cases where the card issuer uses a
balance computation method that is identified by name in Sec.
1026.60(g), the card issuer must disclose below the table only the
name of the method. In cases where the card issuer uses a balance
computation method that is not identified by name in Sec.
1026.60(g), the disclosure below the table must clearly explain the
method in as much detail as set forth in the descriptions of balance
methods in Sec. 1026.60(g). The explanation need not be as detailed
as that required for the disclosures under Sec. 1026.6(b)(4)(i)(D).
2. Determining the method. In determining which balance
computation method to disclose for purchases, the card issuer must
assume that a purchase balance will exist at the end of any grace
period. Thus, for example, if the average daily balance method will
include new purchases only if purchase balances are not paid within
the grace period, the card issuer would disclose the name of the
average daily balance method that includes new purchases. The card
issuer must not assume the existence of a purchase balance, however,
in making other disclosures under Sec. 1026.60(b).
60(b)(7) Statement on Charge Card Payments
1. Applicability and content. The disclosure that charges are
payable upon receipt of the periodic statement is applicable only to
charge card accounts. In making this disclosure, the card issuer may
make such modifications as are necessary to more accurately reflect
the circumstances of repayment under the account. For example, the
disclosure might read, ``Charges are due and payable upon receipt of
the periodic statement and must be paid no later than 15 days after
receipt of such statement.''
60(b)(8) Cash Advance Fee
1. Content. See Samples G-10(B) and G-10(C) for guidance on how
to disclose clearly and conspicuously the cash advance fee.
2. Foreign cash advances. Cash advance fees required to be
disclosed under Sec. 1026.60(b)(8) include any charge imposed by
the card issuer for cash advances in a foreign currency or that take
place outside the United States or with a foreign merchant.
[[Page 80073]]
(See comment 4(a)-4 for guidance on when a foreign transaction fee
is considered charged by the card issuer.) If an issuer charges the
same foreign transaction fee for purchases and cash advances in a
foreign currency or that take place outside the United States or
with a foreign merchant, the issuer may disclose this foreign
transaction fee as shown in Samples G-10(B) and (C). Otherwise, the
issuer must revise the foreign transaction fee language shown in
Samples G-10(B) and (C) to disclose clearly and conspicuously the
amount of the foreign transaction fee that applies to purchases and
the amount of the foreign transaction fee that applies to cash
advances.
3. ATM fees. An issuer is not required to disclose pursuant to
Sec. 1026.60(b)(8) any charges imposed on a cardholder by an
institution other than the card issuer for the use of the other
institution's ATM in a shared or interchange system.
60(b)(9) Late Payment Fee
1. Applicability. The disclosure of the fee for a late payment
includes only those fees that will be imposed for actual,
unanticipated late payments. (See the commentary to Sec.
1026.4(c)(2) for additional guidance on late payment fees. See
Samples G-10(B) and G-10(C) for guidance on how to disclose clearly
and conspicuously the late payment fee.)
60(b)(10) Over-the-Limit Fee
1. Applicability. The disclosure of fees for exceeding a credit
limit does not include fees for other types of default or for
services related to exceeding the limit. For example, no disclosure
is required of fees for reinstating credit privileges or fees for
the dishonor of checks on an account that, if paid, would cause the
credit limit to be exceeded. (See Samples G-10(B) and G-10(C) for
guidance on how to disclose clearly and conspicuously the over-the-
limit fee.)
60(b)(13) Required Insurance, Debt Cancellation or Debt Suspension
Coverage
1. Content. See Sample G-10(B) for guidance on how to comply
with the requirements in Sec. 1026.60(b)(13).
60(b)(14) Available Credit
1. Calculating available credit. If the 15 percent threshold
test is met, the issuer must disclose the available credit excluding
optional fees, and the available credit including optional fees. In
calculating the available credit to disclose in the table, the
issuer must consider all fees for the issuance or availability of
credit described in Sec. 1026.60(b)(2), and any security deposit,
that will be imposed and charged to the account when the account is
opened, such as one-time issuance and set-up fees. For example, in
calculating the available credit, issuers must consider the first
year's annual fee and the first month's maintenance fee (as
applicable) if they are charged to the account on the first billing
statement. In calculating the amount of the available credit
including optional fees, if optional fees could be charged multiple
times, the issuer shall assume that the optional fee is only imposed
once. For example, if an issuer charges a fee for each additional
card issued on the account, the issuer in calculating the amount of
the available credit including optional fees may assume that the
cardholder requests only one additional card. In disclosing the
available credit, the issuer shall round down the available credit
amount to the nearest whole dollar.
2. Content. See Sample G-10(C) for guidance on how to provide
the disclosure required by Sec. 1026.60(b)(14) clearly and
conspicuously.
60(b)(15) Web Site Reference
1. Content. See Samples G-10(B) and G-10(C) for guidance on
disclosing a reference to the Web site established by the Bureau and
a statement that consumers may obtain on the Web site information
about shopping for and using credit card accounts.
60(c) Direct Mail and Electronic Applications and Solicitations
1. Mailed publications. Applications or solicitations contained
in generally available publications mailed to consumers (such as
subscription magazines) are subject to the requirements applicable
to take-ones in Sec. 1026.60(e), rather than the direct mail
requirements of Sec. 1026.60(c). However, if a primary purpose of a
card issuer's mailing is to offer credit or charge card accounts--
for example, where a card issuer ``prescreens'' a list of potential
cardholders using credit criteria, and then mails to the targeted
group its catalog containing an application or a solicitation for a
card account--the direct mail rules apply. In addition, a card
issuer may use a single application form as a take-one (in racks in
public locations, for example) and for direct mailings, if the card
issuer complies with the requirements of Sec. 1026.60(c) even when
the form is used as a take-one--that is, by presenting the required
Sec. 1026.60 disclosures in a tabular format. When used in a direct
mailing, the credit term disclosures must be accurate as of the
mailing date whether or not the Sec. 1026.60(e)(1)(ii) and
(e)(1)(iii) disclosures are included; when used in a take-one, the
disclosures must be accurate for as long as the take-one forms
remain available to the public if the Sec. 1026.60(e)(1)(ii) and
(e)(1)(iii) disclosures are omitted. (If those disclosures are
included in the take-one, the credit term disclosures need only be
accurate as of the printing date.)
60(d) Telephone Applications and Solicitations
1. Coverage. i. This paragraph applies if:
A. A telephone conversation between a card issuer and consumer
may result in the issuance of a card as a consequence of an issuer-
initiated offer to open an account for which the issuer does not
require any application (that is, a prescreened telephone
solicitation).
B. The card issuer initiates the contact and at the same time
takes application information over the telephone.
ii. This paragraph does not apply to:
A. Telephone applications initiated by the consumer.
B. Situations where no card will be issued--because, for
example, the consumer indicates that he or she does not want the
card, or the card issuer decides either during the telephone
conversation or later not to issue the card.
2. Right to reject the plan. The right to reject the plan
referenced in this paragraph is the same as the right to reject the
plan described in Sec. 1026.5(b)(1)(iv). If an issuer substitutes
the account-opening summary table described in Sec. 1026.6(b)(1) in
lieu of the disclosures specified in Sec. 1026.60(d)(2)(ii), the
disclosure specified in Sec. 1026.60(d)(2)(ii)(B) must appear in
the table, if the issuer is required to do so pursuant to Sec.
1026.6(b)(2)(xiii). Otherwise, the disclosure specified in Sec.
1026.60(d)(2)(ii)(B) may appear either in or outside the table
containing the required credit disclosures.
3. Substituting account-opening table for alternative written
disclosures. An issuer may substitute the account-opening summary
table described in Sec. 1026.6(b)(1) in lieu of the disclosures
specified in Sec. 1026.60(d)(2)(ii).
60(e) Applications and Solicitations Made Available to General Public
1. Coverage. Applications and solicitations made available to
the general public include what are commonly referred to as take-one
applications typically found at counters in banks and retail
establishments, as well as applications contained in catalogs,
magazines and other generally available publications. In the case of
credit unions, this paragraph applies to applications and
solicitations to open card accounts made available to those in the
general field of membership.
2. In-person applications and solicitations. In-person
applications and solicitations initiated by a card issuer are
subject to Sec. 1026.60(f), not Sec. 1026.60(e). (See Sec.
1026.60(f) and accompanying commentary for rules relating to in-
person applications and solicitations.)
3. Toll-free telephone number. If a card issuer, in complying
with any of the disclosure options of Sec. 1026.60(e), provides a
telephone number for consumers to call to obtain credit information,
the number must be toll-free for nonlocal calls made from an area
code other than the one used in the card issuer's dialing area.
Alternatively, a card issuer may provide any telephone number that
allows a consumer to call for information and reverse the telephone
charges.
60(e)(1) Disclosure of Required Credit Information
1. Date of printing. Disclosure of the month and year fulfills
the requirement to disclose the date an application was printed.
2. Form of disclosures. The disclosures specified in Sec.
1026.60(e)(1)(ii) and (e)(1)(iii) may appear either in or outside
the table containing the required credit disclosures.
60(e)(2) No Disclosure of Credit Information
1. When disclosure option available. A card issuer may use this
option only if the issuer does not include on or with the
application or solicitation any statement that refers to the credit
disclosures required by Sec. 1026.60(b). Statements such as no
annual fee, low interest rate, favorable rates, and low costs are
deemed to refer to the required credit disclosures and, therefore,
may not be included on or with the solicitation or application, if
the card issuer chooses to use this option.
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60(e)(3) Prompt Response to Requests for Information
1. Prompt disclosure. Information is promptly disclosed if it is
given within 30 days of a consumer's request for information but in
no event later than delivery of the credit or charge card.
2. Information disclosed. When a consumer requests credit
information, card issuers need not provide all the required credit
disclosures in all instances. For example, if disclosures have been
provided in accordance with Sec. 1026.60(e)(1) and a consumer calls
or writes a card issuer to obtain information about changes in the
disclosures, the issuer need only provide the items of information
that have changed from those previously disclosed on or with the
application or solicitation. If a consumer requests information
about particular items, the card issuer need only provide the
requested information. If, however, the card issuer has made
disclosures in accordance with the option in Sec. 1026.60(e)(2) and
a consumer calls or writes the card issuer requesting information
about costs, all the required disclosure information must be given.
3. Manner of response. A card issuer's response to a consumer's
request for credit information may be provided orally or in writing,
regardless of the manner in which the consumer's request is received
by the issuer. Furthermore, the card issuer must provide the
information listed in Sec. 1026.60(e)(1). Information provided in
writing need not be in a tabular format.
60(f) In-Person Applications and Solicitations
1. Coverage. i. This paragraph applies if:
A. An in-person conversation between a card issuer and a
consumer may result in the issuance of a card as a consequence of an
issuer-initiated offer to open an account for which the issuer does
not require any application (that is, a preapproved in-person
solicitation).
B. The card issuer initiates the contact and at the same time
takes application information in person. For example, the following
are covered:
1. A consumer applies in person for a car loan at a financial
institution and the loan officer invites the consumer to apply for a
credit or charge card account; the consumer accepts the invitation
and submits an application.
2. An employee of a retail establishment, in the course of
processing a sales transaction using a bank credit card, asks a
customer if he or she would like to apply for the retailer's credit
or charge card; the customer responds affirmatively and submits an
application.
ii. This paragraph does not apply to:
A. In-person applications initiated by the consumer.
B. Situations where no card will be issued--because, for
example, the consumer indicates that he or she does not want the
card, or the card issuer decides during the in-person conversation
not to issue the card.
Appendix A--Effect on State Laws
1. Who may make requests. Appendix A sets forth the procedures
for preemption determinations. As discussed in Sec. 1026.28, which
contains the standards for preemption, a request for a determination
of whether a state law is inconsistent with the requirements of
chapters 1, 2, or 3 may be made by creditors, states, or any
interested party. However, only states may request and receive
determinations in connection with the fair credit billing provisions
of chapter 4.
Appendix B--State Exemptions
1. General. Appendix B sets forth the procedures for exemption
applications. The exemption standards are found in Sec. 1026.29 and
are discussed in the commentary to that section.
Appendix C--Issuance of Official Interpretations
1. General. This commentary is the vehicle for providing
official interpretations. Individual interpretations generally will
not be issued separately from the commentary.
Appendix D--Multiple-Advance Construction Loans
1. General rule. Appendix D provides a special procedure that
creditors may use, at their option, to estimate and disclose the
terms of multiple-advance construction loans when the amounts or
timing of advances is unknown at consummation of the transaction.
This appendix reflects the approach taken in Sec.
1026.17(c)(6)(ii), which permits creditors to provide separate or
combined disclosures for the construction period and for the
permanent financing, if any; i.e., the construction phase and the
permanent phase may be treated as one transaction or more than one
transaction. Appendix D may also be used in multiple-advance
transactions other than construction loans, when the amounts or
timing of advances is unknown at consummation.
2. Variable-rate multiple-advance loans. The hypothetical
disclosure required in variable-rate transactions by Sec.
1026.18(f)(1)(iv) is not required for multiple-advance loans
disclosed pursuant to Appendix D, part I.
3. Calculation of the total of payments. When disclosures are
made pursuant to Appendix D, the total of payments may reflect
either the sum of the payments or the sum of the amount financed and
the finance charge.
4. Annual percentage rate. Appendix D does not require the use
of Volume I of the Bureau's Annual Percentage Rate Tables for
calculation of the annual percentage rate. Creditors utilizing
Appendix D in making calculations and disclosures may use other
computation tools to determine the estimated annual percentage rate,
based on the finance charge and payment schedule obtained by use of
the appendix.
5. Interest reserves. In a multiple-advance construction loan, a
creditor may establish an ``interest reserve'' to ensure that
interest is paid as it accrues by designating a portion of the loan
to be used for paying the interest that accrues on the loan. An
interest reserve is not treated as a prepaid finance charge, whether
the interest reserve is the same as or different from the estimated
interest figure calculated under Appendix D.
i. If a creditor permits a consumer to make interest payments as
they become due, the interest reserve should be disregarded in the
disclosures and calculations under Appendix D.
ii. If a creditor requires the establishment of an interest
reserve and automatically deducts interest payments from the reserve
amount rather than allow the consumer to make interest payments as
they become due, the fact that interest will accrue on those
interest payments as well as the other loan proceeds must be
reflected in the calculations and disclosures. To reflect the
effects of such compounding, a creditor should first calculate
interest on the commitment amount (exclusive of the interest
reserve) and then add the figure obtained by assuming that one-half
of that interest is outstanding at the contract interest rate for
the entire construction period. For example, using the example shown
under paragraph A, part I of Appendix D, the estimated interest
would be $1,117.68 ($1093.75 plus an additional $23.93 calculated by
assuming half of $1093.75 is outstanding at the contract interest
rate for the entire construction period), and the estimated annual
percentage rate would be 21.18%.
6. Relation to Sec. 1026.18(s). A creditor must disclose an
interest rate and payment summary table for transactions secured by
real property or a dwelling, pursuant to Sec. 1026.18(s), instead
of the general payment schedule required by Sec. 1026.18(g).
Accordingly, home construction loans that are secured by real
property or a dwelling are subject to Sec. 1026.18(s) and not Sec.
1026.18(g). Under Sec. 1026.176(c)(6)(ii), when a multiple-advance
construction loan may be permanently financed by the same creditor,
the construction phase and the permanent phase may be treated as
either one transaction or more than one transaction.
i. If a creditor uses Appendix D and elects pursuant to Sec.
1026.17(c)(6)(ii) to disclose the construction and permanent phases
as separate transactions, the construction phase must be disclosed
according to the rules in Sec. 1026.18(s). Under Sec. 1026.18(s),
the creditor must disclose the applicable interest rates and
corresponding periodic payments during the construction phase in an
interest rate and payment summary table. The provision in Appendix
D, Part I.A.3, which allows the creditor to omit the number and
amounts of any interest payments ``in disclosing the payment
schedule under Sec. 1026.18(g)'' does not apply because the
transaction is governed by Sec. 1026.18(s) rather than Sec.
1026.18(g). Also, because the construction phase is being disclosed
as a separate transaction and its terms do not repay all principal,
the creditor must disclose a balloon payment, pursuant to Sec.
1026.18(s)(5).
ii. On the other hand, if the creditor elects to disclose the
construction and permanent phases as a single transaction, the
construction phase must be disclosed pursuant to Appendix D, Part
II.C, which provides that the creditor shall disclose the repayment
schedule without reflecting the number or amounts of payments of
interest only that are made during the construction phase. Appendix
D also provides, however,
[[Page 80075]]
that creditors must disclose (outside of the table) the fact that
interest payments must be made and the timing of such payments. The
rate and payment summary table disclosed under Sec. 1026.18(s) must
reflect only the permanent phase of the transaction. Therefore, in
determining the rates and payments that must be disclosed in the
columns of the table, creditors should apply the requirements of
Sec. 1026.18(s) to the permanent phase only. For example, under
Sec. 1026.18(s)(2)(i)(A) or Sec. 1026.18(s)(2)(i)(B)(1), as
applicable, the creditor should disclose the interest rate
corresponding to the first installment due under the permanent phase
and not any rate applicable during the construction phase.
Appendix F--Optional Annual Percentage Rate Computations for Creditors
Offering Open-End Credit Plans Secured by a Consumer's Dwelling
1. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and
the application of a daily periodic rate, see comment 14(c)(3)-2 for
guidance on an appropriate calculation method.
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
1. Permissible changes. Although use of the model forms and
clauses is not required, creditors using them properly will be
deemed to be in compliance with the regulation with regard to those
disclosures. Creditors may make certain changes in the format or
content of the forms and clauses and may delete any disclosures that
are inapplicable to a transaction or a plan without losing the Act's
protection from liability, except formatting changes may not be made
to model forms and samples in H-18, H-19, H-20, H-21, H-22, H-23, G-
2(A), G-3(A), G-4(A), G-10(A)-(E), G-17(A)-(D), G-18(A) (except as
permitted pursuant to Sec. 1026.7(b)(2)), G-18(B)-(C), G-19, G-20,
and G-21, or to the model clauses in H-4(E), H-4(F), H-4(G), and H-
4(H). Creditors may modify the heading of the second column shown in
Model Clause H-4(H) to read ``first adjustment'' or ``first
increase,'' as applicable, pursuant to Sec. 1026.18(s)(2)(i)(C).
The rearrangement of the model forms and clauses may not be so
extensive as to affect the substance, clarity, or meaningful
sequence of the forms and clauses. Creditors making revisions with
that effect will lose their protection from civil liability. Except
as otherwise specifically required, acceptable changes include, for
example:
i. Using the first person, instead of the second person, in
referring to the borrower.
ii. Using ``borrower'' and ``creditor'' instead of pronouns.
iii. Rearranging the sequences of the disclosures.
iv. Not using bold type for headings.
v. Incorporating certain state ``plain English'' requirements.
vi. Deleting inapplicable disclosures by whiting out, blocking
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out,
leaving blanks, checking a box for applicable items, or circling
applicable items. (This should permit use of multipurpose standard
forms.)
vii. Using a vertical, rather than a horizontal, format for the
boxes in the closed-end disclosures.
2. Debt-cancellation coverage. This part does not authorize
creditors to characterize debt-cancellation fees as insurance
premiums for purposes of this part. Creditors may provide a
disclosure that refers to debt cancellation or debt suspension
coverage whether or not the coverage is considered insurance.
Creditors may use the model credit insurance disclosures only if the
debt cancellation coverage constitutes insurance under state law.
Appendix G--Open-End Model Forms and Clauses
1. Models G-1 and G-1(A). The model disclosures in G-1 and G-
1(A) (different balance computation methods) may be used in both the
account-opening disclosures under Sec. 1026.6 and the periodic
disclosures under Sec. 1026.7. As is clear from the models given,
``shorthand'' descriptions of the balance computation methods are
not sufficient, except where Sec. 1026.7(b)(5) applies. For
creditors using model G-1, the phrase ``a portion of'' the finance
charge should be included if the total finance charge includes other
amounts, such as transaction charges, that are not due to the
application of a periodic rate. If unpaid interest or finance
charges are subtracted in calculating the balance, that fact must be
stated so that the disclosure of the computation method is accurate.
Only model G-1(b) contains a final sentence appearing in brackets,
which reflects the total dollar amount of payments and credits
received during the billing cycle. The other models do not contain
this language because they reflect plans in which payments and
credits received during the billing cycle are subtracted. If this is
not the case, however, the language relating to payments and credits
should be changed, and the creditor should add either the disclosure
of the dollar amount as in model G-1(b) or an indication of which
credits (disclosed elsewhere on the periodic statement) will not be
deducted in determining the balance. (Such an indication may also
substitute for the bracketed sentence in model G-1(b).) (See the
commentary to Sec. 1026.7(a)(5) and (b)(5).) For open-end plans
subject to the requirements of Sec. 1026.40, creditors may, at
their option, use the clauses in G-1 or G-1(A).
2. Models G-2 and G-2(A). These models contain the notice of
liability for unauthorized use of a credit card. For home-equity
plans subject to the requirements of Sec. 1026.40, at the
creditor's option, a creditor either may use G-2 or G-2(A). For
open-end plans not subject to the requirements of Sec. 1026.40,
creditors properly use G-2(A).
3. Models G-3, G-3(A), G-4 and G-4(A).
i. These set out models for the long-form billing-error rights
statement (for use with the account-opening disclosures and as an
annual disclosure or, at the creditor's option, with each periodic
statement) and the alternative billing-error rights statement (for
use with each periodic statement), respectively. For home-equity
plans subject to the requirements of Sec. 1026.40, at the
creditor's option, a creditor either may use G-3 or G-3(A), and for
creditors that use the short form, G-4 or G-4(A). For open-end (not
home-secured) plans that are not subject to the requirements of
Sec. 1026.40, creditors properly use G-3(A) and G-4(A). Creditors
must provide the billing-error rights statements in a form
substantially similar to the models in order to comply with the
regulation. The model billing-rights statements may be modified in
any of the ways set forth in the first paragraph to the commentary
on Appendices G and H. The models may, furthermore, be modified by
deleting inapplicable information, such as:
A. The paragraph concerning stopping a debit in relation to a
disputed amount, if the creditor does not have the ability to debit
automatically the consumer's savings or checking account for
payment.
B. The rights stated in the special rule for credit card
purchases and any limitations on those rights.
ii. The model billing rights statements also contain optional
language that creditors may use. For example, the creditor may:
A. Include a statement to the effect that notice of a billing
error must be submitted on something other than the payment ticket
or other material accompanying the periodic disclosures.
B. Insert its address or refer to the address that appears
elsewhere on the bill.
C. Include instructions for consumers, at the consumer's option,
to communicate with the creditor electronically or in writing.
iii. Additional information may be included on the statements as
long as it does not detract from the required disclosures. For
instance, information concerning the reporting of errors in
connection with a checking account may be included on a combined
statement as long as the disclosures required by the regulation
remain clear and conspicuous.
4. Models G-5 through G-9. These models set out notices of the
right to rescind that would be used at different times in an open-
end plan. The last paragraph of each of the rescission model forms
contains a blank for the date by which the consumer's notice of
cancellation must be sent or delivered. A parenthetical is included
to address the situation in which the consumer's right to rescind
the transaction exists beyond 3 business days following the date of
the transaction, for example, when the notice or material
disclosures are delivered late or when the date of the transaction
in paragraph 1 of the notice is an estimate. The language of the
parenthetical is not optional. See the commentary to Sec.
1026.2(a)(25) regarding the specificity of the security interest
disclosure for model form G-7.
5. Model G-10(A), samples G-10(B) and G-10(C), model G-10(D),
sample G-10(E), model G-17(A), and samples G-17(B), 17(C) and 17(D).
i. Model G-10(A) and Samples G-10(B) and G-10(C) illustrate, in the
tabular format, the disclosures required under Sec. 1026.60 for
applications and solicitations for credit cards other than charge
cards. Model G-10(D) and Sample G-10(E) illustrate the tabular
format disclosure for charge card applications and solicitations
[[Page 80076]]
and reflect the disclosures in the table. Model G-17(A) and Samples
G-17(B), G-17(C) and G-17(D) illustrate, in the tabular format, the
disclosures required under Sec. 1026.6(b)(2) for account-opening
disclosures.
ii. Except as otherwise permitted, disclosures must be
substantially similar in sequence and format to Models G-10(A), G-
10(D) and G-17(A). While proper use of the model forms will be
deemed in compliance with the regulation, card issuers and other
creditors offering open-end (not home-secured) plans are permitted
to disclose the annual percentage rates for purchases, cash
advances, or balance transfers in the same row in the table for any
transaction types for which the issuer or creditor charges the same
annual percentage rate. Similarly, card issuer and other creditors
offering open-end (not home-secured) plans are permitted to disclose
fees of the same amount in the same row if the fees are in the same
category. Fees in different categories may not be disclosed in the
same row. For example, a transaction fee and a penalty fee that are
of the same amount may not be disclosed in the same row. Card
issuers and other creditors offering open-end (not home-secured)
plans are also permitted to use headings other than those in the
forms if they are clear and concise and are substantially similar to
the headings contained in model forms, with the following
exceptions. The heading ``penalty APR'' must be used when describing
rates that may increase due to default or delinquency or as a
penalty, and in relation to required insurance, or debt cancellation
or suspension coverage, the term ``required'' and the name of the
product must be used. (See also Sec. Sec. 1026.60(b)(5) and
1026.6(b)(2)(v) for guidance on headings that must be used to
describe the grace period, or lack of grace period, in the
disclosures required under Sec. 1026.60 for applications and
solicitations for credit cards other than charge cards, and the
disclosures required under Sec. 1026.6(b)(2) for account-opening
disclosures, respectively.)
iii. Models G-10(A) and G-17(A) contain two alternative headings
(``Minimum Interest Charge'' and ``Minimum Charge'') for disclosing
a minimum interest or fixed finance charge under Sec. Sec.
1026.60(b)(3) and 1026.6(b)(2)(iii). If a creditor imposes a minimum
charge in lieu of interest in those months where a consumer would
otherwise incur an interest charge but that interest charge is less
than the minimum charge, the creditor should disclose this charge
under the heading ``Minimum Interest Charge'' or a substantially
similar heading. Other minimum or fixed finance charges should be
disclosed under the heading ``Minimum Charge'' or a substantially
similar heading.
iv. Models G-10(A), G-10(D) and G-17(A) contain two alternative
headings (``Annual Fees'' and ``Set-up and Maintenance Fees'') for
disclosing fees for issuance or availability of credit under Sec.
1026.60(b)(2) or Sec. 1026.6(b)(2)(ii). If the only fee for
issuance or availability of credit disclosed under Sec.
1026.60(b)(2) or Sec. 1026.6(b)(2)(ii) is an annual fee, a creditor
should use the heading ``Annual Fee'' or a substantially similar
heading to disclose this fee. If a creditor imposes fees for
issuance or availability of credit disclosed under Sec.
1026.60(b)(2) or Sec. 1026.6(b)(2)(ii) other than, or in addition
to, an annual fee, the creditor should use the heading ``Set-up and
Maintenance Fees'' or a substantially similar heading to disclose
fees for issuance or availability of credit, including the annual
fee.
v. Although creditors are not required to use a certain paper
size in disclosing the Sec. Sec. 1026.60 or 1026.6(b)(1) and (2)
disclosures, samples G-10(B), G-10(C), G-17(B), G-17(C) and G-17(D)
are designed to be printed on an 8\1/2\ x 14 inch sheet of paper. A
creditor may use a smaller sheet of paper, such as 8\1/2\ x 11 inch
sheet of paper. If the table is not provided on a single side of a
sheet of paper, the creditor must include a reference or references,
such as ``SEE BACK OF PAGE for more important information about your
account.'' at the bottom of each page indicating that the table
continues onto an additional page or pages. A creditor that splits
the table onto two or more pages must disclose the table on
consecutive pages and may not include any intervening information
between portions of the table. In addition, the following formatting
techniques were used in presenting the information in the sample
tables to ensure that the information is readable:
A. A readable font style and font size (10-point Arial font
style, except for the purchase annual percentage rate which is shown
in 16-point type).
B. Sufficient spacing between lines of the text.
C. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as
appropriate. For example, in the samples in the row of the tables
with the heading ``APR for Balance Transfers,'' the forms disclose
two components: The applicable balance transfer rate and a cross
reference to the balance transfer fee. The samples show these two
components on separate lines with adequate space between each
component. On the other hand, in the samples, in the disclosure of
the late payment fee, the forms disclose two components: The late
payment fee, and the cross reference to the penalty rate. Because
the disclosure of both these components is short, these components
are disclosed on the same line in the tables.
D. Standard spacing between words and characters. In other
words, the text was not compressed to appear smaller than 10-point
type.
E. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text.
F. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
vi. While the Bureau is not requiring issuers to use the above
formatting techniques in presenting information in the table (except
for the 10-point and 16-point font requirement), the Bureau
encourages issuers to consider these techniques when deciding how to
disclose information in the table, to ensure that the information is
presented in a readable format.
vii. Creditors are allowed to use color, shading and similar
graphic techniques with respect to the table, so long as the table
remains substantially similar to the model and sample forms in
Appendix G.
viii. Models G-10(A) and G-17(A) contain rows in the table with
the prescribed language, ``For Credit Card Tips from the Consumer
Financial Protection Bureau'' and calling for a ``[Reference to the
Bureau's Web site]'' next to that language. Until January 1, 2013,
creditors may substitute ``For Credit Card Tips from the Federal
Reserve Board'' for these two model forms' prescribed language and
may provide a reference to the Federal Reserve Board's Web site
rather than the Bureau's Web site.
6. Model G-11. Model G-11 contains clauses that illustrate the
general disclosures required under Sec. 1026.60(e) in applications
and solicitations made available to the general public.
7. Models G-13(A) and G-13(B). These model forms illustrate the
disclosures required under Sec. 1026.9(f) when the card issuer
changes the entity providing insurance on a credit card account.
Model G-13(A) contains the items set forth in Sec. 1026.9(f)(3) as
examples of significant terms of coverage that may be affected by
the change in insurance provider. The card issuer may either list
all of these potential changes in coverage and place a check mark by
the applicable changes, or list only the actual changes in coverage.
Under either approach, the card issuer must either explain the
changes or refer to an accompanying copy of the policy or group
certificate for details of the new terms of coverage. Model G-13(A)
also illustrates the permissible combination of the two notices
required by Sec. 1026.9(f)--the notice required for a planned
change in provider and the notice required once a change has
occurred. This form may be modified for use in providing only the
disclosures required before the change if the card issuer chooses to
send two separate notices. Thus, for example, the references to the
attached policy or certificate would not be required in a separate
notice prior to a change in the insurance provider since the policy
or certificate need not be provided at that time. Model G-13(B)
illustrates the disclosures required under Sec. 1026.9(f)(2) when
the insurance provider is changed.
8. Samples G-18(A)-(D). For home-equity plans subject to the
requirements of Sec. 1026.40, if a creditor chooses to comply with
the requirements in Sec. 1026.7(b), the creditor may use Samples G-
18(A) through G-18(D) to comply with these requirements, as
applicable.
9. Samples G-18(D). Sample G-18(D) illustrates how credit card
issuers may comply with proximity requirements for payment
information on periodic statements. Creditors that offer card
accounts with a charge card feature and a revolving feature may
change the disclosure to make clear to which feature the disclosures
apply.
10. Forms G-18(F)-(G). Forms G-18(F) and G-18(G) are intended as
a compliance aid to illustrate front sides of a periodic statement,
and how a periodic statement for open-end (not home-secured) plans
might be designed to comply with the requirements of Sec. 1026.7.
The samples contain information that is not required by Regulation
Z. The samples also
[[Page 80077]]
present information in additional formats that are not required by
Regulation Z.
i. Creditors are not required to use a certain paper size in
disclosing the Sec. 1026.7 disclosures. However, Forms G-18(F) and
G-18(G) are designed to be printed on an 8 x 14 inch sheet of paper.
ii. The due date for a payment, if a late payment fee or penalty
rate may be imposed, must appear on the front of the first page of
the statement. See Sample G-18(D) that illustrates how a creditor
may comply with proximity requirements for other disclosures. The
payment information disclosures appear in the upper right-hand
corner on Samples G-18(F) and G-18(G), but may be located elsewhere,
as long as they appear on the front of the first page of the
periodic statement. The summary of account activity presented on
Samples G-18(F) and G-18(G) is not itself a required disclosure,
although the previous balance and the new balance, presented in the
summary, must be disclosed in a clear and conspicuous manner on
periodic statements.
iii. Additional information not required by Regulation Z may be
presented on the statement. The information need not be located in
any particular place or be segregated from disclosures required by
Regulation Z, although the effect of proximity requirements for
required disclosures, such as the due date, may cause the additional
information to be segregated from those disclosures required to be
disclosed in close proximity to one another. Any additional
information must be presented consistent with the creditor's
obligation to provide required disclosures in a clear and
conspicuous manner.
iv. Model Forms G-18(F) and G-18(G) demonstrate two examples of
ways in which transactions could be presented on the periodic
statement. Model Form G-18(G) presents transactions grouped by type
and Model Form G-18(F) presents transactions in a list in
chronological order. Neither of these approaches to presenting
transactions is required; a creditor may present transactions
differently, such as in a list grouped by authorized user or other
means.
11. Model Form G-19. See Sec. 1026.9(b)(3) regarding the
headings required to be disclosed when describing in the tabular
disclosure a grace period (or lack of a grace period) offered on
check transactions that access a credit card account.
12. Sample G-24. Sample G-24 includes two model clauses for use
in complying with Sec. 1026.16(h)(4). Model clause (a) is for use
in connection with credit card accounts under an open-end (not home-
secured) consumer credit plan. Model clause (b) is for use in
connection with other open-end credit plans.
Appendix H--Closed-End Model Forms and Clauses
1. Models H-1 and H-2. i. Creditors may make several types of
changes to closed-end model forms H-1 (credit sale) and H-2 (loan)
and still be deemed to be in compliance with the regulation,
provided that the required disclosures are made clearly and
conspicuously. Permissible changes include the addition of the
information permitted by Sec. 1026.17(a)(1) and ``directly
related'' information as set forth in the commentary to Sec.
1026.17(a).
ii. The creditor may also delete or, on multi-purpose forms,
indicate inapplicable disclosures, such as:
A. The itemization of the amount financed option. (See Samples
H-12 through H-15.)
B. The credit life and disability insurance disclosures. (See
Samples H-11 and H-12.)
C. The property insurance disclosures. (See Samples H-10 through
H-12, and H-14.)
D. The ``filing fees'' and ``non-filing insurance'' disclosures.
(See Samples H-11 and H-12.)
E. The prepayment penalty or rebate disclosures. (See Samples H-
12 and H-14.)
F. The total sale price. (See Samples H-11 through H-15.)
iii. Other permissible changes include:
A. Adding the creditor's address or telephone number. (See the
commentary to Sec. 1026.18(a).)
B. Combining required terms where several numerical disclosures
are the same, for instance, if the ``total of payments'' equals the
``total sale price.'' (See the commentary to Sec. 1026.18.)
C. Rearranging the sequence or location of the disclosures--for
instance, by placing the descriptive phrases outside the boxes
containing the corresponding disclosures, or by grouping the
descriptors together as a glossary of terms in a separate section of
the segregated disclosures; by placing the payment schedule at the
top of the form; or by changing the order of the disclosures in the
boxes, including the annual percentage rate and finance charge
boxes.
D. Using brackets, instead of checkboxes, to indicate
inapplicable disclosures.
E. Using a line for the consumer to initial, rather than a
checkbox, to indicate an election to receive an itemization of the
amount financed.
F. Deleting captions for disclosures.
G. Using a symbol, such as an asterisk, for estimated
disclosures, instead of an ``e.''
H. Adding a signature line to the insurance disclosures to
reflect joint policies.
I. Separately itemizing the filing fees.
J. Revising the late charge disclosure in accordance with the
commentary to Sec. 1026.18(l).
2. Model H-3. Creditors have considerable flexibility in filling
out Model H-3 (itemization of the amount financed). Appropriate
revisions, such as those set out in the commentary to Sec.
1026.18(c), may be made to this form without loss of protection from
civil liability for proper use of the model forms.
3. Models H-4 through H-7. The model clauses are not included in
the model forms although they are mandatory for certain
transactions. Creditors using the model clauses when applicable to a
transaction are deemed to be in compliance with the regulation with
regard to that disclosure.
4. Model H-4(A). This model contains the variable rate model
clauses applicable to transactions subject to Sec. 1026.18(f)(1)
and is intended to give creditors considerable flexibility in
structuring variable rate disclosures to fit individual plans. The
information about circumstances, limitations, and effects of an
increase may be given in terms of the contract interest rate or the
annual percentage rate. Clauses are shown for hypothetical examples
based on the specific amount of the transaction and based on a
representative amount. Creditors may preprint the variable rate
disclosures based on a representative amount for similar types of
transactions, instead of constructing an individualized example for
each transaction. In both representative examples and transaction-
specific examples, creditors may refer either to the incremental
change in rate, payment amount, or number of payments, or to the
resulting rate, payment amount, or number of payments. For example,
creditors may state that the rate will increase by 2%, with a
corresponding $150 increase in the payment, or creditors may state
that the rate will increase to 16%, with a corresponding payment of
$850.
5. Model H-4(B). This model clause illustrates the variable-rate
disclosure required under Sec. 1026.18(f)(2), which would alert
consumers to the fact that the transaction contains a variable-rate
feature and that disclosures were provided earlier.
6. Model H-4(C). This model clause illustrates the early
disclosures required generally under Sec. 1026.19(b). It includes
information on how the consumer's interest rate is determined and
how it can change over the term of the loan, and explains changes
that may occur in the borrower's monthly payment. It contains an
example of how to disclose historical changes in the index or
formula values used to compute interest rates for the preceding 15
years. The model clause also illustrates the disclosure of the
initial and maximum interest rates and payments based on an initial
interest rate (index value plus margin, adjusted by the amount of
any discount or premium) in effect as of an identified month and
year for the loan program disclosure and illustrates how to provide
consumers with a method for calculating the monthly payment for the
loan amount to be borrowed.
7. Models H-4(D) through H-4(J). These model clauses illustrate
certain notices, statements, and other disclosures required as
follows:
i. Model H-4(D) illustrates the adjustment notice required under
Sec. 1026.20(c), and provides examples of payment change notices
and annual notices of interest rate changes.
ii. Model H-4(E) illustrates the interest rate and payment
summary table required under Sec. 1026.18(s) for a fixed-rate
mortgage transaction.
iii. Model H-4(F) illustrates the interest rate and payment
summary table required under Sec. 1026.18(s) for an adjustable-rate
or a step-rate mortgage transaction.
iv. Model H-4(G) illustrates the interest rate and payment
summary table required under Sec. 1026.18(s) for a mortgage
transaction with negative amortization.
v. Model H-4(H) illustrates the interest rate and payment
summary table required under Sec. 1026.18(s) for a fixed-rate,
interest-only mortgage transaction.
vi. Model H-4(I) illustrates the introductory rate disclosure
required by Sec. 1026.18(s)(2)(iii) for an adjustable-rate mortgage
transaction with an introductory rate.
[[Page 80078]]
vii. Model H-4(J) illustrates the balloon payment disclosure
required by Sec. 1026.18(s)(5) for a mortgage transaction with a
balloon payment term.
viii. Model H-4(K) illustrates the no-guarantee-to-refinance
statement required by Sec. 1026.18(t) for a mortgage transaction.
8. Model H-5. This contains the demand feature clause.
9. Model H-6. This contains the assumption clause.
10. Model H-7. This contains the required deposit clause.
11. Models H-8 and H-9. These models contain the rescission
notices for a typical closed-end transaction and a refinancing,
respectively. The last paragraph of each model form contains a blank
for the date by which the consumer's notice of cancellation must be
sent or delivered. A parenthetical is included to address the
situation in which the consumer's right to rescind the transaction
exists beyond 3 business days following the date of the transaction,
for example, where the notice or material disclosures are delivered
late or where the date of the transaction in paragraph 1 of the
notice is an estimate. The language of the parenthetical is not
optional. See the commentary to Sec. 1026.2(a)(25) regarding the
specificity of the security interest disclosure for model form H-9.
The prior version of model form H-9 is substantially similar to the
current version and creditors may continue to use it, as
appropriate. Creditors are encouraged, however, to use the current
version when reordering or reprinting forms.
12. Sample forms. The sample forms (H-10 through H-15) serve a
different purpose than the model forms. The samples illustrate
various ways of adapting the model forms to the individual
transactions described in the commentary to Appendix H. The
deletions and rearrangements shown relate only to the specific
transactions described. As a result, the samples do not provide the
general protection from civil liability provided by the model forms
and clauses.
13. Sample H-10. This sample illustrates an automobile credit
sale. The cash price is $7,500 with a downpayment of $1,500. There
is an 8% add-on interest rate and a term of 3 years, with 36 equal
monthly payments. The credit life insurance premium and the filing
fees are financed by the creditor. There is a $25 credit report fee
paid by the consumer before consummation, which is a prepaid finance
charge.
14. Sample H-11. This sample illustrates an installment loan.
The amount of the loan is $5,000. There is a 12% simple interest
rate and a term of 2 years. The date of the transaction is expected
to be April 15, 1981, with the first payment due on June 1, 1981.
The first payment amount is labeled as an estimate since the
transaction date is uncertain. The odd days' interest ($26.67) is
collected with the first payment. The remaining 23 monthly payments
are equal.
15. Sample H-12. This sample illustrates a refinancing and
consolidation loan. The amount of the loan is $5,000. There is a 15%
simple interest rate and a term of 3 years. The date of the
transaction is April 1, 1981, with the first payment due on May 1,
1981. The first 35 monthly payments are equal, with an odd final
payment. The credit disability insurance premium is financed. In
calculating the annual percentage rate, the U.S. Rule has been used.
Since an itemization of the amount financed is included with the
disclosures, the statement regarding the consumer's option to
receive an itemization is deleted.
16. Samples H-13 through H-15. These samples illustrate various
mortgage transactions. They assume that the mortgages are subject to
the Real Estate Settlement Procedures Act (RESPA). As a result, no
option regarding the itemization of the amount financed has been
included in the samples, because providing the good faith estimates
of settlement costs required by RESPA satisfies Truth in Lending's
amount financed itemization requirement. (See Sec. 1026.18(c).)
17. Sample H-13. This sample illustrates a mortgage with a
demand feature. The loan amount is $44,900, payable in 360 monthly
installments at a simple interest rate of 14.75%. The 15 days of
interim interest ($294.34) is collected as a prepaid finance charge
at the time of consummation of the loan (April 15, 1981). In
calculating the disclosure amounts, the minor irregularities
provision in Sec. 1026.17(c)(4) has been used. The property
insurance premiums are not included in the payment schedule. This
disclosure statement could be used for notes with the 7-year call
option required by the Federal National Mortgage Association (FNMA)
in states where due-on-sale clauses are prohibited.
18. Sample H-14. This sample disclosure form illustrates the
disclosures under Sec. 1026.19(b) for a variable-rate transaction
secured by the consumer's principal dwelling with a term greater
than one year. The sample form shows a creditor how to adapt the
model clauses in Appendix H-4(C) to the creditor's own particular
variable-rate program. The sample disclosure form describes the
features of a specific variable-rate mortgage program and alerts the
consumer to the fact that information on the creditor's other
closed-end variable-rate programs is available upon request. It
includes information on how the interest rate is determined and how
it can change over time. Section 1026.19(b)(2)(viii) permits
creditors the option to provide either a historical example or an
initial and maximum interest rates and payments disclosure; both are
illustrated in the sample disclosure. The historical example
explains how the monthly payment can change based on a $10,000 loan
amount, payable in 360 monthly installments, based on historical
changes in the values for the weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity of one year. Index values
are measured for 15 years, as of the first week ending in July. This
reflects the requirement that the index history be based on values
for the same date or period each year in the example. The sample
disclosure also illustrates the alternative disclosure under Sec.
1026.19(b)(2)(viii)(B) that the initial and the maximum interest
rates and payments be shown for a $10,000 loan originated at an
initial interest rate of 12.41 percent (which was in effect July
1996) and to have 2 percentage point annual (and 5 percentage point
overall) interest rate limitations or caps. Thus, the maximum amount
that the interest rate could rise under this program is 5 percentage
points higher than the 12.41 percent initial rate to 17.41 percent,
and the monthly payment could rise from $106.03 to a maximum of
$145.34. The loan would not reach the maximum interest rate until
its fourth year because of the 2 percentage point annual rate
limitations, and the maximum payment disclosed reflects the
amortization of the loan during that period. The sample form also
illustrates how to provide consumers with a method for calculating
their actual monthly payment for a loan amount other than $10,000.
19. Sample H-15. This sample illustrates a graduated payment
mortgage with a 5-year graduation period and a 7\1/2\ percent yearly
increase in payments. The loan amount is $44,900, payable in 360
monthly installments at a simple interest rate of 14.75%. Two points
($898), as well as an initial mortgage guarantee insurance premium
of $225.00, are included in the prepaid finance charge. The mortgage
guarantee insurance premiums are calculated on the basis of \1/4\ of
1% of the outstanding principal balance under an annual reduction
plan. The abbreviated disclosure permitted under Sec. 1026.18(g)(2)
is used for the payment schedule for years 6 through 30. The
prepayment disclosure refers to both penalties and rebates because
information about penalties is required for the simple interest
portion of the obligation and information about rebates is required
for the mortgage insurance portion of the obligation.
20. Sample H-16. This sample illustrates the disclosures
required under Sec. 1026.32(c). The sample illustrates the amount
borrowed and the disclosures about optional insurance that are
required for mortgage refinancings under Sec. 1026.32(c)(5).
Creditors may, at their option, include these disclosures for all
loans subject to Sec. 1026.32. The sample also includes disclosures
required under Sec. 1026.32(c)(3) when the legal obligation
includes a balloon payment.
21. HRSA-500-1 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-500-1 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been
approved for use for loans made prior to the mandatory compliance
date of the disclosures required under Subpart F. The form was
approved for all Health Education Assistance Loans (HEAL) with a
variable interest rate that were considered interim student credit
extensions as defined in Regulation Z.
22. HRSA-500-2 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-500-2 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been
approved for use for loans made prior to the mandatory compliance
date of the disclosures required under Subpart F. The form was
approved for all HEAL loans with a fixed interest rate that were
considered interim student credit extensions as defined in
Regulation Z.
23. HRSA-502-1 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-502-1 9-82 issued by the U.S.
[[Page 80079]]
Department of Health and Human Services for certain student loans
has been approved for use for loans made prior to the mandatory
compliance date of the disclosures required under Subpart F. The
form was approved for all HEAL loans with a variable interest rate
in which the borrower has reached repayment status and is making
payments of both interest and principal.
24. HRSA-502-2 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-502-2 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been
approved for use for loans made prior to the mandatory compliance
date of the disclosures required under Subpart F. The form was
approved for all HEAL loans with a fixed interest rate in which the
borrower has reached repayment status and is making payments of both
interest and principal.
25. Models H-18, H-19, H-20. i. These model forms illustrate
disclosures required under Sec. 1026.47 on or with an application
or solicitation, at approval, and after acceptance of a private
education loan. Although use of the model forms is not required,
creditors using them properly will be deemed to be in compliance
with the regulation with regard to private education loan
disclosures. Creditors may make certain types of changes to private
education loan model forms H-18 (application and solicitation), H-19
(approval), and H-20 (final) and still be deemed to be in compliance
with the regulation, provided that the required disclosures are made
clearly and conspicuously. The model forms aggregate disclosures
into groups under specific headings. Changes may not include
rearranging the sequence of disclosures, for instance, by
rearranging which disclosures are provided under each heading or by
rearranging the sequence of the headings and grouping of
disclosures. Changes to the model forms may not be so extensive as
to affect the substance or clarity of the forms. Creditors making
revisions with that effect will lose their protection from civil
liability.
ii. The creditor may delete inapplicable disclosures, such as:
A. The Federal student financial assistance alternatives
disclosures.
B. The self-certification disclosure.
iii. Other permissible changes include, for example:
A. Adding the creditor's address, telephone number, or Web site.
B. Adding loan identification information, such as a loan
identification number.
C. Adding the date on which the form was printed or produced.
D. Placing the notice of the right to cancel in the top left or
top right of the disclosure to accommodate a window envelope.
E. Combining required terms where several numerical disclosures
are the same. For instance, if the itemization of the amount
financed is provided, the amount financed need not be separately
disclosed.
F. Combining the disclosure of loan term and payment deferral
options required in Sec. 1026.47(a)(3) with the disclosure of cost
estimates required in Sec. 1026.47(a)(4) in the same chart or table
(See comment 47(a)(3)-4.)
G. Using the first person, instead of the second person, in
referring to the borrower.
H. Using ``borrower'' and ``creditor'' instead of pronouns.
I. Incorporating certain state ``plain English'' requirements.
J. Deleting inapplicable disclosures by whiting out, blocking
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out,
leaving blanks, checking a box for applicable items, or circling
applicable items.
iv. Although creditors are not required to use a certain paper
size in disclosing the Sec. Sec. 1026.47(a), (b) and (c)
disclosures, samples H-21, H-22, and H-23 are designed to be printed
on two 8\1/2\ x 11 inch sheets of paper. A creditor may use a larger
sheet of paper, such as 8\1/2\ x 14 inch sheets of paper, or may use
multiple pages. If the disclosures are provided on two sides of a
single sheet of paper, the creditor must include a reference or
references, such as ``SEE BACK OF PAGE'' at the bottom of each page
indicating that the disclosures continue onto the back of the page.
If the disclosures are on two or more pages, a creditor may not
include any intervening information between portions of the
disclosure. In addition, the following formatting techniques were
used in presenting the information in the sample tables to ensure
that the information is readable:
A. A readable font style and font size (10-point Helvetica font
style for body text).
B. Sufficient spacing between lines of the text.
C. Standard spacing between words and characters. In other
words, the body text was not compressed to appear smaller than the
10-point type size.
D. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text.
E. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
v. While the Bureau is not requiring issuers to use the above
formatting techniques in presenting information in the disclosure,
the Bureau encourages issuers to consider these techniques when
deciding how to disclose information in the disclosure to ensure
that the information is presented in a readable format.
vi. Creditors are allowed to use color, shading and similar
graphic techniques in the disclosures, so long as the disclosures
remain substantially similar to the model and sample forms in
Appendix H.
26. Sample H-21. This sample illustrates a disclosure required
under Sec. 1026.47(a). The sample assumes a range of interest rates
between 7.375% and 17.375%. The sample assumes a variable interest
rate that will never exceed 25% over the life of the loan. The term
of the sample loan is 20 years for an amount up to $20,000 and 30
years for an amount more than $20,000. The repayment options and
sample costs have been combined into a single table, as permitted in
the commentary to Sec. 1026.47(a)(3). It demonstrates the loan
amount, interest rate, and total paid when a consumer makes loan
payments while in school, pays only interest while in school, and
defers all payments while in school.
27. Sample H-22. This sample illustrates a disclosure required
under Sec. 1026.47(b). The sample assumes the consumer financed
$10,000 at an 8.23% annual percentage rate. The sample assumes a
variable interest rate that will never exceed 25% over the life of
the loan. The payment schedule and terms assumes a 20-year loan term
and that the consumer elected to defer payments while enrolled in
school. This includes a sample disclosure of a total loan amount of
$10,600 and prepaid finance charges totaling $600, for a total
amount financed of $10,000.
28. Sample H-22. This sample illustrates a disclosure required
under Sec. 1026.47(c). The sample assumes the consumer financed
$10,000 at an 8.23% annual percentage rate. The sample assumes a
variable annual percentage rate in an instance where there is no
maximum interest rate. The sample demonstrates disclosure of an
assumed maximum rate, and the statement that the consumer's actual
maximum rate and payment amount could be higher. The payment
schedule and terms assumes a 20-year loan term, the assumed maximum
interest rate, and that the consumer elected to defer payments while
enrolled in school. This includes a sample disclosure of a total
loan amount of $10,600 and prepaid finance charges totaling $600,
for a total amount financed of $10,000.
Appendix J--Annual Percentage Rate Computations for Closed-End Credit
Transactions
1. Use of Appendix J. Appendix J sets forth the actuarial
equations and instructions for calculating the annual percentage
rate in closed-end credit transactions. While the formulas contained
in this appendix may be directly applied to calculate the annual
percentage rate for an individual transaction, they may also be
utilized to program calculators and computers to perform the
calculations.
2. Relation to Bureau tables. The Bureau's Annual Percentage
Rate Tables also provide creditors with a calculation tool that
applies the technical information in Appendix J. An annual
percentage rate computed in accordance with the instructions in the
tables is deemed to comply with the regulation. Volume I of the
tables may be used for credit transactions involving equal payment
amounts and periods, as well as for transactions involving any of
the following irregularities: odd first period, odd first payment
and odd last payment. Volume II of the tables may be used for
transactions that involve any type of irregularities. These tables
may be obtained from the Bureau, 1700 G Street, NW., Washington, DC
20006, upon request.
Appendix K--Total Annual Loan Cost Rate Computations for Reverse
Mortgage Transactions
1. General. The calculation of total annual loan cost rates
under Appendix K is based on the principles set forth and the
estimation or ``iteration'' procedure used to compute annual
percentage rates under Appendix J. Rather than restate this
iteration process in full, the regulation cross-references the
[[Page 80080]]
procedures found in Appendix J. In other aspects the appendix
reflects the special nature of reverse mortgage transactions.
Special definitions and instructions are included where appropriate.
(b) Instructions and equations for the total annual loan cost rate
(b)(5) Number of unit-periods between two given dates
1. Assumption as to when transaction begins. The computation of
the total annual loan cost rate is based on the assumption that the
reverse mortgage transaction begins on the first day of the month in
which consummation is estimated to occur. Therefore, fractional
unit-periods (used under Appendix J for calculating annual
percentage rates) are not used.
(b)(9) Assumption for discretionary cash advances
1. Amount of credit. Creditors should compute the total annual
loan cost rates for transactions involving discretionary cash
advances by assuming that 50 percent of the initial amount of the
credit available under the transaction is advanced at closing or, in
an open-end transaction, when the consumer becomes obligated under
the plan. (For the purposes of this assumption, the initial amount
of the credit is the principal loan amount less any costs to the
consumer under Sec. 1026.33(c)(1).)
(b)(10) Assumption for variable-rate reverse mortgage transactions
1. Initial discount or premium rate. Where a variable-rate
reverse mortgage transaction includes an initial discount or premium
rate, the creditor should apply the same rules for calculating the
total annual loan cost rate as are applied when calculating the
annual percentage rate for a loan with an initial discount or
premium rate (see the commentary to Sec. 1026.17(c)).
(d) Reverse mortgage model form and sample form
(d)(2) Sample form
1. General. The ``clear and conspicuous'' standard for reverse
mortgage disclosures does not require disclosures to be printed in
any particular type size. Disclosures may be made on more than one
page, and use both the front and the reverse sides, as long as the
pages constitute an integrated document and the table disclosing the
total annual loan cost rates is on a single page.
Appendix L--Assumed Loan Periods for Computations of Total Annual Loan
Cost Rates
1. General. The life expectancy figures used in Appendix L are
those found in the U.S. Decennial Life Tables for women, as rounded
to the nearest whole year and as published by the U.S. Department of
Health and Human Services. The figures contained in Appendix L must
be used by creditors for all consumers (men and women). Appendix L
will be revised periodically by the Bureau to incorporate revisions
to the figures made in the Decennial Tables.
Dated: November 29, 2011.
Alastair M. Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the
Treasury.
[FR Doc. 2011-31715 Filed 12-21-11; 8:45 am]
BILLING CODE 4810-AM-P