Download open-end credit under -truth-in- lending

OPEN-END
CREDIT UNDER
LENDING
-TRUTH-IN-
Ralph C. Clontz, Jr., Esquire
I.
What Is "Open-End Credit" And What Creditors Would Be
Covered By "Special Open-End Credit Rules and Regulations?"
A. Regulation Z and the Federal Act' divide "consumer credit"
into two basic categories, depending primarily upon the manner in
which the "finance charge" is imposed and collected. Throughout
Regulation Z, one set of rules applies to "OPEN-END CREDIT
ACCOUNTS," and a different set of rules applies to "CREDIT
OTHER THAN OPEN-END," called by a number of people
"CLOSED-END CREDIT." In the former category, we find both
"consumer loans" and "credit sales."
B. Essentially, "open-end credit" refers to all types of "consumer
credit" (including "consumer loans" and "credit sales") extended a
customer on an account, pursuant to which
(i) the creditor allows the customer to make purchases and/or
obtain loans, from time to time, directly from the creditor or indirectly
by use of a credit card, check or other device, as each plan may
individually provide;
(ii) the customer has the privilege of paying the balance in full
or in installments; and
(iii) a finance charge may be computed by the creditor, from
time to time, on an outstanding (usually monthly) unpaid balance.
"Open-end credit" does not include negotiated advances under an
open-end real estate mortgage or a letter of credit.2 Finally, "lay-away
plans" of merchants, whereby vendors retain the merchandise until the
cash price has been paid in full, with the customer having no
contractual obligation to make payments, etc., do not constitute
"open-end credit" nor are such plans subject to the provisions of
Regulation Z.:1 In order for an extension of credit to be classified as
"open-end credit," all three characteristics aforementioned must be
present.'
I. Consumer Credit Protection Act (hereinafter cited as C.C.P.A.), 15 U.S.C. o 2uz()
(1969); 12 C.F.R. §§ 2 26.2(r), 226.7 (1969).
2. 12 C.F.R. § 226.2(r) (1969) and Int. Rev. Ruling 226.203, May 26, 1969.
3. 1nt. Rev. Ruling 226.201, May 5, 1969.
4. 1nt. Rev. Ruling 226.203, vlay 26, 1969.
OPEN-END
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CREDIT
C. Creditors to be included under the special "Open-End Credit
Rules" are merchants with "revolving charge accounts," banks and
others utilizing credit cards, financial institutions providing for
"consumer open lines of credit," with an advance-established limit and
the provision that finance charges will be imposed on periodic (usually
monthly) outstanding unpaid balances. A clear example of the latter
is the
FIRST CHECKLOAN PROGRAM
of the First Union National Bank
of North Carolina wherein, among other things, there is a provision
that a customer may activate an advance from his "maximum
authorized credit" by simply writing a check in excess of his checking
account balance with said bank.
D. Finally, it seems appropriate to note that "consumer credit" is
defined as credit offered or extended to a natural person, with the
transaction primarily for personal, family, household or agricultural
purposes and wherein either a finance charge is or may be imposed or
which, pursuant to an agreement, is or which may be payable in 'nore
than four installments! Comparing this definition with the definition
of "open-end credit",' we find that the mere fact that the subject of
the transaction is being paid for in more than four installments does
not constitute the transaction "open-end credit" unless there was
provision for a finance charge to be computed by the creditor, from
time to time, on an outstanding unpaid balance. This seems worthy of
note, where a merchant is deciding whether to comply with, for
example, the "Open-End Credit Specific Disclosure Requirements" or
the "Creditor other than Open-End-Specific Disclosures."
E. While the initial task of preparing forms is probably more
complicated in the "Open-End Credit" situations, disclosures under
Regulation Z are really less complicated than in the "Close-End
Credit" situations. If the basic forms are properly drafted by Counsel,
the possibility of liability under either the civil or criminal penalty
sections should be remote. Despite this, the major litigation thus far
has occurred in the "Open-End Credit" arena.
II.
Determination of Annual Percentage Rate Jbr Open-End Credit
A ccounts7
A.
Accuracy ofAnnual PercentageRate:
The "annual percentage rate" (A.P.R.) for an open-end credit
account is required to be computed, so as to permit disclosure with an
5. 12 C.F.R. § 226.2(k) (1969).
6. 12 C.F.R. § 226.2(r) (1969).
7. C.C.P.A., 15 U.S.C. § 1606 (1969); 12 C.F.R. §§ 226.5(a), (c), (d), and (e), 226.7(a)(4),
226. 10(c)(4) (1969).
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THE AMERICAN UNIVERSITY LAW REVIEW
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accuracy at least to the nearest quarter of one per eent.8 However, an
examination of the rules for disclosing the A.P.R. at various stages of
the transaction reveals that no real accuracy is required except where
the periodic (usually monthly) rate is involved. For example, if a
creditor imposes a periodic rate of 11/2% on the monthly unpaid
balance, he is required to disclose such periodic rate and also to
disclose an A.P.R. determined by simply multiplying the periodic rate
times twelve. With the different options as to payments, and with the
period of time within which the entire balance can be paid without any
"finance charge," it is obvious that this does not reveal an accurate
A.P.R., computed on the proverbial actuarial basis. However, because
of the requirement that each consumer credit plan disclose in this
manner, the customer is given a figure to use for "comparison
shopping," at least in theory.
B.
For DisclosuresBefore Opening Account:
For purposes of disclosure before opening an account, the A. P.R. is
determined, as follows;'
(1) Where one or more periodic rates may be used to compute the
finance charge, each such rate, and the range of balances to which it
is applicable, and the corresponding "annual percentage rate," is
determined by multiplying the periodic rate by the number of periods
in a year.
(2) This means essentially that you start with the monthly finance
charge (e.g., the percentage charged on the monthly unpaid balance),
which monthly finance charge must be disclosed to the customer in
advance and multiply this "rate per month" or whatever time period
is used by twelve or the other number of time periods used by the
creditor duing the year.
EXAMPLE 1: One Periodic Rate:
Assume that a creditor in a credit card or revolving credit plan charges
11/2% on the monthly unpaid balance, with statements being sent out
monthly. With this 11 % monthly finance charge (periodic rate), the
A.P.R. is: 1 % x 12 = 18% A.P.R.
EXAMPLE 2: Two or More Periodic Rates:
Assume that a creditor in a credit card or revolving credit plan applies a
periodic (monthly) rate of 11 % to unpaid balances totaling $500.00 or
8. 12 C.F.R. § 226.5(a) (1969).
9. 12 C.F.R. § 226.7(a)(4) (1969).
OPEN-END CREDIT
1970]
less; with a 1%rate as to the amount of the balance over $500.00. Assume
that a customer, at the billing date, owes a total of $750.00, and that the
"finance charge" is $10.00.
The creditor may state the periodic rates separately (1 2% on $500.00,
with A.P.R. of 18%, and 1% on $250.00, with the A.P.R. stated as 12%)
or, alternatively, the creditor may compute the A.P.R. by dividing the
"finance charge" by the sum of the balances ($750.00), thus obtaining a
quotient or percentage, and then multiplying by the number of billingsper
year (12):
(10 . 750 = 1.333% x 12 = 16%)
C.
For Advertising:
The A. P. R. for purposes of advertising,is determined as follows:10
Where one or more periodic rates may be used to compute the
finance charge [for example, the monthly finance charge might be 1 %
for balances up to $500.00, with 1% for balances above $500.00] each
such rate, the range of balances to which it is applicable, and the
corresponding percentage rate must be determined by multiplying the
(monthly) periodic rate by the number of periods in a year. Thus, the
determination here is essentially the same as the determination for
disclosure purposes prior to opening an account. (See prior examples
for methods of computation and disclosure.)
D.
On PeriodicStatements
The "annual percentage charge" is determined, for purposes of
disclosure on periodic statements, in the following manner:"
1. Where the finance charge is exclusively the product of the
application of one or more periodic rates:
(a) By multiplying each periodic rate by the number of periods
in a year; [e.g., 1 '/2% per month times 12 equals 18%] or
(b) At creditor's option, if one finance charge is the result of the
application of two or more periodic rates, 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. [See Example
2, under sub-paragraph B (2) for method of computation and
disclosure here.]
2. Where creditor imposes all periodic finance charges in amounts
based upon specified ranges or brackets of balance, a periodic rate
10. 12C.F.R. § 226.10(c)(4) (1969).
II. 12 C.F.R. § 226.5(a) (1969).
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UNIVERSITY LAW REVIEW
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must be determined by dividing the amount of the finance charge for
the period in question by the amount of the median balance within the
range or bracket of balances to which it is applicable.
Then, the annual percentage rate must be determined by multiplying
that periodic rate (expressed as a percentage) by the number of periods
in a year. Such ranges or brackets of balances are subjected to
limitations found in Sec. 226.5(c) (2) (iv).12 The cited subsection (iv)
provides that if A.P.R. Tables are applicable to ranges or brackets of
balances, the tables or charts must disclose the amount of the finance
charge, and the annual percentage rate on the median balance within
each range or bracket of balances, where a creditor imposes the same
finance charge for all balances within such bracket.
Further, if the A.P.R. determined in the median balance understates
the A.P.R. determined on the lowest balance in that particular range
or bracket by more than 8% of the rate on the lowest balance; then
the A.P.R. for that range or bracket must be computed upon any
balance lower than the median balance within that range, to the extent
that any understatement will not be more than 8% of the rate on the
3
lowest balance within said range or bracket.
3. Where the finance charge is or includes a minimum, fixed or
other charge not due to applying a periodic rate, and
(a) this finance charge exceeds 50 cents for a monthly or longer
billing cycle, or the pro rata part of 50 cents for billing cycles shorter
than monthly, the A.P.R. is determined by dividing the total finance
charge for the billing cycle (usually monthly) by the amount of the
balance to which applicable, and then multiplying the quotient
(expressed as a percentage) by the number of billing cycles in a year;
or
EXAMPLE: Open-end account balance is $100.06 Creditor imposes
a periodic (monthly) rate of 1 / % plus a transaction fee of $1.75. The
current month, customer owes $3.50 in "transaction fees."
Cumputation of "Finance Charge:"
(a) I/2%of$100.00
$1.50
(b) Transaction fees
$3.50
(c)
Total Finance Charge
$5.00
A.P.R. is 5 . 100 = 5%x 12 = 60% A.P.R.
12. 12 C.F.R. § 226.5(c)(2)(iv) (1969).
13. Mathematical geniuses will be interpreting the foregoing, in preparing charts and tables.
Lenders and their attorneys will simply marvel at their ability to convert the foregoing into a
usable chart or table for disclosure of A.P.R.
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OPEN-END CREDIT
(b) where the finance charge 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, the A.P.R. is determined by
multiplying each applicable periodic rate by the number of periods in
a year, irrespective of the imposition of such minimum, fixed or other
charge.
E.
Errorsin Chartsor Tables:
Attention is invited to Section 226.6(c)(3), Regulation Z,11 wherein
we note that an error in disclosure of either the amount of a "finance
charge" or an A.P.R. caused by an error in a chart or table acquired
or produced in good faith by the creditor shall not constitute a
violation of the Law and Regulation, provided the creditor stops using
the material on discovery of the error and also promptly notifies either
the Board or any Federal Reserve Bank, in writing, of the error.
In this notification, the creditor must identify the inaccurate chart
or table, furnishing the name and address of the person responsible for
its production, its identification number, and other information deemed
necessary to identify the offending chart or table.
III. Some Regulation Z Provisions Govern All Types of Consumer
Credit:
A. In authoring the TRUTH-IN-LENDING MANUAL 5 the
writer set aside PART ONE to include "Principles, Rules and
Regulations applicable to most classes of covered Credit Transaction."
Even though other writers participating in the Symposium will
undoubtedly cover this, it seems worth noting at this point, before
going into the peculiar disclosure requirements applicable to Open-End
Credit. As simply one example, the "general disclosure requirements"
are applicable to all classes of credit, both Open and Closed-End. The
mandatory Federal Terminology applies equally, and all such
requirements pertaining to Disclosure Forms are applicable here.' 6
Some Open-End Creditors have also overlooked the requirement that
creditors preserve proof of compliance with Regulation Z disclosure
requirements for a period of not less than two years after the date the
disclosures are required to be made.' 7 To cover all matters applicable
14.
15.
16.
17.
12 C.F.R. § 226.7(c)(3) (1969).
R. Clontz, Truth-In-Lending Manual, Hanover Lamont Corp., Boston, Mass.
Id. at 39-43.
12C.F.R. § 226.6(I) (1969).
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THE AMERICAN UNIVERSITY LA W REVIEW
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to both types of consumer credit would go beyond the scope of this
article.
I V. Specific Disclosures Required for Open-End Credit
Accounts -Before Account is Opened and on Open-End Credit
Accounts Existing as of July 1, 196918
A. The specific disclosures set out herein must be made by the
creditor BEFORE THE FIRST TRANSACTION IS MADE ON
ANY OPEN-END CREDIT PLAN. Further, as to any open-end
consumer credit plan in existence on the effective date of the Act (July
1, 1969), the items specified herein, to the extent applicable, must be
disclosed in a NOTICE mailed or delivered to the open-end consumer
credit customer not later than July 31, 1969, if a balance remains
unpaid in such account as of July 1, 1969, and is deemed collectable
and not subject to delinquency collection procedures.
B. If a customer subsequently uses an account in existence on July
1, 1969, where no balance remained unpaid on that date, and thus the
aformentioned NOTICE was not furnished that customer; then such
NOTICE must be mailed or delivered to said customer either before
or with the next billing on said account. It follows that creditors must
decide whether it would be more economical to mail out the notices to
all customers- listed on the accounts, including those without any
balance remaining unpaid, or to cope with the problem of catching the
utilization of the account and furnishing these disclosures along with
the billing following the utilization thereof.
C. Before the first transaction is made on any open-end credit plan
(e.g., by mailing, in the same envelope containing a newly issued bank
credit card), and for the aforementioned accounts existing as of July
1, 1969, the following specific disclosures must be made to the
customers in question: 9
I. The conditions under which a finance charge may be imposed,
including the period (if any) during which the credit extended may be
paid for or repaid without incurring a finance charge.
2. The method used by the creditor to determine the balance
upon which a finance charge may be imposed.
3. The method used by the creditor in determining the amount
of the finance charge, including the method of determining any
minimum, fixed, check service; transaction, activity or similar charge,
which may be imposed as a finance charge.
18. C.C.P.A., 15 U.S.C. §§ 1637(a),(c) (1969); 12 C.F.R. § 226.7(a), (f) (1969).
19. 12 C.F.R. § 226.7(b) (1969).
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OPEN-END CREDIT
4. If two or more periodic rates are used, in the open-end
consumer credit plan, to determine the total finance charge, the
creditor must disclose each rate, the range of balances to which each
is applicable, and the corresponding A.P.R. determined by multiplying
the periodic rate by the number of periods in the year.!'
5. If the creditor elects to do so, he may additionally disclose his
finance chage and annual percentage rate by using the "Comparative
Index of Credit Costs," in accordance with Section 226.11 Regulation
Z. 2' This is in addition to specific disclosures covered in a separate
topic herein.
6. The conditions under which any other charges may be
imposed, and the method for determining any such charges.
7. The conditions under which the creditor may take a security
interest in any property to secure payment of any credit extended under
the open-end credit plan, on the account, and also a description or
identification of the type of the interest(s) which may be so retained
22
or acquired.
8. The minimum periodic payment required under the open-end
consumer credit plan.
D. Notice that, generally, wherever a creditor either provides,
offers to provide or arranges credit, etc., 'he is covered by the
"disclosure requirements" of the Federal Act and Regulation Z. Note
particularly, however, Section 226.2(f) of Regulation Z, 23 the last
sentence of which provides that arrangihg for the extension of credit
does not include "honoring a credit card or similar device where no
finance charge is imposed at the tim' of that transaction" (emphasis
supplied.) Were it not for this provision, merchant-members of bank
credit card plans could be held responsible for making disclosures at
the time of each "transaction." Further, each merchant could be
required to make the disclosures in question, simply by belonging to a
particular bank credit card plan.24
20. For most open-end credit plans, this means that a disclosure must be made of both a
monthly and annual rate. For example, a credit card issuer or department store charging I V2%
per month would have to tell its customers not only that the monthly rate is 1 %, but also that
the nominal annual rate is 18%.If one monthly percerntage charge were used up to a specified
amount, with a different monthly percentage charge on a higher or lower amount, this would have
to be disclosed fully under this provision. See, Example 2 under sub-paragraph B of paragraph
II for the method of computation and disclosure.
21. 12C.F.R. § 226.11 (1969).
22. Some bank credit cards utilize the "sale contract," signed by the customer in the
department store-merchant member's establishment, which is a miniature security agreement. For
example, the First Bank Card Plan of First Union National Bank of North Carolina.
23. 12 C.F.R. § 226.2(0 (1969).
24. 12 C.F.R. § 226.6(d) (1969).
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E. It should be noted that Section 226.7(d)2y 5 provides that any
creditor, other than the creditor of the open-end credit account, who
imposes a finance charge at the time of honoring a customer's credit
card, any other device or form of identification for a purchase of
property or services, or for a cash advance to be debited to the
customer's open-end credit account is required to make the specific
disclosures required for "Credit Other Than Open-End", at the time
of the transaction, with the A.P.R. to be disclosed determined by
dividing the amount of the finance charge by the amount financed, and
then multiplying the quotient (expressed as a percentage) by 12. Where
disclosure is made under that subparagraph, the creditor of the openend credit account is not required to make any further disclosure with
respect to the finance charge on that particular transaction. Under
most credit card and similar arrangements, no finance charge is
imposed at the time the credit card is used. Instead, the customer has
the opportunity of paying the entire balance, within a specified number
of days thereafter, without incurring liability for any finance charge.
F. Finally., Section 226.7(e) 6 provides that if any change is made
in the terms of an open-end credit account plan previously disclosed to
the customer, the creditor must mail or deliver to each customer a
written disclosure of the proposed change not less than 30 days prior
to the effective date of such change or 30 days prior to the beginning
of the billing cycle within which such change will be effective, whichever
is the earlier date. [Even if the open-end plan contract allows one to
change the terms, without notice or upon shorter notice than that
provided herein, the statutory provision would prevail.]
G. To demonstrate a proper "Initial Disclosure Statement," there
is furnished at the end of this article a form utilized by First Union
National Bank of North Carolina.
V.
Specific Disclosures Required in Open-End Credit
Accounts- With Each Mandatory PeriodicStatement2 7
A. Under "other than open-end credit," there is no requirement
that a periodic statement be sent to customers. However, as is covered
in the appropriate topics involved, there are certain disclosures that
must be made, if the creditor elects voluntarily to send out a periodic
28
statement.
25.
26.
27.
28.
12 C.F.R.
12 C.F.R.
C.C.P.A.,
12 C.F.R.
§
§
15
§
226.7(d) (1969).
226.7(e) (1969).
U.S.C. § 1637(b) (1969); 12 C.F.R. 226.7(b) and (c) (1969).
226.8(N) (1969).
1970]
OPEN-END CREDIT
B. With "open-end credit plans," periodic statements are required
by the Act and Regulation Z. Except in the case of an account deemed
uncollectable or with respect to which delinquency collection
procedures have been instituted, the creditor of any open-end credit
account must mail or deliver to the customer, for each billing cycle at
the end of which there is an outstanding balance owed in excess of
$1.00 in that account, or with respect to which a finance charge is
imposed, a statement(s) which the customer may retain detailing the
disclosures specified in Section 226.7(b) of Regulation Z.29
C.
Location of Disclosures:
The specific disclosures set forth hereinafter must be made
(i) on the face of the periodic statement,
(ii) on its reverse side, or
(iii) on the periodic statement, supplemented by separate
statement forms, provided they are enclosed together, and delivered to
customer simultaneously, and further provided that:
1. The Previous Balance, the Amount and Date of each
Extension of Credit, or Date Such Extension is Debited to Account
During Billing Cycle and unless previously furnished, a Brief
Identification of Goods or Services Purchased or Other Extension of
Credit; and the Amounts or Respective Totals of "Payments" and
"Credits", with brief identification of each of such items, unless
previously furnished; the Finance Charge, including any fixed,
minimum charges, etc.; the "Annual Percentage Rate(s)"; the Closing
Date of Billing Cycle and "New Balance" must appear on the face of
the periodic statement. If amounts and dates of charges and credits are
not itemized or disclosed on the face or reverse side of the periodic
statement, they must be disclosed on a separate statement or slips,
accompanying the periodic statement with an identification of each
charge and credit, showing the date and amount thereof. Further, if the
Finance Charge and other fixed, minimum charges are not itemized on
the face or reverse side of the periodic statement, they must be disclosed
on a separate statement, accompanying the periodic statement.
2. If the "Periodic Rate(s)", the "Annual Percentage Rate(s)"
and the amounts of "Finance Charges" and the balance upon which
finance charges were computed, are not disclosed together on the face
or reverse side of the periodic statement, they must appear together on
29. 12 C.F.R. § 226.7(b) (1969).
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the face of a single supplemental statement, accompanying the periodic
statement.
3. The fact of the periodic statement must contain one of the
following notices, as applicable:
(i) "NOTICE: See reverse side for important information"; or
(ii) "NOTICE: See accompanying statement(s) for important
information"; or
(iii) "NOTICE: See reverse side and accompanying statement(s)
for important information."
4. The disclosures must not be separated so as to confuse or
mislead the customer or detract attention from the information
required to be disclosed at the time of periodic billing.
D. At the time disclosures are made with or on the periodic
statement, the following items must be disclosed, to the extent
applicable:
I. The outstanding balance in the account at the beginning of the
statement period, using the term "Previous Balance."
2. The amount, type, and date of each extension of credit during
the period, (furnishing either date of extension of credit or date of
debiting to account), and a brief description of goods or services
purchased or other credit extended, unless such identification was
previously furnished. [This identification may be made on an
accompanying slip or by a symbol relating to an identification list
printed upon the periodic statement.]
3. The amounts credited to the account, during the billing cycle,
for payments, using the term "Payments", and for other credits
including returns, rebates of finance charges, and adjustments using the
term "Credits", and unless previously furnished, a brief identification
of each of the items included in such other credits. [Again,
identification of "Credits" may be made on an accompanying slip or
by symbol relating to identification list printed on the statement.]
4. The amount of any finance charge, using the term "Finance
Charge", debited to the account during the billing cycle, itemized and
identified to show amounts, if any, due to the application of periodic
rates, and the a,mount of any other charge included in "Finance
Charge", such as minimum, fixed, check service, transaction, activity,
or similar charges, using appropriate descriptive terminology.
5. Each periodic rate, using the term "Periodic Rate(s)", that
may be used to compute the "Finance Charge" (whether or not applied
during the billing cycle) and the range of balances to which it is
applicable.
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OPEN-END CREDIT
6. The annual percentage rate(s) determined under Section
226.5(a), Regulation Z3 using the term "Annual Percentage Rate(s)",
and', where more than one rate is involved the amount of the balance
to which each rate is applicable.
Where creditor imposes Finance Charges with respect to specific
transactions during billing cycle, such charges shall be combined with
all other Finance Charges imposed during billing cycle, and the annual
percentage rate to be disclosed shall be determined by:
(i) dividing the sum of all of the finance charges imposed during
the billing cycle by the sum of the balances to which the periodic rates
apply (or by the average of daily balances, if a daily periodic rate is
used), plus the sum of the amounts financed to which the specific
transaction charges apply, and
(ii) multiplying the quotient (expressed as a percentage), by the
number of billing cycles in a year. [For an example of the method of
computation and disclosure see the example following subparagraph
D(3)(a) of Paragraph II.]
7. If creditor wishes, the "Comparative Index of Credit Cost"
may additionally be disclosed, in accordance with Section 226.11,
Regulation Z.31 [This method of disclosure is described herein by
separate Topic.]
8. The balance on which the finance charge was computed and
a statement of how that balance was determined.
If the balance was determined without first deducting all credits
during the billing cycle, that fact and the amount of such credits must
also be disclosed.
9. The closing date of billing cycle and the outstanding balance
in the account on that date, using the term "New Balance,"
accompanied by the statement of the date by which, or the period (if
any) within which, payment must be made to avoid additional finance
charges.
E. It seems appropriate to note here also that where any changes
are made in terms previously disclosed, the creditor must notify the
customer either 30 days prior to the effective date of the change or 30
days prior to the beginning of the cycle in which the change will be
effective, whichever date is earlier.32 [A suitable "periodic billing
statement" is appended to this manuscript.]
30. 12 C.F.R. § 226.5(a) (1969).
31. 12C.F.R. § 226.11 (1969).
32. 12 C.F.R. § 226.7(e) (1969).
248
VI.
A.
THE AMERICAN UNIVERSITY LAW REVIEW
[Vol. 19
Disclosure by Use of Comparative Index of Credit Cost For
Open-End Credit Account Pla 33
GeneralRules:
1. A creditor, in an open-end credit plan, is given the option of
disclosing the "Comparative Index of Credit Cost" in addition to the
actual computations required to reveal the credit cost in each account,
in the manner hereinafter explained. As a practical matter, there is so
little space on Open-End Credit Billing Statements, that very little
advantage is taken of this option.
2. If a creditor elects to disclose the Comparative Index of Credit
Cost on open-end credit accounts, he must compute this in accordance
with the instructions herein stated. Further, in the event that he adopts
any new open-end credit account terms, he must recompute the
Comparative Index, in the manner set forth hereinafter in order that
his "hypothetical situation" might remain current as to terms and
conditions of the plan. Further, he must disclose his election to use the
Comparative Index of Credit Cost to all of the open-end account
customers; and finally, he is prohibited from utilizing such method of
disclosure to mislead or confuse the customer or to contradict, obscure
or detract attention from the required disclosures.
B.
Guidancein Computationof Comparative Index of Credit Cost:
[Persons other than Certified Public Accountants may skip this
section.]
The Comparative Index for each open-end credit plan must be
computed by applying the terms of such plan to the following
hypothetical factors:
1. A single transaction, in the amount of $100.00 debited on the
first day of a billing cycle to an open-end credit account having no
previous balance.
2. The creditor next imposes all finance charges provided for in
the plan, including periodic, fixed, minimum and similar charges in
amounts and on dates consistent with the policy of imposing such
charges upon such accounts.
3. Assume that the exact amount of the required minimum
periodic payment is paid on the last day of each subsequent and
successive billing cycle, until the amount of the individual transaction,
together with applicable finance charges have been paid in full.
33. C.C.P.A., 15 U.S.C. § 1637(a)(5) (1969); 12 C.F.R. § 226.11 (1969).
19701
OPEN-END CREDIT
4. After the foregoing, the Comparative Index of Credit Cost
must be expressed and disclosed as a percentage, accurate to the nearest
quarter of 1%, determined by dividing the total finance charges
imposed by the sum of the daily balances, and multiplying the resulting
quotient (expressed as a percentage) by 365.
C.
Form of DisclosureSpecified
A creditor electing to disclose the Comparative Index aforementiond,
shall:
1. Couch the disclosure in the form of the following statement:
"Our Comparative Index of Credit Cost under the terms of our open-end
credit account plan is ____
_%
per year, computed on the basis of
a single transaction of $100.00 debited on the first day of a billing cycle
to an account having no previous balance and paid in required minimum
consecutive installments on the last day of each succeeding billing cycle
until the transaction and all finance charges are paid in full. The actual
percentage cost of credit to your account may be higher or lower,
depending on the dates and amounts of charges and payments."
2. Disclose any newly computed Comparative Index of Credit
Cost in the form of the aforementioned quoted statement, except that
such statement shall be preceded by the words, "'effective as of
-(DATE),"__
and the words "will be" should be substituted in
the quoted statement above for the word "is" in the second line.
VII.
RestrictionsImposed Upon Advertising of Open-End Credita4
A. Scope of Advertising Material Covered and General Rules or
Prohibitions
1. The first thing of importance is to note that restrictions are
not simply imposed upon what we generally term, "advertising." In
Section 226.2(b), Regulation Z,35 the term, "Advertisement" is defined
as "Any commercial message in any newspaper, magazine, leaflet,
flyer, or catalog, on radio, television, or public address system, in
direct mail literature or other printed material, on any interior or
exterior sign or display, in any window display, in any point-oftransaction literature or price tag which is delivered or made available
to a customer or prospective customer in any manner whatsoever."
2. From this, you will find shades being pulled down and paint
34. C.C.P.A., 15 U.S.C. §§ 1661-1665 (1969); 12 C.F.R. § 226.10 (1969).
35. 12 C.F.R. § 226.2(b) (1969).
THE AMERICAN
UNIVERSITY LAW REVIEW
[Vol. 19
brushes being wielded, by creditors using any of the media mentioned
above. In short, the restrictions cover any type of advertising
literature-not simply advertisements by the more usual advertising
media.
3. No advertisement to aid, promote, or assist directly or
indirectly any extension of credit may state (i) that a specific amount
of credit or installment amount can be arranged unless the creditor
usually and customarily arranges or- will arrange credit amounts or
installments for that period and in that amount; or (ii) that no down
payment or that a specified down payment will be accepted, in
connection with any extension of credit; unless the creditor usually and
customarily accepts or will accept down payments in that amount.
4. Treatment of catalogs and multi-page advertisements:
A catalog or other multi-page advertisement is "a single
advertisement" if it sets forth or gives information in sufficient detail
to permit determination of the disclosures required as to credit
advertising in a table or schedule of credit terms; provided:
(i) the table or schedule and disclosures made therein are set
forth clearly and conspicuously; and
(ii) any statement of credit terms appearing in any place other
than in the table or schedule of credit terms, clearly and conspicuously
refers to the page containing such table, unless that statement discloses
all of the credit terms required to be stated under Section 226.10,
Regulation Z.3 1 Further, for purposes of catalog and multi-page
advertisement, it is provided that "cash price" is not a credit term.
B. DisclosuresRequiredin Advertising of Open-End Credit:
No advertisement to aid, promote, or assist directly or indirectly the
extension of open-end credit may set forth any of the terms described
in Section 226.7(a). of Regulation Z1 (specific disclosures that must
be made in open-end credit accounts, before opening a new account);
the Comparative Index or Credit Cost; or that no down payment, a
specified down payment, or a specified periodic payment is required;
or any of the following items, unless it also clearly and conspicuously
sets forth ALL THE FOLLOWING ITEMS in terminology specified
in Section 226.7(b), Regulation Z31 (terminology required to be used
on periodic billing statements):
36. 12 C.F.R. § 226.10 (1969).
37. 12 C.F.R. § 226.7(a) (1969).
38. 12 C.F.R. § 226.7(b) (1969).
1970]
OPEN-END CREDIT
(i) An explanation of the time period, if any, within which credit
extended may be paid without incurring finance charges; and
(ii) The method of determining the balance upon which finance
charges may be imposed; and
(iii) The method of determining the amount of "finance charge",
including determination of any minimum, fixed, check service,
transaction, activity, or similar charge, which may be imposed as a
finance charge; and
(iv) Where one or more periodic rates may be used to compute
"finance charge", each such rate, the range of balances to which it is
applicable, and the corresponding A.P.R. determined by multiplying
the periodic rate by the number of periods in the year; and
(i') The conditions under which any other charges may be
imposed, and the method by which they shall bbe determined; and
(vi) The minimum periodic payment required.
C.
Criticism of Restrictionson Advertising of Credit:
No objective evaluator can be critical of the requirements of honesty
found in Section 226.10(a), Regulation Z.39
While one might well question the propriety of the regulation of
"local advertising" by an Act of Congress, no thinking person could
argue that a creditor should be allowed to advertise specific credit terms
which he does not customarily accept or offer.
However, the writer strongly questions the reasoning of Congress as
to the requirements established in subsection (c)40 to the effect that if
one true credit term is stated in a catalog or other "advertisement"
then all of the six "magic terms" must also be stated. Such is simply
not the purpose of advertisement. An advertisement is not intended to
be a legal offer, the acceptance of which shall constitute a binding
agreement between two parties.
Instead, a creditor should be permitted to advertise only his "best
points" in his catalog or newspaper advertising. For example, if he
allowed the entire balance in a credit card plan to be paid within 30
days without the imposition of a finance charge, he would advertise this
fact, where competitors allowed only 25 days.
Additionally, it might be noted that if one used extremely vague and
general terms, there would be no requirement of truthfulness in the
advertising. As an example, one could state "easy credit", "bank rates
39. 12C.F.R. § 226.10(a)(1969).
40. 12C.F.R. § 226.10(c)(1969).
THE AMERICAN UNIVERSITY LA W REVIEW
[Vol. 19
available", "very small monthly payments" or similar generalities and
not be required to take an extra page of the newspaper to include the
Federal disclosures aforementioned.
The appended "INITIAL DISCLOSURE STATEMENT"
demonstrates the items that would have to be disclosed to a credit card
customer, if any single credit term is mentioned otherwise. Thus,
Section 226.10(c)4' essentially requires that an "INITIAL
DISCLOSURE STATEMENT" be embodied in the literature.
Assuming that the customer is "sold" by the advertising, he then
would fill out an application for "open-end credit"; e.g., for the
issuance of a bank credit card. Before the first ransaction, the creditor
would be required again to furnish the aforementioned information.A2
As pointed out previously, the easiest way to furnish the customer
an "INITIAL DISCLOSURE STATEMENT" is to furnish it with
the credit card being issued him. This, incidentally, makes it easier to
prove compliance and to maintain a record of compliance for the
requisite two-year period.
In essence, the writer feels that "the cure is worse than the disease."
VIII.
Conclusion:
The foregoing has been adapted, with permission of the publishers,
from similar material presented in the writer's TRUTH-INLENDING MANUAL.13 Creditors should have very little difficulty
complying with the "Open-End Credit mandates" of Regulation Z,
once their Counsel has.composed proper Forms and procedures. It is
hoped that the foregoing presentation will assist in the task.
41. Id.
42. 12 C.F.R. § 226.7(a) (1969).
43. See note 15 supra.
1970]
OPEN-END CREDIT
APPENDIX A
PERIODIC BILLING STATEMENT
FIRST BANK CARD
First
Bank
Card
PLEASE DIRECT ALL REMITTANCES
AND CORRESPONDENCE TO:
FIRST BANK CARD SERVICENTER
P. 0. Box 3426
Chorlotte, N. C. 28203
When
Your
Your Monthly
I
Bal....
Is IPyment
$ 5to$100
$101 to 200 I
$201 to $3001
$301 to $40D1
$ 5
$10
$15
$20
$401
$501
$001
$701
$25
$30
$35
$40
to $500
to $000
to $700
to $300
Over $300
AMOUNT ENCLOSED $
PLEASE ENCLOSE TOP OF STATEMENT WITH REMITTANCE
Billing
Date
(1)
Previous
Balance
Payments and
Credits
Subtotal
20 f Ba nce
Finance
Chre
Charg
Purchases
New
Balance
(2)'
Minimum Payment
Now
(3)Out
F I NANCE CHARGEis computed by a "Periodic Rate" of
1.50%per month, which is an ANNUAL PERCENTAGE
RAt__.. of 1 8%appliad to the vimus balance before deducting cur.
Rint an
payments
and/or credits appiling on Tn statement for merchan
dill
/or saffl~c
There isan Inittal FINANCE CHARGEofl.25% oncashd,unces charged to your account which is an ANNUAL PERCENTAGE RATof15%.Asubseuent FINAN
ARGis
imposed on cs advances without deductin payments ass/or sAjustmits appearing on this sthtement.by applying a (monthly) "5Peiodi
Rte"*to the "*Previus Sianc, of 1 . 25%per month. which Is an
- NUAL PERCENTAGE RATEof 15%.
deiinqunncy charee of S%is made on minimam periodic (monthly) pay.
mente which arenot paid withilS daysof the biling dote of the second
gend) statement on which said minimum periodic (monthly) payment has
. (minimum charge $.50- maximum charge$5.00).
n
To avoid additional FI NANCE CHARGE, pay First Bank Card
"new balance" before billing datenext month.
(I)Transactions received after billing date wil
be shown on your next statement.
(2)You may pay the amount Indicated In the
balance
coun.l colamn if you prefer a 25 day at(3)Should you wish to take advantage of the
flexibe payment schedule, pay the minimum payment now due.
'NOTICE: See accompanying starement(s) for important information.
254
THE AMERICAN
[Vol. 19
UNIVERSITY LAW REVIEW
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