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FDIC Law, Regulations, Related Acts

[Main Tabs]     [Table of Contents - 6500]     [Index]     [Previous Page]     [Next Page]     [Search] 6500 - Consumer Protection Subpart D—Miscellaneous Section 226.25--Record Retention   25(a)  General rule.   1.  Evidence of required actions.  The creditor must retain evidence that it performed the required actions as well as made the required disclosures. This includes, for example, evidence that the creditor properly handled adverse credit reports in connection with amounts subject to a billing dispute under § 226.13, and properly handled the refunding of credit balances under §§ 226.11 and 226.21.   2.  Methods of retaining evidence.  Adequate evidence of compliance does not necessarily mean actual paper copies of disclosure statements or other business records. The evidence may be retained on microfilm, microfiche, or by any other method that reproduces records accurately (including computer programs). The creditor need retain only enough information to reconstruct the required disclosures or other records. Thus, for example, the creditor need not retain each open-end periodic statement, so long as the specific information on each statement can be retrieved.   3.   Certain variable-rate transactions.   In variable-rate transactions that are subject to the disclosure requirements of § 226.19(b), written procedures for compliance with those requirements as well as a sample disclosure form for each loan program represent adequate evidence of compliance. (See comment 25(a)--2 pertaining to permissible methods of retaining the required disclosures.)   4.  Home equity plans.  In home equity plans that are subject to the requirements of § 226.5b, written procedures for compliance with those requirements as well as a sample disclosure form and contract for each home equity program represent adequate evidence of compliance. (See comment 25(a)--2 pertaining to permissible methods of retaining the required disclosures.) References   Statute:  Secs. 105 and 108.   Other sections:  Appendix I.   Previous regulation:  § 226.6(i).   1981 changes:  Section 226.25 substitutes a uniform two-year record-retention rule for the previous requirement that certain creditors retain records through at least one compliance examination. It also states more explicitly that the record-retention requirements apply to evidence of required actions. Section 226.26--Use of Annual Percentage Rate in Oral Disclosures   1.  Application of rules.  The restrictions of § 226.26 apply only if the creditor chooses to respond orally to the consumer's request for credit cost information. Nothing in the regulation requires the creditor to supply rate information orally. If the creditor volunteers information (including rate information) through oral solicitations directed generally to prospective customers, as through a telephone solicitation, those communications may be advertisements subject to the rules in §§ 226.16 and 226.24. {{8-29-08 p.6970}}   26(a)  Open-end credit.   1.  Information that may be given.  The creditor may state periodic rates in addition to the required annual percentage rate, but it need not do so. If the annual percentage rate is unknown because transaction charges, loan fees, or similar finance charges may be imposed, the creditor must give the corresponding annual percentage rate (that is, the periodic rate multiplied by the number of periods in a year, as described in §§ 226.6(a)(2) and 226.7(d)). In such cases, the creditor may, but need not, also give the consumer information about other finance charges and other charges.   26(b)  Closed-end credit.   1.  Information that may be given.  The creditor may state other annual or periodic rates that are applied to an unpaid balance, along with the required annual percentage rate. This rule permits disclosure of a simple interest rate, for example, but not an add-on, discount, or similar rate. If the creditor cannot give a precise annual percentage rate in its oral response because of variables in the transaction, it must give the annual percentage rate for a comparable sample transaction; in this case, other cost information may, but need not, be given. For example, the creditor may be unable to state a precise annual percentage rate for a mortgage loan without knowing the exact amount to be financed, the amount of loan fees or mortgage insurance premiums, or similar factors. In this situation, the creditor should state an annual percentage rate for a sample transaction; it may also provide information about the consumer's specific case, such as the contract interest rate, points, other finance charges, and other charges. References   Statute:  Section 146.   Other sections:  §§ 226.6(a)(2) and 226.7(d).   Previous regulation:  Interpretation § 226.101.   1981 changes:  This section implements amended § 146 of the act, which added a provision dealing with oral disclosures, and incorporates interpretation § 226.101. Section 226.27--Language of Disclosures   1.  Subsequent disclosures.  If a creditor provides initial disclosures in a language other than English, subsequent disclosures need not be in that other language. For example, if the creditor gave Spanish-language initial disclosures, periodic statements and change-in-terms notices may be made in English.   2.  [Removed and Reserved.] References   Statute:  None.   Other sections:  None.   Previous regulation:  § 226.6(a).   1981 changes:  No substantive change. Section 226.28--Effect on State Laws   28(a)  Inconsistent disclosure requirements   1.  General.  There are three sets of preemption criteria: One applies to the general disclosure and advertising rules of the regulation, and two apply to the credit billing provisions. Section 226.28 also provides for Board determinations of preemption.   2.  Rules for chapters 1, 2, and 3.  The standard for judging whether state laws that cover the types of requirements in chapters 1 (General provisions), 2 (Credit transactions), and 3 (Credit advertising) of the act are inconsistent and therefore preempted, is contradiction of the federal law. Examples of laws that would be preempted include: {{4-29-83 p.6971}}   • A state law that requires use of the term "finance charge," but defines the term to include fees that the federal law excludes, or to exclude fees the federal law includes.   • A state law that requires a label such as "nominal annual interest rate" to be used for what the federal law calls the "annual percentage rate."   3.  Laws not contradictory to chapters 1, 2, and 3.  Generally, state law requirements that call for the disclosure of items of information not covered by the federal law, or that require more detailed disclosures, do not contradict the federal requirements. Examples of laws that are not preempted include:   • A state law that requires disclosure of the minimum periodic payment for open-end credit, even though not required by § 226.7.   • A state law that requires contracts to contain warnings such as: "Read this contract before you sign. Do not sign if any spaces are left blank. You are entitled to a copy of this contract."   Similarly, a state law that requires itemization of the amount financed does not automatically contradict the permissive itemization under § 226.18(c). However, a state law requirement that the itemization appear with the disclosure of the amount financed in the segregated closed-end credit disclosures is inconsistent, and this location requirement would be preempted.   4.  Creditor's options.  Before the Board makes a determination about a specific state law, the creditor has certain options. Since the prohibition against giving the state disclosures does not apply until the Board makes its determination, the creditor may choose to give state disclosures until the Board formally determines that the state law is inconsistent. (The Board will provide sufficient time for creditors to revise forms and procedures as necessary to conform to its determinations.)   • Under this first approach, as in all cases, the federal disclosures must be clear and conspicuous, and the closed-end disclosures must be properly segregated in accordance with § 226.17(a)(1).   • This ability to give state disclosures relieves any uncertainty that the creditor might have prior to Board determinations of inconsistency.   As a second option, the creditor may apply the preemption standards to a state law, conclude that it is inconsistent, and choose not to give the state-required disclosures. However, nothing in § 226.28(a) provides the creditor with immunity for violations of state law if the creditor chooses not to make state disclosures and the Board later determines that the state law is not preempted.   5.  Rules for correction of billing errors and regulation of credit reports.  The preemption criteria for the fair credit billing provisions set forth in § 226.28 have two parts. With respect to the rules on correction of billing errors and regulation of credit reports (which are in § 226.13), § 226.28(a)(2)(i) provides that a state law is inconsistent and preempted if its requirements are different from the federal law. An exception is made, however, for state laws that allow the consumer to inquire about an account and require the creditor to respond to such inquiries beyond the time limits in the federal law. Such a state law is not preempted with respect to the extra time period. For example, § 226.13 requires the consumer to submit a written notice of billing error within 60 days after transmittal of the periodic statement showing the alleged error. If a state law allows the consumer 90 days to submit a notice, the state law remains in effect to provide the extra 30 days. Any state law disclosures concerning this extended state time limit must reflect the qualifications and conform to the format specified in § 226.28(a)(2)(i). Examples of laws that would be preempted include:   • A state law that has a narrower or broader definition of "billing error."   • A state law that requires the creditor to take different steps to resolve errors.   • A state law that provides different timing rules for error resolution (subject to the exception discussed above).   6.  Rules for other fair credit billing provisions.  The second part of the criteria for fair credit billing relates to the other rules implementing chapter 4 of the act (addressed in §§ 226.4(c)(8), 226.5(b)(2)(ii), 226.6(d), 226.7(k), 226.9(a), 226.10, 226.11, 226.12(c) through {{4-29-83 p.6972}}(f), 226.13, and 226.21). Section 226.28(a)(2)(ii) provides that the test of inconsistency is whether the creditor can comply with state law without violating federal law. For example:   • A state law that allows the card issuer to offset the consumer's credit-card indebtedness against funds held by the card issuer would be preempted, since § 226.12(d) prohibits such action.   • A state law that requires periodic statements to be sent more than 14 days before the end of a free-ride period would not be preempted.   • A state law that permits consumers to assert claims and defenses against the card issuer without regard to the $50 and 100-mile limitation of § 226.12(c)(3)(ii) would not be preempted.   In the last two cases, compliance with state law would involve no violation of the federal law.   7.  Who may receive a chapter 4 determination.  Only states (through their authorized officials) may request and receive determinations on inconsistency with respect to the fair credit billing provisions.   8.  Preemption determination--Arizona.   Effective October 1, 1983, the Board has determined that the following provisions in the state law of Arizona are preempted by the federal law:   • Section 44-287 B.5--Disclosure of final cash price balance. This provision is preempted in those transactions in which the amount of the final cash price balance is the same as the federal amount financed, since in such transactions the state law requires the use of a term different from the federal term to represent the same amount.   • Section 44-287 B.6--Disclosure of finance charge. This provision is preempted in those transactions in which the amount of the finance charge is differenct from the amount of the federal finance charge, since in such transactions the state law requires the use of the same term as the federal law to represent a different amount.   • Section 44-287 B.7--Disclosure of the time balance. The time balance disclosure provision is preempted in those transactions in which the amount is the same as the amount of the federal total of payments, since in such transactions the state law requires the use of a term different from the federal term to represent the same amount.   9.  Preemption determination--Florida.   Effective October 1, 1983, the Board has determined that the following provisions in the state law of Florida are preempted by the federal law:   • Sections 520.07(2)(f) and 520.34(2)(f)--Disclosure of amount financed. This disclosure is preempted in those transactions in which the amount is different from the federal amount financed, since in such transactions the state law requires the use of the same term as the federal law to represent a different amount.   • Sections 520.07(2)(g), 520.34(2)(g), and 520.35(2)(d)--Disclosure of finance charge and a description of its components. The finance charge disclsoure is preempted in those transactions in which the amount of the finance charge is different from the federal amount, since in such transactions the state law requires the use of the same term as the federal law to represent a different amount. The requirement to describe or itemize the components of the finance charge, which is also included in these provisions, is not preempted.   • Sections 520.07(2)(h) and 520.34(2)(h)--Disclosure of total of payments. The total of payments disclosure is preempted in those transactions in which the amount differs from the amount of the federal total of payments, since in such transactions the state law requires the use of the same term as the federal law to represent a different amount than the federal law.   • Sections 520.07(2)(i) and 520.34(2)(i)--Disclosure of deferred payment price. This disclosure is preempted in those transactions in which the amount is the same as the federal total sale price, since in such transactions the state law requires the use of a different term than the federal law to represent the same amount as the federal law. {{4-30-91 p.6973}}   10.  Preemption determination--Missouri.   Effective October 1, 1983, the Board has determined that the following provisions in the state law of Missouri are preempted by the federal law:   • Sections 365.070--6(9) and 408.260--5(6)--Disclosure of principal balance. This disclosure is preempted in those transactions in which the amount of the principal balance is the same as the federal amount financed, since in such transactions the state law requires the use of a term different from the federal term to represent the same amount.   • Sections 365.070--6(10) and 408.260--5(7)--Disclosure of time price differential and time charge, respectively. These disclosures are preempted in those transactions in which the amount is the same as the federal finance charge, since in such transactions the state law requires the use of a term different from the federal law to represent the same amount.   • Sections 365.070--2 and 408.260--2--Use of the terms "time price differential" and "time charge" in certain notices to the buyer. In those transactions in which the state disclosure of the time price differential or time charge is preempted, the use of the terms in this notice also is preempted. The notice itself is not preempted.   • Sections 365.070--6(11) and 408.260--5(8)--Disclosure of time balance. The time balance disclosure is preempted in those transactions in which the amount is the same as the amount of the federal total of payments, since in such transactions the state law requires the use of a different term than the federal law to represent the same amount.   • Sections 365.070--6(12) and 408.260--5(9)--Disclosure of time sale price. This disclosure is preempted in those transactions in which the amount is the same as the federal total sale price, since in such transactions the state law requires the use of a different term from the federal law to represent the same amount.   11.  Preemption determination--Mississippi.   Effective October 1, 1984, the Board has determined that the following provision in the state law of Mississippi is preempted by the federal law:   • Section 63--19--31(2)(g)--Disclosure of finance charge. This disclosure is preempted in those cases in which the term "finance charge" would be used under state law to describe a different amount than the finance charge disclosed under federal law.   12.  Preemption determination--South Carolina.  Effective October 1, 1984, the Board has determined that the following provision in the state law of South Carolina is preempted by the federal law.   • Section 37--10--102(c)--Disclosure of due-on-sale clause. This provision is preempted, but only to the extent that the creditor is required to include the disclosure with the segregated federal disclosures. If the creditor may comply with the state law by placing the due-on-sale notice apart from the federal disclosures, the state law is not preempted.   13.  Preemption determination--Arizona. Effective October 1, 1986, the Board has determined that the following provision in the state law of Arizona is preempted by the federal law:   • Section 6--621A.2--Use of the term "the total sum of $ _______ " in certain notices provided to borrowers. This term describes the same item that is disclosed under federal law as the "total of payments." Since the state law requires the use of a different term than federal law to describe the same item, the state-required term is preempted. The notice itself is not preempted.   (NOTE: The state disclosure notice that incorporated the above preempted term was amended on May 4, 1987, to provide that disclosures must now be made pursuant to the federal disclosure provisions.)   14.  Preemption determination--Indiana. Effective October 1, 1988, the Board has determined that the following provision in the state law of Indiana is preempted by the federal law:   • Section 23--2--5--8--Inclusion of the loan broker's fees and charges in the calculation of, among other items, the finance charge and annual percentage rate disclosed to {{4-30-91 p.6974}}potential borrowers. This disclosure is inconsistent with sections 106(a) and § 226.4(a) of the federal statute and regulation, respectively, and is preempted in those instances where the use of the same term would disclose a different amount than that required to be disclosed under federal law.   15.  Preemption determination--Wisconsin. Effective October 1, 1991, the Board has determined that the following provisions in the state law of Wisconsin are preempted by the federal law:   • Section 422.308(1)--the disclosure of the annual percentage rate in cases where the amount of the annual percentage rate disclosed to consumers under the state law differs from the amount that would be disclosed under federal law, since in those cases the state law requires the use of the same term as the federal law to represent a different amount then the federal law.   • Section 766.565(5)--the provision permitting a creditor to include in an open-end home equity agreement authorization to declare the account balance due and payable upon receiving notice of termination from a non-obligor spouse, since such provision is inconsistent with the purpose of the federal law.   28(b)  Equivalent disclosure requirements.   1.  General.  A state disclosure may be substituted for a federal disclosure only after the Board has made a finding of substantial similarity. Thus, the creditor may not unilaterally choose to make a state disclosure in place of a federal disclosure, even if it believes that the state disclosure is substantially similar. Since the rule stated in § 226.28(b) does not extend to any requirement relating to the finance charge or annual percentage rate, no state provision on computation, description, or disclosure of these terms may be substituted for the federal provision. References   Statute:  Secs. 111 and 171(a) and (c).   Other sections:  Appendix A.   Previous regulation:  § 226.6(b) and (c), and interpretation § 226.604.   1981 changes:  Section 226.28 implements amended § 111 of the act. The test for preemption of state laws relating to disclosure and advertising is now whether the state law "contradicts" the federal, rather than whether state requirements are "different."   The revised regulation contains no counterpart to § 226.6(c) of the previous regulation concerning placement of inconsistent disclosures. It also reflects the statutory amendment providing that once the Board determines that a state-required disclosure is inconsistent with federal law, the creditor may not make the state disclosure. 28(d) Special Rule for Credit and Charge Cards   1.  General.  The standard that applies to preemption of state laws as they affect transactions of the type subject to §§ 226.5a and 226.9(e) differs from the preemption standards generally applicable under the Truth in Lending Act. The Fair Credit and Charge Card Disclosure Act fully preempts state laws relating to the disclosure of credit information in consumer credit or charge card applications or solicitations. (For purposes of this section, a single credit or charge card application or solicitation that may be used to open either an acccount for consumer purposes or an account for business purposes is deemed to be a "consumer credit or charge card application or solicitation.") For example, a state law requiring disclosure of credit terms in direct mail solicitations for consumer credit card accounts is preempted. A state law requiring disclosures in telephone applications for consumer credit card accounts also is preempted, even it if applies to applications initiated by the consumer rather than the issuer, because the state law relates to the disclosure of credit information in applications or solicitations within the general field of preemption, that is, consumer credit and charge cards.   2.  Limitations on field of preemption.  Preemption under the Fair Credit and Charge Card Disclosure Act does not extend to state laws applying to types of credit other than open-end consumer credit and charge card accounts. Thus, for example, a state law is not preempted as it applies to disclosures in credit and charge card applications and solicitations solely for business-purpose accounts. On the other hand, state credit disclosure {{4-30-91 p.6975}}laws will not apply to a single application or solicitation to open either an account for consumer purposes or an account for business purposes. Such "dual purpose" applications and solicitations are treated as "consumer credit or charge card applications or solicitations" under this section and state credit disclosure laws applicable to them are preempted. Preemption under this statute does not extend to state laws applicable to home equity plans; preemption determinations in this area are based on the Home Equity Loan Consumer Protection Act, as implemented in § 226.5b of the regulation.   3.  Laws not preempted.  State laws relating to disclosures concerning credit and charge cards other than in applications, solicitations, or renewal notices are not preempted under § 226.28(d). In addition, state laws regulating the terms of credit and charge card accounts are not preempted, nor are laws preempted that regulate the form or content of information unrelated to the information required to be disclosed under §§ 226.5a and 226.9(e). Finally, state laws concerning the enforcement of the requirements of §§ 226.5a and 226.9(e) and state laws prohibiting unfair or deceptive acts or practices concerning credit and charge card applications, solicitations and renewals are not preempted. Examples of laws that are not preempted include:   • A state law that requires card issuers to offer a grace period or that prohibits certain fees in credit and charge card transactions.   • A state retail installment sales law or a state plain language law, except to the extent that it regulates the disclosure of credit information in applications, solicitations and renewals of accounts of the type subject to §§ 226.5a and 226.9(e).   • A state law requiring notice of a consumer's rights under antidiscrimination or similar laws or a state law requiring notice about credit information available from state authorities. Section 226.29—State Exemptions   29(a)  General rule.   1.  Classes eligible.  The state determines the classes of transactions for which it will request an exemption, and makes its application for those classes. Classes might be, for example, all open-end credit transactions, all open-end and closed-end transactions, or all transactions in which the creditor is a bank.   2.  Substantial similarity.  The "substantially similar" standard requires that state statutory or regulatory provisions and state interpretations of those provisions be generally the same as the federal act and Regulation Z. This includes the requirement that state provisions for reimbursement to consumers for overcharges be at least equivalent to those required in § 108 of the act. A state will be eligible for an exemption even if its law covers classes of transactions not covered by the federal law. For example, if a state's law covers agricultural credit, this will not prevent the Board from granting an exemption for consumer credit, even though agricultural credit is not covered by the federal law.   3.  Adequate enforcement.  The standard requiring adequate provision for enforcement generally means that appropriate state officials must be authorized to enforce the state law through procedures and sanctions comparable to those available to federal enforcement agencies. Furthermore, state law must make adequate provision for enforcement of the reimbursement rules.   4.  Exemptions granted.  Effective October 1, 1982, the Board has granted the following exemptions from portions of the revised Truth in Lending Act:   • Maine.  Credit or lease transactions subject to the Maine Consumer Credit Code and its implementing regulations are exempt from chapters 2, 4 and 5 of the federal act. (The exemption does not apply to transactions in which a federally chartered institution is a creditor or lessor.)   • Connecticut.  Credit transactions subject to the Connecticut Truth in Lending Act are exempt from chapters 2 and 4 of the federal act. (The exemption does not apply to transactions in which a federally chartered institution is a creditor.) {{4-30-91 p.6976}}   • Massachusetts.  Credit transactions subject to the Massachusetts Truth in Lending Act are exempt from chapters 2 and 4 of the federal act. (The exemption does not apply to transactions in which a federally chartered institution is a creditor.)   • Oklahoma.  Credit or lease transactions subject to the Oklahoma Consumer Credit Code are exempt from chapters 2 and 5 of the federal act. (The exemption does not apply to §§ 132 through 135 of the federal act, nor does it apply to transactions in which a federally chartered institution is a creditor or lessor.)   • Wyoming.  Credit transactions subject to the Wyoming Consumer Credit Code are exempt from chapter 2 of the federal act. (The exemption does not apply to transactions in which a federally chartered institution is a creditor.)   29(b)  Civil liability.   1.  Not eligible for exemption.  The provision that an exemption may not extend to §§ 130 and 131 of the act assures that consumers retain access to both federal and state courts in seeking damages or civil penalties for violations, while creditors retain the defenses specified in those sections.   References   Statute:  Secs. 108, 123, and 171(b).   Other sections:  Appendix B.   Previous regulation:  § 226.12.   1981 changes:  The procedures that states must follow to seek exemptions are now located in an appendix. Exemptions under the previous regulation will be automatically revoked on April 1, 1982, when compliance with the new regulation is mandatory. Section 226.30--Limitation on Rates   1.  Scope of coverage. The requirement of this section applies to consumer credit obligations secured by a dwelling (as dwelling is defined in § 226.2(a)(19)) in which the annual percentage rate may increase after consummation (or during the term of the plan, in the case of open-end credit) as a result of an increase in the interest rate component of the finance charge--whether those increases are tied to an index or formula or are within a creditor's discretion. The section applies to credit sales as well as loans. Examples of credit obligations subject to this section include:   • Dwelling-secured credit obligations that require variable-rate disclosures under the regulation because the interest rate may increase during the term of the obligation.   • Dwelling-secured open-end credit plans entered into before November 7, 1989 (the effective date of the home equity rules) that are not considered variable-rate obligations for purposes of disclosure under the regulation but where the creditor reserves the contractual right to increase the interest rate--periodic rate and corresponding annual percentage rate--during the term of the plan.   In contrast, credit obligations in which there is no contractual right to increase the interest rate during the term of the obligation are not subject to this section. Examples include:   • "Shared-equity" or "shared-appreciation" mortgage loans that have a fixed rate of interest and a shared-appreciation feature based on the consumer's equity in the mortgaged property. (The appreciation share is payable in a lump sum at a specified time.)   • Dwelling-secured fixed rate closed-end balloon payment mortgage loans and dwelling-secured fixed rate open-end plans with a stated term that the creditor may renew at maturity. (Contrast with the renewable balloon-payment mortgage instrument described in comment 17(c)(1)--11.)   • Dwelling-secured fixed rate closed-end multiple advance transactions in which each advance is disclosed as a separate transaction.   • "Price level adjusted mortgages" or other indexed mortgages that have a fixed rate of interest but provide for periodic adjustments to payments and the loan balance to reflect changes in an index measuring prices or inflation. {{4-30-96 p.6977}} The requirement of this section does not apply to credit obligations entered into prior to December 9, 1987. Consequently, new advances under open-end credit plans existing prior to December 9, 1987, are not subject to this section.   2.  Refinanced obligations. On or after December 9, 1987, when a credit obligation is refinanced, as defined in § 226.20(a), the new obligation is subject to this section if it is dwelling-secured and allows for increases in the interest rate.   3.  Assumptions. On or after December 9, 1987, when a credit obligation is assumed, as defined in § 226.20(b), the obligation becomes subject to this section if it is dwelling-secured and allows for increases in the interest rate.   4.  Modifications of obligations. The modification of an obligation, regardless of when the obligation was entered into, is generally not covered by this section. For example, increasing the credit limit on a dwelling-secured, open-end plan with a variable interest rate entered into before the effective date of the rule does not make the obligation subject to this section. If, however, a security interest in a dwelling is added on or after December 9, 1987, to a credit obligation that allows for interest rate increases, the obligation becomes subject to this section. Similarly, if a variable interest rate feature is added to a dwelling-secured credit obligation, the obligation becomes subject to this section.   5.  Land trusts. In some states, a land trust is used in residential real estate transactions. (See discussion in comment 3(a)--8). If a consumer-purpose loan that allows for interest rate increases is secured by an assignment of a beneficial interest in a land trust that holds title to a consumer's dwelling, that loan is subject to this section.   6.  Relationship to other sections. Unless otherwise provided for in the commentary to this section, other provisions of the regulation such as definitions, exemptions, rules and interpretations also apply to this section where appropriate. To illustrate:   • An adjustable interest rate business-purpose loan is not subject to this section even if the loan is secured by a dwelling because such credit extensions are not subject to the regulation. (See generally § 226.3(a).)   • Creditors subject to this section are only those that fall within the definition of a creditor in § 226.2(a)(17).   7.  Consumer credit contract. Creditors are required to specify a lifetime maximum interest rate in their credit contracts--the instrument that creates personal liability and generally contains the terms and conditions of the agreement (for example, a promissory note or home-equity line of credit agreement). In some states, the signing of a commitment letter may create a binding obligation, for example, constituting "consummation" as defined in § 226.2(a)(13). The maximum interest rate must be included in the credit contract, but a creditor may include the rate ceiling in the commitment instrument as well.   8.  Manner of stating the maximum interest rate. The maximum interest rate must be stated in the credit contract either as a specific amount or in any other manner that would allow the consumer to easily ascertain, at the time of entering into the obligation, what the rate ceiling will be over the term of the obligation. For example, the following statements would be sufficiently specific:   • The maximum interest rate will not exceed X%.   • The interest rate will never be higher than X percentage points above the initial rate of Y%.   • The interest rate will not exceed X%, or X percentage points about [a rate to be determined at some future point in time], whichever is less.   • The maximum interest rate will not exceed X%, or the state usury ceiling, whichever is less.   The following statements would not comply with this section:   • The interest rate will never be higher than X percentage points over the prevailing market rate.   • The interest rate will never be higher than X percentage points above [a rate to be determined at some future point in time].   • The interest rate will not exceed the state usury ceiling which is currently X%. {{4-30-96 p.6978}}   A creditor may state the maximum rate in terms of a maximum annual percentage rate that may be imposed. Under an open-end credit plan, this normally would be the corresponding annual percentage rate. (See generally § 226.6(a)(2).)   9.  Multiple interest rate ceilings. Creditors are not prohibited from setting multiple interest rate ceilings. For example, on loans with multiple variable-rate features, creditors may establish a maximum interest rate for each feature. To illustrate, in a variable-rate loan that has an option to convert to a fixed rate, a creditor may set one maximum interest rate for the initially imposed index-based variable-rate feature and another for the conversion option. Of course, a creditor may establish one maximum interest rate applicable to all features.   10.  Interest rate charged after default. State law may allow an interest rate after default higher than the contract rate in effect at the time of default; however, the interest rate after default is subject to a maximum interest rate set forth in a credit obligation that is otherwise subject to this section. This rule applies only in situations in which a post-default agreement is still considered part of the original obligation.   11.  Increasing the maximum interest rate--general rule. Generally, a creditor may not increase the maximum interest rate originally set on a credit obligation subject to this section unless the consumer and the creditor enter into a new obligation. Therefore, under an open-end plan, a creditor may not increase the rate ceiling imposed merely because there is an increase in the credit limit. If an open-end plan is closed and another opened, a new rate ceiling may be imposed. Furthermore, where an open-end plan has a fixed maturity and a creditor renews the plan at maturity, or enters into a closed-end credit transaction, a new maximum interest rate may be set at that time. If the open-end plan provides for a repayment phase, the maximum interest rate cannot be increased when the repayment phase begins unless the agreement provided for such an increase. For a closed-end credit transaction, a new maximum interest rate may be set only if the transaction is satisfied and replaced by a new obligation. (The exceptions in § 226.20(a)(1)--(5) which limit what transactions are considered refinancings for purposes of disclosure do not apply with respect to increasing a rate ceiling that has been imposed; if a transaction is satisfied and replaced, the rate ceiling may be increased.)   12.  Increasing the maximum interest rate--assumption of an obligation. If an obligation subject to this section is assumed by a new obligor and the original obligor is released from liability, the maximum interest rate set on the obligation may be increased as part of the assumption agreement. (This rule applies whether or not the transaction constitutes an assumption as defined in § 226.20(b).)   13.  Transition rules. Under footnote 50, if creditors properly include the maximum rate in their credit contracts, creditors need not revise their Truth in Lending disclosure statement forms to add the disclosures about limitations on rate increases as part of the variable-rate disclosures, until October 1, 1988. On or after that date, creditors must have the maximum rate set forth in their credit contracts and, where applicable, as part of their Truth in Lending disclosures in the manner prescribed in the applicable sections of the regulation. References   Statute: Competitive Equality Banking Act of 1987, Pub. L. No. 100--86, 101 Stat. 552   Other sections: Sections 226.6, 226.18, and 226.19.   Previous regulation: None   1987 changes: This section implements section 1204 of the Competitive Equality Banking Act of 1987, Pub. L. 100--86, 101 Stat. 552 which provides that, effective December 9, 1987, adjustable-rate mortgages must include a limitation on the interest rate that may apply during the term of the mortgage loan. An adjustable-rate mortgage loan is defined in section 1204 as "any loan secured by a lien on a one-to-four family dwelling unit, including a condominium unit, cooperative housing unit, or mobile home, where the loan is made pursuant to an agreement under which the creditor may, from time to time, adjust the rate of interest." The rule in this section incorporates section 1204 into Regulation Z and limits the scope of section 1204 to dwelling-secured consumer credit {{8-29-08 p.6979}}subject to the Truth in Lending Act, in which a creditor has the contractual right to increase the interest rate during the term of the credit obligation. [Main Tabs]     [Table of Contents - 6500]     [Index]     [Previous Page]     [Next Page]     [Search]

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