Proposed Commentary To Regulation Z

The Federal Reserve Board staff has proposed revisions to the Regulation Z Official Staff Commentary. The proposed changes deal with finance charge elements, advertisements, APR calculations for periodic statements, and the difference between open end and closed end credit.

Finance charge elements
The proposal includes two clarifications for the definition of finance charge. First, comment 4(b)(2)-1 would be revised to clarify that charges such as service charges that are imposed on accounts with a credit feature and on accounts without a credit feature are not finance charges. The proposal compares a fee for a returned check to a fee to activate an overdraft line of credit. If the charge exceeds the amount charged for a comparable non-credit event, the amount in excess is a finance charge. However, if it is the same as or less than the amount charged in the non-credit transaction, none of the fee would be a finance charge.

Second, the proposal provides additional guidance for settlement agent fees and fees incurred by settlement agents. The language would clarify that a fee for conducting or attending a closing is a finance charge. It may be excluded only if it is included in - and incidental to - fees for real estate closing that may be excluded under 4(c)(7).

Definition of open end credit
Open end and closed end credit follow two significantly different disclosure formats because of the nature of the credit programs. Regulation Z provides a detailed definition of open end credit and >
APR calculation for open end credit
The proposal would clarify that balance amounts subject to a free ride period or balance amounts not subject to a finance charge should not be included in the denominator for purposes of calculating the APR. Similarly, multi-featured plans, such as those with different rates for cash advances and charges, should disclose separate APRs.

In addition, plans that involve an increase in interest rate for a late payment or other form of non-performance by the borrower, should disclose the increased APR in addition to the program APR and the circumstances when the increased rate would be imposed.

Advertisements
The FRB is proposing to add examples to Commentary Paragraph 226.2(a)(2)-1 to better distinguish between advertisements for credit and communications to customers about existing accounts or applications. The principle behind the examples is that once the lender has correctly and properly quoted an APR for a credit program, the creditor can further discuss the program with the applicant or customer without having to repeatedly quote the APR. However, APRs must be present on all advertising and informational material that is given to or made available to customers.

The proposal would also clarify that rate sheets without APRs are not advertisements as long as they are not put into the hands of customers. They can be shared with other business entities as long as that business entity does not in turn provide it to the customer.

Downpayment in credit sale
The proposal would clarify that if the customer owes more than the value of goods, (such as a car worth $6,000 and a loan balance of $7,000) the amount of the loan balance that exceeds the value of the goods should not be reflected in the downpayment. The proposal would thus separate the sale transaction and credit agreement on the old vehicle from the sale and credit agreement on the new transaction.

ACTION STEPS

Comment on the proposal. If you like it, say so. Support counts. If you have problems or questions, explain them and include examples that happen in your bank. Examples really help.
Review your credit programs. Identify those that don't cleanly meet the open end program definition.
Compare them to the new commentary examples. Use your program as an example in your comment letter to the FRB.
Review your APR calculations. Also review open end contracts to see if your program imposes an increased APR for late payments or other problems.
Review your advertising practices. Check for correct disclosures of APRs and triggered terms in all ads.