[Federal Register Volume 65, Number 192 (Tuesday, October 3, 2000)]
[Rules and Regulations]
[Pages 58903-58911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25316]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1070]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is adopting a final rule amending Regulation Z, 
which implements the Truth in Lending Act, to revise the disclosure 
requirements for credit and charge card solicitations and applications. 
The act requires disclosure of the annual percentage rate (APR) and 
other cost information in direct mail and other applications and 
solicitations to open card accounts. The amendments to Regulation Z are 
intended to enhance consumers' ability to notice and understand this 
cost information that generally must be provided in the form of a 
table. Under the final rule, disclosures must be in a readily 
understandable form and readily noticeable to consumers. The APR 
disclosed for purchase transactions must be in 18-point type. Cash 
advance and balance transfer APRs must be included in the table and any 
balance transfer fee must be disclosed either in or outside of the 
table. Additional guidance is provided on the requirement that the card 
solicitation and application disclosures be prominently located, and on 
the level of detail about cost information required or permitted in the 
table.

DATES: The rule is effective September 27, 2000; compliance is 
mandatory as of October 1, 2001.

FOR FURTHER INFORMATION CONTACT: Deborah Stipick, Attorney, Division of 
Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, at (202) 452-3667 or 452-2412; for users of 
Telecommunications Device for the Deaf (TDD) only, contact Janice Simms 
at (202) 872-4984.

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

[[Page 58904]]

terms and cost. The Board's Regulation Z (12 CFR part 226) implements 
the act. 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 Fair Credit and Charge Card Disclosure Act of 1988 (1988 Act) 
amended TILA generally to require that the APR and certain other terms 
(primarily applicable to purchase transactions) be disclosed in direct 
mail and certain other solicitations and applications to open credit 
and charge card accounts. The purpose of the 1988 Act was to ensure 
that consumers receive key cost information about credit and charge 
cards early enough to have the opportunity to comparison shop for such 
cards. The 1988 Act generally requires that card application and 
solicitation disclosures be provided in the form of a table (commonly 
referred to as the ``Schumer box'' after the law's chief sponsor) with 
headings for each item of information. The terms required to be in the 
table include: the name of the method used for calculating finance 
charges on an outstanding balance, any minimum finance charge per 
billing cycle, transaction fee, annual fee, grace period, and the APR 
for purchase transactions. The card issuer also must disclose any cash 
advance fee, late payment fee, or fee for exceeding a credit limit. 
These items may be either in the required table or clearly and 
conspicuously elsewhere. The applicable disclosures must also be 
provided for charge cards, which do not have a periodic rate that is 
used to compute a finance charge.
    As with all TILA disclosures, the table is subject to the ``clear 
and conspicuous'' standard. Currently, the table meets the ``clear and 
conspicuous'' standard if the disclosures are in a ``readily 
understandable form.'' There are no type-size requirements associated 
with this standard. The table is also required to be in a ``prominent 
location'' on or with the application or solicitation. Under the 
existing rules, this requirement is met if the table is ``readily 
noticeable to the consumer'' but the table need not be in any 
particular location to satisfy the requirement.
    Over the years, the pricing of credit card programs has changed, 
and the cost disclosures accompanying card issuers' solicitations and 
applications have become more complex. Multiple APRs may apply to a 
single program. There may be a temporary introductory rate, a fixed or 
variable rate for all purchases after the introductory period expires, 
and one or more ``penalty rates'' that apply if, for example, the 
consumer makes late payments. There may also be separate rates that 
apply to cash advances and balance transfers.
    As interest rates and other account features have become more 
complex, and disclosures longer, some card issuers have compensated by 
using reduced type sizes for the table instead of allocating additional 
space for the disclosures. In such cases, consumers may have difficulty 
in using the table to readily identify key costs and terms. In 
contrast, the promotional materials that accompany the credit card 
application or solicitation may highlight a low introductory APR in a 
large, easy to read type size; oftentimes without the expiration date 
in close proximity. The APR in effect after the introductory rate 
expires typically is disclosed much less prominently--in a smaller type 
size--and it may only appear in the disclosure table and not at all in 
the promotional materials. The table may be in a location that is less 
likely to capture the consumer's attention, for example, on the reverse 
side of an application or on the last page of a multi-page 
solicitation.
    Even with the format requirements, the current regulatory framework 
allows substantial flexibility in how and where disclosures are 
presented. While some card issuers' disclosures are fairly 
straightforward, other card issuers have created disclosures that are 
difficult for consumers to use. Accordingly, changes to the current 
regulatory scheme appear necessary to ensure that consumers receive 
meaningful disclosures on a more consistent basis, for comparison-
shopping.

II. The Proposed Revisions

    On May 24, 2000, the Board published proposed revisions to 
Regulation Z and the accompanying commentary to revise the disclosure 
requirements for credit and charge card solicitations and applications 
(65 FR 33499). The proposal was issued pursuant to the Board's 
authority under the 1988 Act to require disclosure of additional 
information or to modify disclosures required by the statute if the 
Board determines that such action is necessary to carry out the 
purposes of, or prevent evasions of the 1988 Act. See 15 U.S.C. 
1637(c)(5). The proposed revisions were also issued under the Board's 
authority under section 105(a) of TILA to prescribe regulations to 
effectuate the purposes of TILA, to prevent circumvention or evasion, 
or to facilitate compliance. See 15 U.S.C. 1604(a).
    Under the proposal, the APR applicable to purchase transactions 
would be subject to a type-size requirement, to highlight this 
information. It would be in 18-point type and would appear with any 
introductory rate under a separate heading from other APRs, such as the 
penalty rate. The proposal also more strictly construes the requirement 
that disclosures be clear and conspicuous by requiring that information 
in the table be ``readily noticeable,'' in addition to being reasonably 
understandable. As to type size, disclosures in at least 12-point type 
were deemed readily noticeable.
    The proposal gave additional guidance on satisfying the current 
requirements that disclosures be prominently located. Under the 
proposal, disclosures would be prominently located if, for example, 
they are on the same page as an application or solicitation reply form, 
or on a separate insert with a reference to the insert on the 
application or reply form.
    To avoid clutter, guidance was proposed to reduce the level of 
detail required or permitted in the table, and to promote the use of 
more concise language. For example, card issuers must disclose the 
penalty rate APR and the conditions under which a rate may be imposed 
such as when payments are late. Under the proposal, only the rate could 
be included in the table; all explanatory information must be located 
elsewhere. The Board also solicited comment on whether additional rates 
and fees should be disclosed in the table.
    The Board received more than 250 comment letters. More than half of 
the comment letters were from consumers that addressed issues outside 
of the scope of the proposal. More than 80 comment letters were 
received regarding the proposed revisions. Most of these comments were 
from financial institutions and their representatives; about one-fourth 
were from individual consumers.
    In general, most commenters supported the Board's effort to improve 
disclosures for credit and charge card applications and solicitations. 
Most industry commenters, however, objected to specific aspects of the 
proposal or requested clarification of the rules. In particular, 
industry commenters objected to the use of type-size requirements and 
stated that the use of italics, bolding, or similar means of making 
disclosures clear and conspicuous is preferable. They raised concerns 
about the prominent location standard and requested more flexibility in 
locating the table within an

[[Page 58905]]

application or solicitation. Most industry commenters were supportive 
of efforts to decrease clutter and use more concise language, and these 
commenters supported the removal of the penalty rate explanation from 
the table. They also opposed the inclusion of additional rates and fees 
in the table. A few industry commenters objected to the Board's 
proposal to remove the penalty rate explanation from the table and 
suggested that the disclosure might be overlooked if it were outside 
the table.
    Consumers were generally supportive of the proposal including the 
stricter clear and conspicuous standard. Consumers that commented 
generally favored including in one location all rates and fees along 
with any explanation of how the rates and fees are charged. In 
particular, they favored including in the table the rate and fee for 
balance transfers and the cash advance APR.

III. Summary of Final Rule

    As discussed below, the Board is adopting the revisions 
substantially as proposed in order to effectuate the purposes of the 
1988 Act and promote more effective disclosure of the costs and terms 
in credit and charge card applications and solicitations. Some 
revisions have been made for clarity or in response to commenters' 
requests for guidance.
    Under the final rules, the APR for purchases must be in at least 
18-point type and must appear under a separate heading from other APRs, 
such as the penalty rates. The disclosures must be ``readily 
noticeable,'' as well as in a ``reasonably understandable form.'' As to 
type size, disclosures in at least 12-point type would be deemed 
readily noticeable. Additional guidance is provided for electronic 
communications to clarify that card issuers comply with the rules if 
disclosures are provided in the required form even though the consumer 
may view the disclosures in a different form.
    The final rule provides additional guidance on the current 
requirement that disclosures be prominently located but has been 
modified from the proposal to provide additional flexibility. 
Disclosures are sufficiently prominent, for example, if they are on the 
same page as an application or solicitation reply form. If located 
elsewhere, the disclosures still would be considered prominently 
located if the application or solicitation reply form contains a clear 
and conspicuous reference to the location of the disclosures.
    As proposed, guidance is provided on the level of detail required 
or permitted in the table. Under existing rules, the table must include 
any increased penalty APR that will apply upon the occurrence of one or 
more specific events, such as a late payment or an extension of credit 
exceeding the credit limit. Card issuers must also provide a 
description of the specific events that can trigger an increase. To 
simplify the table, the existing commentary is revised so that only the 
penalty rates can appear inside the table; the explanatory information 
must appear outside the table.
    Currently the regulation only requires disclosure of the APR for 
purchase transactions in the table. The final rule also requires 
disclosure of the APRs for cash advances and balance transfers in the 
table and the disclosure of balance transfer fees either in or outside 
the table, as is currently the case for cash advance, late payment, and 
over-the-limit fees.
    Generally, updates to the Board's staff commentary are effective 
within 30 days of publication. Consistent with the requirements of 
section 105(d) of TILA, however, the Board typically provides an 
implementation period of six months or longer. During that period, 
compliance with the published update is optional so that creditors may 
adjust documents to accommodate TILA's disclosure requirements. 
Accordingly, compliance with the revised credit card provisions is 
mandatory as of October 1, 2001.

IV. Section-by-Section Analysis of the Final Rule

Subpart B--Open-End Credit

Section 226.5--General Disclosure Requirements

5(a) Form of Disclosures

    Section 226.5(a)(1) states the general rule that TILA disclosures 
for open-end credit plans must be made clearly and conspicuously. 
Existing comment 5(a)(1)-1 interprets this standard to require 
disclosures to be in a ``reasonably understandable form.'' Under the 
final rule, as proposed, this standard is more strictly construed for 
purposes of the disclosures required under Sec. 226.5a for credit and 
charge card applications and solicitations. Accordingly, comment 
5(a)(1)-1 is revised to reflect this fact, by including a cross-
reference to the special rules for Sec. 226.5a disclosures. See 
comments 5a(a)(2)-1 and -2.
    Section 226.5(a)(2) n.9 provides that the APRs under Sec. 226.5a 
need not be more conspicuous than other disclosures. Footnote 9 is 
revised by adding a cross-reference to reflect the special type-size 
rule under Sec. 226.5a for purchases APRs. Comment 5(a)(2)-1 is also 
revised to make a technical correction.

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

5a(a) General Rules

5a(a)(2) Form of Disclosures

    Disclosures that are required by Sec. 226.5a must be clear and 
conspicuous and prominently located on or with an application or 
solicitation or other applicable document. Certain of these disclosures 
also are required to be in a table format. As proposed, comment 
5a(a)(2)-1 is added to establish a stricter standard for satisfying the 
``clear and conspicuous'' standard with respect to credit or charge 
card application or solicitation disclosures. Comment 5a(a)(2)-2 
provides additional interpretative guidance on the requirement that 
certain disclosures be prominently located. Because the interpretations 
differ somewhat from those currently provided, they are intended to 
apply prospectively.
    Currently, disclosures meet the ``clear and conspicuous'' 
requirement if they are reasonably understandable. To ensure that 
consumers receive meaningful disclosures on a consistent basis, comment 
5a(a)(2)-1 provides that disclosures are clear and conspicuous if they 
are both reasonably understandable and readily noticeable.
    Industry commenters that opposed the revision cited a variety of 
reasons including the belief that a court might apply the stricter 
construction of the clear and conspicuous standard under Sec. 226.5a to 
other sections of Regulation Z. Consumers and their representatives 
generally favored the stricter construction and thought the revisions 
would assist consumers in comparison-shopping for credit and charge 
cards by making disclosures more noticeable.
    Many commenters representing financial institutions expressed a 
belief that the stricter construction of the ``clear and conspicuous'' 
standard is unnecessary and the same result could be achieved through 
more rigorous enforcement of the existing standard. These commenters 
generally objected to the proposal's use of particular type-size 
examples. Under the final rule, comment 5a(a)(2)-1 provides, as 
proposed, that as to type size, disclosures are deemed to be readily 
noticeable if they are in at least 12-point type. A number of 
commenters stated that using the example of 12-point type to satisfy 
the standard would have the effect of establishing a minimum type-size 
requirement. Accordingly, some commenters suggested that the final rule

[[Page 58906]]

use 10-point type as the example of a conspicuous type size, or that 
the final rule includes additional language clarifying that some 
disclosures smaller than 12-point may also satisfy the rule. To address 
commenters concerns, the comment states that disclosures printed in 
less than 12-point type do not automatically violate the standard. 
Disclosures in less than 8-point type, however, would likely be too 
small to satisfy the standard.
    Some commenters requested further guidance on whether the new 
``clear and conspicuous standard'' would apply only to information 
required to be disclosed in a tabular format, or to all disclosures 
required under Sec. 226.5a. In response to the comment received, 
comment 226.5a(a)(2)-1 provides that the stricter clear and conspicuous 
standard applies to all Sec. 226.5a disclosures.
    Comment 5a(a)(2)-2 addresses the requirement that certain 
disclosures be prominently located. Currently, the standard does not 
require disclosures to be located in any particular location. For 
example, card issuers may locate disclosures that are required to be in 
a tabular format on the reverse side of an application or on the last 
page of a multi-page solicitation. Consumers may see the promotional 
materials and fill out the application without being aware that there 
is additional cost information elsewhere following the application.
    Under the proposal, the table would have been deemed to be 
prominently located, for example, if it appeared on the same page as 
the application or solicitation reply form, or on a separate insert 
with a reference to the insert on the application or reply form. Many 
commenters, including both consumers and some financial institution 
representatives suggested that card issuers might favor the use of 
inserts instead of locating the table on the application or reply form. 
These commenters were concerned that inserts might be overlooked by 
consumers and they urged that the Board grant flexibility to card 
issuers that cannot fit their disclosures on the same page as the 
application. Commenters also requested additional guidance. For 
example, some suggested that disclosures on the reverse side of a one-
page application might be considered to be on the same page as the 
application. (They would not; each side would be considered a separate 
page.)
    In response to commenters' concerns, comment 5(a)(2)-2 provides 
additional flexibility. Disclosures that do not appear on the same page 
as the application or solicitation reply form will also be considered 
prominently located if a clear and conspicuous reference to the 
location of the disclosures is on the application or solicitation reply 
form indicating that they contain additional information about rates, 
fees, and other costs, as applicable.
    The revised comment clarifies that the tabular disclosures required 
under Sec. 226.5a(b) must all appear on the same page. Disclosures 
required under Sec. 226.5a(b)(8)-(11) that appear outside the table 
must start on the same page as the table but may continue on subsequent 
pages.
    Electronic Disclosures--In September 1999, the Board published a 
proposal that would amend Regulation Z to authorize creditors to use 
electronic communication to deliver required disclosures. 64 FR 49722 
(September 14, 1999). On June 30, 2000, the Electronic Signatures in 
Global and National Commerce Act was signed into law, which authorizes 
the use of electronic records to provide written disclosures to 
consumers. Pub. L. 106-229, 114 Stat. 464. That law is effective 
October 1, 2000.
    The Board's proposal specifically requested comment on any guidance 
that may be needed when credit and charge card applications and 
solicitations are provided by electronic communication. The majority of 
commenters requested that the Board provide guidance in the final rule 
on the use of electronic disclosures for credit and charge card 
applications and solicitations. Some commenters requested clarification 
that electronically transmitting or posting the APR disclosures in the 
required type size is sufficient in light of the consumer's ability to 
alter the appearance of information received electronically. In 
response to commenters' concerns, comment 5a(a)(2)-1 indicates that if 
disclosures required by Sec. 226.5a(b) are provided by electronic 
communication, they are judged for purposes of the clear and 
conspicuous standard based on the form in which they are provided even 
though they may be viewed by consumers in a different format.
    Commenters also requested guidance on complying with the 
requirement that certain disclosures be ``prominently located'' when 
electronic media are used. This guidance has been provided in comment 
5a(a)(2)-2. Electronic disclosures are deemed to be prominently located 
if 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, or they are located on the same page as an 
application or solicitation reply form that 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.

5a(b) Required Disclosures

    Disclosure of Additional Rates and Fees--The table required under 
Sec. 226.5a provides consumers with key cost information, grouped 
together in one place to facilitate consumers' use of the information 
for comparison-shopping. These disclosures are not intended to be as 
detailed as disclosures provided to consumers at account opening. At 
the time the 1988 Act was adopted, the primary focus was on cost 
disclosures for purchase transactions. Thus, under the current rules 
the APR and transaction fees for purchases must be disclosed in the 
table, but not the APR for cash advances.
    Because the services and features offered with credit and charge 
cards have evolved in recent years, the disclosures required by the 
1988 Act do not capture costs that are commonly assessed on such cards, 
such as the APR assessed on a balance transfer (which the card issuer 
may characterize as a cash advance). Accordingly, the Board solicited 
comment on whether consumers would be aided in comparison-shopping by 
having additional rates and fees disclosed in the table. In particular, 
commenters were asked to address whether the APR and transaction fee 
for balance transfers and the APR for cash advances should be included 
in the table.
    Many of the consumers and consumer advocates supported the 
inclusion of additional rate and fee information. These commenters 
generally favored including the APR and transaction fee for balance 
transfers and the APR for cash advances. They noted that these card 
features are common and that disclosure of these terms aids consumers 
in more effective comparison-shopping. Industry commenters generally 
opposed the inclusion of new fees and rates. They believe that the 
application and solicitation disclosures are more likely to be 
effective if they are simpler. They are also concerned that adding new 
disclosures based on card issuer's current program features is likely 
to lead to further expansion of the disclosures in response to new 
trends in future industry card programs.
    On balance, the Board believes that consumers seeking to 
comparison-shop would benefit from having the APR and

[[Page 58907]]

transaction fee for balance transfers and the APR for cash advances 
provided in a consistent and uniform manner along with other key cost 
information. Balance transfer features have become common and cash 
advance features are an integral part of many card programs. 
Frequently, these features are prominently listed by card issuers in 
their promotional materials, sometimes as part of an introductory offer 
that expires after several months. Consumers' ability to understand the 
offered terms is likely to be enhanced by more uniform disclosure of 
these terms, particularly as consumers become familiar with the new 
format. Accordingly, Sec. 226.5a(b)(1) has been revised to include the 
APR for cash advances and balance transfers in the tabular disclosures. 
Under the final rule, Sec. 226.5a(b)(11) has also been added to provide 
that a balance transfer fee must also be disclosed, either in the 
table, or clearly or conspicuously elsewhere.
    APR for Purchase Transactions--Section 226.5a(b)(1) requires card 
issuers to disclose in the table each periodic rate that may be used to 
compute the finance charge on an outstanding balance for purchases, 
expressed as an APR. The final rule is being adopted, as proposed, to 
require the APR for purchases to be disclosed in the table in at least 
18-point type. This type-size requirement does not apply to temporary 
initial rates, that are lower than the APR that will apply after the 
temporary rate expires (to the extent such programs exist), or to 
penalty rates that result upon the occurrence of one or more specific 
events (such as a late payment or an extension of credit that exceeds 
the credit limit). See comment 5a(b)(1)-6. The APR for purchases must 
also appear with any introductory rate under a separate heading from 
other APRs, such as penalty rates, or rates for cash advances.
    The Board proposed the use of this larger type size to highlight 
the significance of this information, particularly in light of the 
larger type sizes typically used by card issuers to promote 
introductory rates. Under existing rules, the APR information is often 
obscured due to the amount of other information provided in the table 
and the small type size used by some card issuers.
    Consumers and consumer advocates generally believed that the type-
size requirement is appropriate to ensure that the APR for purchases is 
clear and conspicuous. Industry commenters generally opposed the type-
size requirement. Many of these commenters stated that the larger type 
size would place too much emphasis on the APR for purchases even though 
consumers may have differing opinions regarding which disclosures are 
most important. Many industry commenters suggested that highlighting 
the APR for purchases in this manner would diminish the effectiveness 
of other disclosures in the table.
    Some financial institutions contend that an increase in type size 
will increase paper and production costs, although few institutions 
attempted to quantify the cost. One financial institution estimated 
that under the new rule its paper costs would increase 7% annually. 
Some credit unions expressed concern regarding increased costs; 
however, many indicated that the increased costs could be avoided if 
the final rule does not become effective for at least six months 
thereby, permitting them to use their existing stock of disclosures.
    Overall, the benefits of requiring 18-point type in disclosing the 
APR for purchases seem to outweigh any potential adverse effects. Even 
though some consumers comparison-shop for credit and charge cards based 
on a variety of features, the APR for purchases remains one of the key 
features that consumers consider. Moreover, many card issuers use 
larger than 18-point type to promote introductory APRs and other 
features in their credit and charge card promotional materials. Also, 
to aid consumers in better understanding the rates being imposed on a 
card account, card issuers are encouraged to disclose, in close 
proximity with any introductory rate being promoted, the period of time 
that the rate is in effect, and the post-introductory APR for 
purchases.
    Rules to Simplify the Table--Card issuers are required to disclose 
``penalty rates'' in the table, along with a description of the 
specific events that can trigger a rate increase and any index or 
margin used to determine the penalty rate. Under existing comment 
5a(b)(1)-7, card issuers have the option of including this information 
inside the table or elsewhere. To simplify the table, the comment has 
been revised to provide that only the penalty rate should appear inside 
the table; the explanatory information must appear outside the table. 
Card issuers must use an asterisk or other means to direct the consumer 
to the additional information.
    Most commenters believed that removing the explanatory information 
from the table would decrease clutter and promote the use of concise 
language in the table. A few consumers, however, stated that the 
significant impact of penalty rates justifies leaving the explanation 
in the table to prevent it from being overlooked. The Board has 
determined that consumers are more likely to notice the penalty APRs if 
the table is uncluttered by removing the explanatory information. 
Moreover, the stricter interpretation of the ``clear and conspicuous'' 
standard should ensure that the explanatory information appears outside 
in a readily noticeable form.

Appendices G and H to Part 226--Open-end and Closed-End Model Forms 
and Clauses

    Revisions to comment App. G and H-1 are adopted, as proposed, to 
clarify that there are special rules for disclosures required under 
Sec. 226.5a for applications and solicitations for credit and charge 
cards.

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

    The Board provides model forms to aid compliance with the 
disclosure requirements of Sec. 226.5a(b). See Appendix G-10(A)-(C). 
Model form G-10(A) is revised and model form G-10(B) has been removed 
as unnecessary. A new sample form G-10(B) is added to illustrate an 
account with an introductory rate and a penalty rate. The forms also 
reflect the inclusion of the cash advance APR, balance transfer APR, 
and the balance transfer fee. Also comment G-5 is revised to clarify 
that there are format and sequence requirements for certain Sec. 226.5a 
disclosures.

V. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act, 
the Board has reviewed the amendments to Regulation Z. The amendments 
require creditors to use a specific type size for the APR for 
purchases, to add the APR and fee for balance transfers and the APR for 
cash advances; to provide supplemental information about penalty rates 
outside the table; and to locate the table on the same page as the 
application or solicitation reply form, or elsewhere with a reference 
in the application or reply form to the location and content of the 
disclosures.
    Some smaller financial institutions, particularly credit unions, 
expressed concerns that the need to revise disclosures to comply would 
increase costs; however, costs could be minimized by delaying the 
mandatory compliance date for at least six months thereby permitting 
them to utilize existing stocks of disclosures. Since the mandatory 
compliance date is October 1, 2001, the amendments do not have any 
significant impact on small entities beyond these initial revisions.

[[Page 58908]]

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule under the 
authority delegated to the Board by the Office of Management and 
Budget. The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, this information collection 
unless it displays a currently valid OMB control number. The OMB 
control number is 7100-0199.
    The collection of information that is revised by this rulemaking is 
found in 12 CFR part 226 and in Appendices F, G, H, J, K, and L. This 
information is mandatory (15 U.S.C. 1601 et seq.) to evidence 
compliance with the requirements of Regulation Z and the Truth in 
Lending Act (TILA). The respondents/recordkeepers are for-profit 
financial institutions, including small businesses. Institutions are 
required to retain records for twenty-four months. 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 on their respective constituencies under this regulation.
    The revisions require creditors to revise disclosures for credit 
card solicitations and applications by: (1) Requiring an 18-point type-
size for the APR for purchase transactions, (2) requiring creditors to 
provide supplemental information about penalty rates outside the table, 
(3) requiring disclosure of the APR and fee for balance transfers and 
cash advance APR, and (4) requiring that such table be located on the 
same page as the application or solicitation reply form or elsewhere 
with a reference to the location on the application or reply form. 
Although the final rule adds these requirements, it is expected that 
these revisions would not significantly increase the paperwork burden 
of creditors. With respect to state member banks, it is estimated that 
there are 988 respondent/recordkeepers and an average frequency of 
136,294 responses per respondent each year. Therefore, the current 
amount of annual burden is estimated to be 1,863,754 hours. Because 
these revisions modify preexisting tables, there is estimated to be no 
additional annual cost burden and no capital or start-up cost.
    Because the records would be maintained at state member banks and 
the notices are not provided to the Federal Reserve, no issue of 
confidentiality under the Freedom of Information Act arises; however, 
any information obtained by the Federal Reserve may be protected from 
disclosure under exemptions (b)(4), (6), and (8) of the Freedom of 
Information Act (5 U.S.C. 522 (b)(4), (6) and (8)). The disclosures and 
information about error allegations are confidential between creditors 
and the customer.
    The Federal Reserve has a continuing interest in the public's 
opinion of our collections of information. At any time, comments 
regarding the burden estimates, or any other aspect of this collection 
of information, including suggestions for reducing the burden estimate, 
may be sent to: Secretary, Board of Governors of the Federal Reserve 
System, 20th and C Streets, N.W., Washington, DC 20551; and to the 
Office of Management and Budget, Paperwork Reduction Project (7100-
0199), Washington, DC 20503.

List of Subjects in 12 CFR Part 226

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

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

PART 226--TRUTH IN LENDING (REGULATION Z)

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

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

Subpart B--Open-End Credit

    2. Section 226.5 is amended by revising footnote 9 to read as 
follows:


Section 226.5  General disclosure requirements.

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

    3. Section 226.5a is amended by:

    a. Revising paragraphs (a)(2)(ii), (a)(5), (b) introductory text 
and (b)(1) introductory text; and
    b. Adding a new paragraph (b)(11).


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

* * * * *
    (a) * * *
    (a)(2) Form of disclosures. * * *
    (ii) The disclosures in paragraphs (b)(8) through (11) of this 
section shall be provided either in the table containing the 
disclosures in paragraphs (b)(1) through (7), or clearly and 
conspicuously elsewhere on or with the application or solicitation.
* * * * *
    (a)(5) Certain fees that vary by state. If the amount of any fee 
referred to in paragraphs (b)(8) through (11) of this section varies 
from state to state, the card issuer may disclose the range of the fees 
instead of the amount for each state, if the disclosure includes a 
statement that the amount of the fee varies from state to state.
    (b) Required disclosures. The card issuer shall disclose the items 
in this paragraph on or with an application or a solicitation in 
accordance with the requirements of paragraphs (c), (d), or (e) of this 
section. A credit card issuer shall disclose all applicable items in 
this paragraph except for paragraph (b)(7) of this section. A charge 
card issuer shall disclose the applicable items in paragraphs (b)(2), 
(4), and (7) through (11) of this section.
    (1) Annual percentage rate. Each periodic rate that may be used to 
compute the finance charge on an outstanding balance for purchases, a 
cash advance, or a balance transfer, expressed as an annual percentage 
rate (as determined by Sec. 226.14(b)). When more than one rate applies 
for a category of transactions, the range of balances to which each 
rate is applicable shall also be disclosed. The annual percentage rate 
for purchases disclosed pursuant to this paragraph shall be in at least 
18-point type, except for the following: a temporary initial rate that 
is lower than the rate that will apply after the temporary rate 
expires, and a penalty rate that will apply upon the occurrence of one 
or more specific events.
* * * * *
    (11) Balance transfer fee. Any fee imposed to transfer an 
outstanding balance.
* * * * *
    4. Appendix G to Part 226 is amended by:
    a. Revising the table of contents at the beginning of the appendix;
    b. Revising Model G-10(A); and
    c. Removing Model G-10(B) and adding a new Sample G-10(B) in its 
place.

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

G-1  Balance-Computation Methods Model Clauses (Secs. 226.6 and 
226.7)
G-2  Liability for Unauthorized Use Model Clause (Sec. 226.12)

[[Page 58909]]

G-3  Long-Form Billing-Error Rights Model Form (Secs. 226.6 and 
226.9)
G-4  Alternative Billing-Error Rights Model Form (Sec. 226.9)
G-5  Rescission Model Form (When Opening an Account) (Sec. 226.15)
G-6  Rescission Model Form (For Each Transaction) (Sec. 226.15)
G-7  Rescission Model Form (When Increasing the Credit Limit) 
(Sec. 226.15)
G-8  Rescission Model Form (When Adding a Security Interest) 
(Sec. 226.15)
G-9  Rescission Model Form (When Increasing the Security) 
(Sec. 226.15)
G-10(A)  Applications and Solicitations Model Forms (Credit Cards) 
(Sec. 226.5a(b))
G-10(B)  Applications and Solicitations Sample (Credit Card) 
(Sec. 226.5a(b))
G-10(C)  Applications and Solicitations Model Form (Charge Cards) 
(Sec. 226.5a(b))
G-11  Applications and Solicitations Made Available to General 
Public Model Clauses (Sec. 226.5a(e))
G-12  Charge Card Model Clause (When Access to Plan Offered by 
Another) (Sec. 226.5a(f))
G-13(A)  Change in Insurance Provider Model Form (Combined Notice) 
(Sec. 226.9(f))
G-13(B)  Change in Insurance Provider Model Form (Sec. 226.9(f)(2))
G-14A  Home Equity Sample
G-14B  Home Equity Sample
G-15  Home Equity Model Clauses
* * * * *

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* * * * *

    5. In Supplement I to Part 226, MAKE the following amendments:
    a. Under Section 226.5--General Disclosure Requirements, under 
Paragraph 5(a)(1), paragraph 1. introductory text is revised;
    b. Under Section 226.5--General Disclosure Requirements, under 
Paragraph 5(a)(2), the first sentence in paragraph 1 is revised;
    c. Under Section 226.5a--Credit and Charge Card Applications and 
Solicitations, under 5a(a)(2) Form of Disclosures, paragraph 1 through 
paragraph 6 are redesignated as paragraph 2 through paragraph 7 
respectively, a new paragraph 1 is added, and newly designated 
paragraph 2 is revised.
    d. Under Section 226.5a--Credit and Charge Card Applications and 
Solicitations, under 5a(b)(1) Annual Percentage Rate, paragraphs 6 and 
7 are revised.
    e. Under Appendices G and H--Open-End and Closed-End Model Forms 
and Clauses, a new sentence is added after the second sentence in 
paragraph 1.
    f. Under Appendix G--Open-end Model Forms and Clauses, paragraph 5 
is revised.

SUPPLEMENT I TO PART 226--OFFICIAL STAFF INTERPRETATIONS

* * * * *

Subpart B--End Credit

Sec. 226.5--General Disclosure Requirements

    5(a) Form of disclosures.
    Paragraph 5(a)(1).
    1. Clear and conspicuous. The clear and conspicuous standard 
requires that disclosures be in a reasonably understandable form. 
Except where otherwise provided, the 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. (But see 
comments 5a(a)(2)-1 and -2 for special rules concerning Sec. 226.5a 
disclosures for credit card applications and solicitations.) The 
standard does not prohibit:
* * * * *
    Paragraph 5(a)(2).
    1. When disclosures must be more conspicuous. The term 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 footnote 9. * * *
* * * * *

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

* * * * *

5a(a) General Rules

5a(a)(2) Form of Disclosures

    1. Clear and conspicuous standard. For purposes of Sec. 226.5a 
disclosures, clear and

[[Page 58911]]

conspicuous means in a reasonably understandable form and readily 
noticeable to the consumer. As to type size, disclosures in 12-point 
type are deemed to be readily noticeable for purposes of 
Sec. 226.5a. Disclosures printed in less than 12-point type do not 
automatically violate the standard; however, disclosures in less 
than 8-point type would likely be too small to satisfy the standard. 
Disclosures that are transmitted by electronic communication are 
judged for purposes of the clear and conspicuous standard based on 
the form in which they are provided even though they may be viewed 
by the consumer in a different form.
    2. Prominent location. i. Generally. Certain of the required 
disclosures provided on or with an application or solicitation must 
be prominently located. 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. Disclosures required by Sec. 226.5a(b) that are 
placed outside the table must begin on the same page as the table 
but need not end on the same page.
    ii. Electronic disclosures. Electronic disclosures are deemed to 
be prominently located if:
    A. 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; or
    B. They are located on the same page as an application or 
solicitation reply form, that 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.
* * * * *

5a(b) Required Disclosures

5a(b)(1) Annual Percentage Rate

* * * * *
    6. Introductory rates--premium rates. If the initial rate is 
temporary and is higher than the permanently applicable rate, the 
card issuer must disclose the initial rate in the table. The initial 
rate must be in at least 18-point type unless the issuer also 
discloses in the table the permanently applicable rate. The issuer 
may disclose in the table the permanently applicable rate that would 
otherwise apply if the issuer also discloses the time period during 
which the initial rate will remain in effect. In that case, the 
permanently applicable rate must be in at least 18-point type.
    7. 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 
card issuer must disclose in the table 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 also disclose 
in the table the index and the margin as well as the specific event 
or events that may result in the increased rate, such as ``applies 
to accounts 60 days late.'' If the penalty rate cannot be determined 
at the time disclosures are given, the issuer must provide an 
explanation of the specific event or events that may result in 
imposing an increased rate. In describing the specific event or 
events that may result in an increased rate, issuers need not be as 
detailed as for the disclosures required under Sec. 226.6(a)(2). For 
issuers using a tabular format, the specific event or events must be 
placed outside the table and an asterisk or other means shall be 
used to direct the consumer to the additional information. At its 
option, the issuer may include in the explanation of the penalty 
rate the period for which the increased rate will remain in effect, 
such as ``until you make three timely payments.'' The issuer need 
not disclose an increased rate that is imposed when credit 
privileges are permanently terminated.
* * * * *

Appendices G and H--Open-End and Closed-End Model Forms and Clauses

    1. Permissible changes. * * * (But see Appendix G comment 5 for 
special rules concerning certain disclosures required under 
Sec. 226.5a for credit and charge card applications and 
solicitations). * * *
* * * * *

APPENDIX G--OPEN-END MODEL FORMS AND CLAUSES

* * * * *
    5. Model G-10(A), Sample G-10(B) and Model G-10(C). i. Model G-
10(A) and Sample G-10(B) illustrate, in the tabular format, all of 
the disclosures required under Sec. 226.5a for applications and 
solicitations for credit cards other than charge cards. Model G-
10(B) is a sample disclosure illustrating an account with a lower 
introductory rate and penalty rate. Model G-10(C) illustrates the 
tabular format disclosure for charge card applications and 
solicitations and reflects all of the disclosures in the table.
    ii. Except as otherwise permitted, disclosures must be 
substantially similar in sequence and format to model forms G-10(A) 
and (C). The disclosures may, however, be arranged vertically or 
horizontally and need not be highlighted aside from being included 
in the table. While proper use of the model forms will be deemed in 
compliance with the regulation, card issuers are permitted to use 
headings and disclosures other than those in the forms (with an 
exception relating to the use of ``grace period'') if they are clear 
and concise and are substantially similar to the headings and 
disclosures contained in model forms. For further discussion of 
requirements relating to form, see the commentary to 
Sec. 226.5a(a)(2).
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, September 27, 2000.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 00-25316 Filed 10-2-00; 8:45 am]
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