Final Rule—Amendment To Regulation Z - Part 226 — Truth in Lending Act

Federal Reserve Bulletin, May, 2000

The Board of Governors is amending 12 C.F.R. Part 226, its Regulation Z (Truth in Lending), to reflect revisions addressing short-term cash advances commonly called "payday loans." The Board is also publishing technical corrections to the commentary and regulation.

Effective March 24, 2000, 12 C.F.R. Part 226 is amended 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).

Subpart B--Open-End Credit

2. Section 226.5a(a)(3) is revised to read as follows:

Section 226.5a--Credit and charge card applications and solicitations

(a) * * *

   (3) Exceptions. This section does not apply to home-equity plans accessible
   by a credit or charge card that are of the type subject to the requirements
   of section 226.5b; overdraft lines of credit tied to asset accounts
   accessed by check-guarantee cards or by debit cards; or lines of credit
   accessed by check-guarantee cards or by debit cards that can be used only
   at automated teller machines.

3. In section 226.12, paragraph (g) is revised to read as follows:

Section 226.12--Special credit card provisions

(g) Relation to Electronic Fund Transfer Act and Regulation E. For guidance on whether Regulation Z (12 C.F.R. Part 226) or Regulation E (12 C.F.R. Part 205) applies in instances involving both credit and electronic fund transfer aspects, refer to Regulation E, 12 C.F.R. 205.12(a) regarding issuance and liability for unauthorized use. On matters other than issuance and liability, this section applies to the credit aspects of combined credit/electronic fund transfer transactions, as applicable.

4. In Supplement I to Part 226:

   a. Under Section 226.2-Definitions and Rules of Construction, under
   2(a)(14) Credit., paragraph 2. is added.

   b. Under Section 226.13-Billing Error Resolution, under 13(i) Relation to
   Electronic Fund Transfer Act and Regulation E., paragraph 3. is revised.

   c. Under Section 226.19-Certain Residential Mortgage and Variable-Rate
   Transactions, under 19(b) Certain variable-rate transactions, paragraph 5.
   is revised.

   d. Under Section 226.19-Certain Residential Mortgage and Variable-Rate
   Transactions, under Paragraph 19(b)(2), paragraph 4. is amended by removing
   "section 226.19(b)(2)(xi)" and adding "section 226.19(b)(2)(x)" in its
   place.

   e. Under Section 226.19-Certain Residential Mortgage and Variable-Rate
   Transactions, under Paragraph 19(b)(2)(vi), paragraph 1. is amended by
   removing "comments 19(b)(2)(viii)-7 and 19(b)(2)(x)-4" and adding "comments
   19(b)(2)(viii)(A)-7 and 19(b)(2)(viii)(B)-4" in its place.

   f. Under Section 226.19-Certain Residential Mortgage and Variable-Rate
   Transactions, under Paragraph 19(b)(2)(vii), paragraph 1. is amended by
   removing "comments 19(b)(2)(viii)-6 and 19(b)(2)(x)-3" and adding "comments
   19(b)(2)(viii)(A)-6 and 19(b)(2)(viii)(B)-3" in its place.

   g. Under Section 226.32-Requirements for Certain Closed-End Home Mortgages,
   under Paragraph 32(a)(1)(ii), the second sentence of paragraph 2. is
   revised and paragraph 2.v. is added; and

   h. Under Section 226.32-Requirements for Certain Closed-End Home Mortgages,
   under Paragraph 32(c)(4), paragraph 1. is amended by removing "section
   226.19(b)(2)(x)" and adding "section 226.19(b)(2)(viii)(B)" in its place.

Supplement I to Part 226--Official Staff Interpretations

Subpart A--General

Section 226.2--Definitions and Rules of Construction

2(a) Definitions

2(a)(14) Credit

2. Payday loans; deferred presentment. Credit includes a transaction in which a cash advance is made to a consumer in exchange for the consumer's personal check, or in exchange for the consumer's authorization to debit the consumer's deposit account, and where the parties agree either that the check will not be cashed or deposited, or that the consumer's deposit account will not be debited, until a designated future date. This type of transaction is often referred to as a "payday loan" or "payday advance" or "deferred presentment loan." A fee charged in connection with such a transaction may be a finance charge for purposes of section 226.4, regardless how the fee is characterized under state law. Where the fee charged constitutes a finance charge under section 226.4 and the person advancing funds regularly extends consumer credit, that person is a creditor and is required to provide disclosures consistent with the requirements of Regulation Z. See section 226.2(a)(17).

Subpart B--Open-End Credit

Section 226.13--Billing Error Resolution

13(i) Relation to Electronic Fund Transfer Act and Regulation E

3. Application to debit/credit transactions-examples. If a consumer withdraws money at an automated teller machine and activates an overdraft credit feature on the checking account:

   i.  An error asserted with respect to the transaction is subject, for error
   resolution purposes, to the applicable Regulation E provisions (such as
   timing and notice) for the entire transaction.

   ii. The creditor need not provisionally credit the consumer's account,
   under section 205.11(c)(2)(i) of Regulation E, for any portion of the
   unpaid extension of credit.

   iii. The creditor must credit the consumer's account under section
   205.11(c) with any finance or other charges incurred as a result of the
   alleged error.

   iv. The provisions of section 226.13(d) and (g) apply only to the credit
   portion of the transaction.