[Federal Register: March 25, 1998 (Volume 63, Number 57)]
[           Proposed            Rules]               
[Page 14548-14552]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25mr98-41]

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FEDERAL RESERVE SYSTEM

           12                       CFR                       Part            226

[Regulation Z; Docket No. R-1005]

 
Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION:            Proposed            rule.

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SUMMARY: The Board is publishing for comment a            proposed            rule amending 
Regulation Z, which implements the Truth in Lending Act. The proposal 
would permit creditors to use electronic communication (for example, 
communication via personal computer and modem) to provide disclosures 
required by the act and regulation, if the consumer agrees to such 
delivery.

DATES: Comments must be received by May 15, 1998.

ADDRESSES: Comments should refer to Docket No. R-1005, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in            12                       CFR            261.           12            of the Board's 
Rules Regarding Availability of Information.

FOR FURTHER INFORMATION CONTACT: Michael Hentrel, Obrea Poindexter, or 
Pamela Morris Blumenthal, Staff Attorneys, Division of Consumer and 
Community Affairs, at (202) 452-3667 or (202) 452-2412. For the hearing 
impaired only, Telecommunications Device for the Deaf (TDD), contact 
Diane Jenkins, at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The purpose of the Truth in Lending Act (TILA), 15 U.S.C. 1601 et 
seq., is to promote the informed use of consumer credit by requiring 
disclosures about its terms and cost. The act requires creditors to 
disclose the cost of credit as a dollar amount (the finance charge) and 
as an annual percentage rate (the APR). Uniformity in creditors' 
disclosures is intended to assist consumers in comparison shopping. The 
TILA requires additional disclosures for loans secured by consumers' 
homes and permits consumers to rescind certain transactions that 
involve their principal dwellings. The act is implemented by the 
Board's Regulation Z (           12                       CFR                       Part            226).
    As            part            of the Regulatory Planning and Review Program and its 
review of regulations under section 303 of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (           12            U.S.C. 4803), 
the Board determined that the use of electronic communication for 
delivery of information to consumers that is required by federal 
consumer financial services and fair lending laws could effectively 
reduce regulatory compliance burden without adversely affecting 
consumer protections. Thus, the Board has been considering the issue 
and closely following the development of electronic communication. For 
example in May 1996, the Board            proposed            to amend Regulation E 
(Electronic Fund Transfers) to permit disclosures to be provided 
electronically. In March 1997, the Board issued an amendment to the 
staff commentary to Regulation CC (Availability of Funds and Collection 
of Checks) that allowed financial institutions to send notices 
electronically. (62 FR 13801, March 18, 1997.)
    Having considered the comments received on the Regulation E 
proposal and other rulemakings, the Board now proposes to amend 
Regulation Z to allow creditors to provide Regulation Z disclosures 
electronically; such disclosures would remain subject to any applicable 
timing, format, and other requirements of the act and the regulation. 
Concurrently, the Board is issuing similar            proposed            revisions to 
address electronic communication under Regulations DD (Truth in 
Savings), B (Equal Credit Opportunity), and M (Consumer Leasing), 
published elsewhere in today's Federal Register. In addition, the Board 
has issued an interim rule under Regulation E, also published elsewhere 
in today's Federal Register so that financial institutions can 
implement systems to provide Electronic Fund Transfer Act disclosures 
electronically.

II.            Proposed            Regulatory Revisions

    The TILA and Regulation Z require several disclosures to be 
provided to consumers in writing. The requirement that disclosures be 
in writing has been presumed to require that creditors provide paper 
documents. However, under many laws that call for information to be in 
writing, information in electronic form is considered to be 
``written.'' Information produced, stored, or communicated by computer 
is also generally considered to

[[Page 14549]]

be a writing at least where visual text is involved.
    Therefore, pursuant to its authority under section 105 of the TILA, 
the Board proposes to amend Regulation Z to permit creditors to use 
electronic communication where the regulation calls for information to 
be provided in writing. The term ``electronic communication'' is 
limited to a communication that can be displayed as visual text. An 
example is an electronic visual text message that is displayed on a 
screen (such as the consumer's computer monitor). Communications by 
telephone voicemail systems do not meet the definition of ``electronic 
communication'' for purposes of this regulation because they do not 
have the feature generally associated with a writing--visual text.
    Section 226.2(a)(27) would be revised to include the definition of 
electronic communication for purposes of Regulation Z. Under the 
definition, electronic communication is a visual text message 
electronically transmitted between a creditor and a consumer's home 
computer or other electronic device used by a consumer. Sections 226.5, 
226.17 and 226.31 would be revised to address electronic communication. 
These sections contain general disclosure requirements for open-end 
credit, closed-end credit, and certain home secured loans referred to 
as ``HOEPA loans.''

Agreements Between Creditors and Consumers

    Sections 226.5(a)(5), 226.17(a)(3), and 226.31(b)(2) would permit 
creditors to send electronic disclosures if the consumer agrees. There 
may be various ways that a creditor and a consumer could agree to the 
electronic delivery of disclosures and other information. Whether such 
an agreement exists between the parties would be determined by 
applicable state law. The regulation would not preclude a creditor and 
a consumer from entering into an agreement electronically, nor does it 
prescribe a formal mechanism for doing so. The Board does believe, 
however, that consumers should be clearly informed when they are 
consenting to the delivery of TILA disclosures and other information 
electronically.

Delivery Requirements for Electronic Communication

    Regulation Z provides that an institution ``furnish,'' ``provide,'' 
``send,'' ``deliver,'' or ``mail'' information to a consumer. 
Generally, the delivery requirement anticipates that a creditor will 
deliver the information--typically by mail--to an address designated by 
the consumer. For a paper communication, a creditor would not satisfy 
that requirement by making disclosures ``available'' to consumers, for 
example, at a creditor's office or other location. The Board believes 
that consumers receiving disclosures by electronic communication should 
have protections regarding delivery similar to those afforded consumers 
receiving disclosures in paper form. Simply posting information on an 
Internet site without some appropriate notice and instructions about 
how the consumer may obtain the required information would not satisfy 
the requirement.
    The requirement to send disclosures to a consumer would be 
satisfied when the institution ensures that the disclosures will be 
displayed in a timely manner. For example, under Regulation Z, open-end 
credit initial disclosures generally must be provided before the first 
transaction under the plan. Assume that a consumer uses a personal 
computer to apply for a plan and consents to the electronic delivery of 
the initial disclosures. If the disclosures automatically appear on the 
computer screen before the consumer commits to the plan (in accordance 
with the format, timing rules and any other requirements of the act and 
regulation), the creditor would satisfy the requirement to provide 
(deliver or transmit) disclosures to the consumer.
    As a practical matter, there may be little distinction between 
sending or delivering electronic disclosures and making them 
``available.'' Creditors have flexibility in how they may deliver 
electronic disclosures to consumers, including, but not limited to, the 
following examples. They may send disclosures to a consumer-designated 
electronic mail address or they may designate a location on a website 
where the consumer enters a personal identification number or other 
identifier to access required information. In the scenario described 
above, assume that the consumer applies for a credit plan, receives the 
initial disclosures at that time, and agrees to receive all Regulation 
Z disclosures electronically. Subsequent disclosures sent to the 
designated address or placed at a designated location (for example, 
periodic statements or change-in-terms notices) would satisfy the 
delivery requirements of the regulation.
    Electronic communication would remain subject to any timing or 
other applicable requirements under Regulation Z. For example, an 
electronic change in terms notice required by Sec. 226.9(c) of 
Regulation Z must still be provided at least fifteen days in advance of 
the change. The Board solicits comment on whether further guidance is 
needed on how to comply wth the timing requirements when a notice is 
posted on an Internet website.

Section 226.5a--Credit and Charge Card Applications and 
Solicitations

    The act and regulation require credit and charge card issuers to 
provide credit disclosures in certain applications and solicitations to 
open credit and charge card accounts. Format and content requirements 
differ for applications or solicitations sent in direct mail campaigns 
and for those made available to the general public such as in ``take-
ones'' and catalogs or magazines. Disclosures accompanying direct mail 
applications and solicitations must be presented in a tabular format. 
Disclosures in a take-one also may be presented in a table with the 
same content as for direct mail, but the act and regulation permit 
alternatives as to format and content. The APR disclosed in a direct 
mail solicitation must be accurate within 60 days of mailing; in a 
take-one, within 30 days of printing.
    Consumers could obtain an electronically sent credit or charge card 
application in much the same way as either opening a direct-mail piece 
or browsing through a magazine. Under the proposal, if a card issuer 
sends an application or solicitation to a consumer by electronic means 
that alert the consumer that the application or solicitation has 
arrived, such as electronic mail, the card issuer would follow the 
direct-mail rules under Sec. 226.5a. If an issuer merely makes an 
application or solicitation publicly available, such as by posting it 
on an Internet site, the issuer would follow the ``take-one'' rules. 
The Board believes that in the context of electronic communications, 
``printing'' is the equivalent of updating a site on the Internet, for 
example. Thus, where the ``take-one'' rules apply, consumers would view 
APRs that are accurate within 30 days of the card issuer's most recent 
update of the Internet site. Where the direct-mail rules apply, the 
APRs disclosed would be accurate within 60 days of the sending of the 
electronic application or solicitation. The Board requests comment on 
any compliance difficulties this approach may pose, and possible 
suggestions for their resolution.

Section 226.17(g)--Mail or Telephone Orders--Delay in Disclosures

    Section 226.17(g) allows credit to be offered via mail, telephone, 
or other electronic means and full TILA disclosures to be deferred as 
long as a certain number of disclosures are ``made

[[Page 14550]]

available in written form.'' The rationale underlying the deferral is 
that, in some instances, the creditor cannot provide disclosures in the 
form required by the regulation because of the lack of face to face or 
direct interaction with the consumer. Because loan products offered by 
electronic communication (for example, those offered on the Internet) 
do not appear to pose the same difficulty, the Board believes that this 
deferral should not apply to electronic disclosures. The Board believes 
that permitting a deferral would not effectuate the purpose of the TILA 
to provide consumers with information about credit terms prior to being 
obligated. Thus, the            proposed            rule provides that specific disclosures 
must be provided before consummation of the transaction.

Requirement That Information Be ``Clear and Conspicuous''

    The act and Regulation Z require creditors to present required 
information ``clearly and conspicuously.'' Under the            proposed            rule, the 
``clear and conspicuous'' requirement applies to electronic 
communication. The Board does not intend to discourage or encourage 
specific types of technologies. Regardless of technology, however, the 
disclosures provided by electronic communication must meet the ``clear 
and conspicuous'' standard. While a creditor is generally not required 
to ensure that the consumer has the equipment to read the disclosures, 
in some circumstances a creditor would have the responsibility of 
making sure the proper equipment is in place. For example, to use 
electronic disclosures for credit offered through terminals in a 
creditor's lobby, or through kiosks located in public or other places, 
the creditor must ensure that the equipment meets the clear and 
conspicuous standard for TILA disclosures that are being provided 
electronically.

Consumer Ability to Retain Disclosures

    Regulation Z requires that many of its written disclosures be in a 
form that the consumer may keep. This requirement would apply to 
disclosures provided by electronic communication. Creditors would 
satisfy the retention requirement if, for example, disclosures can be 
printed or downloaded by the consumer. The requirements for electronic 
delivery should be similar to the current paper requirements, where 
creditors generally must mail or deliver the information to the 
consumer but need not ensure that the consumer reads or retains it. 
Thus, creditors would not be required to monitor an individual 
consumer's ability to retain the information, nor to take steps to find 
out whether the consumer has in fact retained it. The Board anticipates 
that, where appropriate, a creditor would provide special technical 
specifications for receiving or retaining information before or at the 
time a consumer agrees to receive information electronically.
    As in the case of the ``clear and conspicuous'' standard discussed 
above, in circumstances where the creditor (or a network of which the 
creditor is a member) controls the equipment to be used for the 
service--such as terminals in institution lobbies or kiosks in shopping 
centers--the creditor would have the responsibility of ensuring 
retainability. Provided that the delivery requirements (discussed 
above) are satisfied, methods for fulfilling this requirement could 
include, for example, printers incorporated into terminals or a screen 
message offering to transmit the disclosure to the consumer's 
electronic mail or post office address.

Signature Requirements Under Regulation Z

    There are two signature requirements under Regulation Z. Under 
Sec. 226.4(d) consumers may elect to accept credit life insurance by 
signing or initialing an affirmative written request after receiving 
disclosure about the insurance. Under Sec. 226.23 (and the 
corresponding model forms and official staff commentary) consumers may 
cancel certain home-secured loans or waive this right by providing a 
written signed notice to the creditor. The Board indicated in the May 
1996 Regulation E proposal that any electronic authentication method 
should provide the same assurance as a signature in a paper-based 
system, and cited security codes and digital signatures as examples of 
authentication devices that might meet the requirements. The Board is 
interested in learning about other ways in which authentication in an 
electronic environment might take the place of the consumer's 
signature.

Current Need for Safeguards Concerning the Electronic Delivery of 
Disclosures

    Today, most consumers receive federal disclosures in paper form. As 
electronic commerce and electronic banking increase and technological 
advances take place, obtaining disclosures by electronic communication 
will likely become more commonplace. Currently, however, the use of 
electronic communication in the delivery of financial services is still 
evolving. Thus, it is difficult to fully predict the extent to which 
additional safeguards, if any, may be needed to ensure that consumers 
receive the same protections that exist for disclosures in paper form. 
The Board expects that creditors subject to the TILA and Regulation Z 
will provide sufficient details about the delivery of disclosures. The 
Board plans to closely monitor the development of electronic delivery 
of TILA disclosures and other information, and will address compliance 
or other issues that may arise as appropriate.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-1005 and, when 
possible, should use a standard typeface with a type size of 10 or            12            
characters per inch. This will enable the Board to convert the text to 
machine-readable form through electronic scanning, and will facilitate 
automated retrieval of comments for review. Also, if accompanied by an 
original document in paper form, comments may be submitted on 3\1/2\ 
inch or 5\1/4\ inch computer diskettes in any IBM-compatible DOS-based 
format.

IV. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act, 
the Board's Office of the Secretary has reviewed the            proposed            
amendments to Regulation Z. Overall, the            proposed            amendments are not 
expected to have any significant impact on small entities. The            proposed            
rule would relieve compliance burden by giving creditors flexibility in 
providing disclosures. A final regulatory flexibility analysis will be 
conducted after consideration of comments received during the public 
comment period.

V. Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. Ch. 35; 5            CFR                       Part            1320 Appendix A.1), the Board 
reviewed the            proposed            revisions under the authority delegated to the 
Board by the Office of Management and Budget.
    The Federal Reserve has no data with which to estimate the burden 
the            proposed            revised requirements would impose on state member banks. 
Creditors would be able to use electronic communication to provide 
disclosures and other information required by this regulation rather 
than having to print and mail the information in paper form. The use of 
electronic communication in home banking and financial services may 
reduce the paperwork burden on creditors and financial institutions or 
merely may reduce the dollar cost.
    The Federal Reserve requests comments from creditors, especially

[[Page 14551]]

state member banks, that will help to estimate the number and burden of 
the various disclosures that would be made in the first year this rule 
is effective. Comments are invited on: (a) Whether the            proposed            revised 
collection of information is necessary for the proper performance of 
the Federal Reserve's functions, including whether the information has 
practical utility; (b) the accuracy of the Federal Reserve's estimate 
of the burden of the            proposed            revised information collection, including 
the cost of compliance; (c) ways to enhance the quality, utility, and 
clarity of the information to be collected; and (d) ways to minimize 
the burden of information collection on respondents, including through 
the use of automated collection techniques or other forms of 
information technology. Comments on the collection of information 
should be sent to the Office of Management and Budget, Paperwork 
Reduction Project (7100-0199), Washington, DC 20503, with copies of 
such comments to be sent to Mary M. McLaughlin, Chief, Financial 
Reports Section, Division of Research and Statistics, Mail Stop 97, 
Board of Governors of the Federal Reserve System, Washington, DC 20551.
    The collection of information requirements in this            proposed            revised 
regulation are found throughout            12                       CFR                       Part            226 and in Appendices F, G, 
H, J, K, and L. This information is mandatory (15 U.S.C. 1604(a)) to 
ensure the disclosure of certain credit costs and terms to consumers, 
at or before the time consumers enter into a consumer credit 
transaction and when the availability of consumer credit on particular 
terms is advertised. The purpose of the disclosures is to encourage 
competition among various credit sources through informed comparison-
shopping by consumers. The respondents/recordkeepers are for-profit 
financial institutions, including small businesses. Creditors are also 
required to retain records as evidence of compliance for twenty-four 
months.
    The Board also proposes to extend the Recordkeeping and Disclosure 
Requirements in Connection with Regulation Z (OMB No. 7100-0199) for 
three years. The current estimated total annual burden for this 
information collection is 1,878,846 hours, as shown in the table below. 
These amounts reflect the burden estimate of the Federal Reserve System 
for the 996 state member banks under its supervision. This regulation 
applies to all types of creditors, not just state member banks. 
However, under Paperwork Reduction Act regulations, the Federal Reserve 
accounts for the burden of the paperwork associated with the regulation 
only for state member banks. Other agencies account for the paperwork 
burden for the institutions they supervise.

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                                                                                                      Estimated 
                                           Number of    Estimated                                       annual  
                                          respondents     annual        Estimated response time         burden  
                                                        frequency                                       hours   
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Open-end credit:                                                                                                
    Initial terms.......................          996        1,150  2.5 minutes                           47,725
    Change in terms.....................          996        2,500  1.0 minute                            41,500
Periodic Statements.....................          996       86,250  45.0 seconds                       1,073,813
Error resolution........................          996            8  15.0 minutes                           1,992
Credit and charge card accounts:                                                                                
    Advance disclosures.................          996       29,750  10.0 seconds                          82,308
    Renewal notice......................          996       10,700  5.0 seconds                           14,802
    Insurance notice....................          996           60  15.0 seconds                             249
Home equity plans:                                                                                              
    Advance disclosure..................          996          120  2.0 minutes                            3,984
    Change in terms.....................          996            3  2.0 minutes                              100
Closed-end credit disclosures...........          996        5,750  6.4 minutes                          610,880
Advertising.............................          996            3  30.0 minutes                           1,493
                                                                                                    ------------
    Total...............................  ...........  ...........  ...............................    1,878,846
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[[Page 14552]]

    General disclosures of credit terms that appear in advertisements 
or take-one applications are available to the public. Since the Federal 
Reserve does not collect any information, no issue of confidentiality 
normally arises. However, the information may be protected from 
disclosure under the exemptions (b)(4), (6), and (8) of the Freedom of 
Information Act (5 U.S.C. 522(b)). Transaction- or account-specific 
disclosures and billing error allegations are not publicly available 
and are confidential between the creditor and the consumer. An agency 
may not conduct or sponsor, and an organization is not required to 
respond to, an information collection unless it displays a currently 
valid OMB control number. The OMB control number for the Recordkeeping 
and Disclosure Requirements in Connection with Regulation Z is 7100-
0199.

List of Subjects in            12                       CFR                       Part            226

    Advertising, Federal Reserve System, Mortgages, Reporting and 
recordkeeping requirements, Truth in lending.

Text of            Proposed            Revisions

    Certain conventions have been used to highlight the            proposed            
changes to Regulation Z. New language is shown inside bold-faced 
arrows, while language that would be removed is set off with brackets.
    For the reasons set forth in the preamble, the Board proposes to 
amend            12                       CFR                       part            226 as follows:

           PART            226--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for            part            226 continues to read as 
follows:

    Authority:            12            U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).

    2. Section 226.2 would be amended by adding a new paragraph (a)(27) 
to read as follows:

Sec. 226.2  Definitions and rules of construction.

    (a) Definitions. * * *
    (27) Electronic communication means a message transmitted 
electronically between a consumer and a creditor in a format that 
allows visual text to be displayed on equipment such as a personal 
computer monitor.
* * * * *
    &lt;rt-triang&gt;3. Section 226.5 would be amended by adding a new 
paragraph (a)(5) as follows:&lt;lf-triang&gt;

Sec. 226.5  General disclosure requirements.

    (a) Form of disclosures. * * *
    &lt;rt-triang&gt;(5) Electronic communication. A creditor and a consumer 
may agree to send by electronic communication, as that term is defined 
in Sec. 226.2(a)(27), any information required by this subpart to be 
provided in writing. Information sent by electronic communication to a 
consumer must comply with paragraph (a)(1) of this section and any 
applicable timing requirements contained in this subpart.&lt;lf-triang&gt;
    4. Section 226.17 would be amended as follows:
    a. By adding a new paragraph (a)(3); and
    b. By revising paragraph (g) introductory text.
    The revision and addition would read as follows:

Sec. 226.17  General disclosure requirements.

    (a) Form of disclosures. * * *
    &lt;rt-triang&gt;(3) Electronic communication. A creditor and a consumer 
may agree to send by electronic communication, as that term is defined 
in Sec. 226.2(a)(27), any information required by this subpart to be 
provided in writing. Information sent by electronic communication to a 
consumer must comply with paragraph (a)(1) of this section and any 
applicable timing requirements contained in this subpart.&lt;lf-triang&gt;
* * * * *
    (g) Mail or telephone orders--delay in disclosures. If a creditor 
receives a purchase order or a request for an extension of credit by 
mail, telephone, or any other written [or electric] communication, 
&lt;rt-triang&gt;excluding electronic communication as discussed in paragraph 
(a)(3) of this section,&lt;lf-triang&gt; 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 to the consumer or to the public before the actual purchase order 
or request:
* * * * *
    5. Section 226.31 would be amended by redesignating paragraph (b) 
as paragraph (b)(1) and adding a new paragraph (b)(2) as to read as 
follows:

Sec. 226.31  General rules.

* * * * *
    (b)&lt;rt-triang&gt;(1)&lt;lf-triang&gt; Form of disclosures. * * *
    &lt;rt-triang&gt;(2) Electronic communication. A creditor and a consumer 
may agree to send by electronic communication, as that term is defined 
in Sec. 226.2(a)(27), any information required by this subpart to be 
provided in writing. Information sent by electronic communication to a 
consumer must comply with this paragraph (b) and any applicable timing 
requirements contained in this subpart.&lt;lf-triang&gt;
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, March            12           , 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-6991 Filed 3-24-98; 8:45 am]
BILLING CODE 6210-01-P