Truth in Lending

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Final rule.

SUMMARY:

The Board is publishing revisions to the official staff commentary to Regulation Z (Truth in Lending). The commentary applies and interprets the requirements of Regulation Z. The revisions address short-term cash advances commonly called “payday loans.” The Board is also publishing technical corrections to the commentary and regulation.

DATES:

This rule is effective March 24, 2000. Compliance is optional until October 1, 2000.

FOR FURTHER INFORMATION CONTACT:

Natalie E. Taylor, Counsel, or Michael L. Hentrel or David A. Stein, Staff Attorneys; 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 providing for disclosures about its terms and cost. The act requires creditors to disclose the cost of credit as a dollar amount (the finance charge) and as an annual percentage rate (APR). Uniformity in creditors' disclosures is intended to assist consumers in comparison shopping. TILA requires additional disclosures for loans secured by consumers' homes and permits consumers to rescind certain transactions that involve their principal dwelling. The act also regulates certain practices of creditors.

TILA is implemented by the Board's Regulation Z (12 CFR part 226). The Board's official staff commentary (12 CFR part 226 (Supp. I)) interprets the regulation, and provides guidance to creditors in applying the regulation to specific transactions. The commentary is a substitute for individual staff interpretations; it is updated periodically to address significant questions that arise.

In November 1999, the Board published proposed amendments to the commentary (64 FR 60368, November 5, 1999). The Board received more than 50 comment letters. Most of the comments were from financial institutions, other creditors, and their representatives. Comments were also received from state attorneys general, state regulatory agencies, and consumer advocates. The comment letters were focused on the proposed comment concerning payday loans. Most commenters supported the proposal. A few commenters, mostly payday lenders and their representatives, were opposed.

As discussed below, the commentary is being adopted substantially as proposed. Some revisions have been made for clarity in response to commenters' suggestions. The commentary revision concerning payday loans clarifies that when such transactions involve an agreement to defer payment of a debt, they are within the definition of credit in TILA and Regulation Z. Several technical corrections are being made to the commentary and regulation.

II. Regulatory Revisions

Subpart B—Open-End Credit

Section 226.5a—Credit and Charge Card Applications and Solicitations

5a(a) General Rules.

5a(a)(3) Exceptions.

Section 226.5a(a)(3) is republished to correct a technical error. This section was published in its entirety in 1989. (54 FR 13865, April 6, 1989.) A portion of the text was inadvertently omitted from subsequent publications of the Code of Federal Regulations (54 FR 24670, June 9, 1989).

Section 226.12-Special Credit Card Provisions

12(g) Relation to Electronic Fund Transfer Act and Regulation Z.

Section 226.12(g) contains a reference and citation to the Board's Regulation E (Electronic Fund Transfers), 12 CFR Part 205. Technical amendments have been made to conform the citation in section 226.12(g) with organizational changes made to Regulation E in 1996. The references to sections 205.5 and 205.6 of Regulation E are replaced by a reference to section 205.12(a).

III. Commentary Revisions

Subpart A—General

Section 226.2—Definitions and Rules of Construction

2(a) Definitions.

2(a)(14) Credit.

The Board proposed to add comment 2(a)(14)-2 to clarify that transactions commonly known as “payday loans” constitute credit for purposes of TILA. These transactions may also be known as “cash advance loans,” “check advance loans,” “post-dated check loans,” “delayed deposit checks,” or “deferred deposit checks.”

Typically in such transactions, a cash advance is made to a consumer in exchange for the consumer's personal check, or the consumer's authorization to debit the consumer's deposit account electronically. In either case, the consumer pays a fee in connection with the advance. Both parties understand that the amount advanced is not, or may not be, available from the consumer's deposit account at the time of the exchange. The parties agree, therefore, that the consumer's check will not be cashed or deposited for collection (or the consumer's deposit account debited) until a designated future date. On that date, the consumer may have the option of repaying the obligation or further deferring repayment of the advance. The consumer may repay the obligation in various ways, for example, by providing cash or by allowing the obligee to deposit the consumer's check or electronically debit the consumer's deposit account.

Most commenters supported the proposal because they believed that payday loans are credit transactions. A few commenters opposed the proposal. These commenters questioned whether payday loans should be covered under TILA when applicable state law does not treat such transactions as credit. They were concerned that Regulation Z would preempt state law where, for example, the transactions are regulated under check-cashing laws, and they also asserted that providing TILA disclosures would result in unnecessary compliance costs. These commenters also questioned whether disclosure of the APR in such transactions provides consumers with useful information. One commenter asserted that the proposed comment's scope was unclear, and believed the comment might be interpreted too broadly, resulting in the application of Regulation Z to noncredit transactions. This commenter also suggested that payday lenders will be unable to determine whether transactions are consumer credit or for an exempt purpose, such as business credit.

For the reasons discussed below, comment 2(a)(14)-2 is adopted to clarify that payday loans, and similar transactions where there is an agreement to defer payment of a debt, constitute credit for purposes of TILA. Some revisions have been made for clarity to address commenters' concerns.

Consistent with section 103(e) of TILA, section 226.2(a)(14) of Regulation Z defines “credit” as the right to defer the payment of debt or the right to incur debt and defer its payment. Comment 2(a)(14)-2 is intended to provide an example of a specific transaction that involves an agreement to defer payment of a debt. In these transactions, the consumer receives a cash advance in exchange for the consumer's check or authorization to debit the consumer's deposit account. Because there is also an agreement to defer presentment of the check or defer debiting the consumer's account, there is an agreement to defer payment of the debt. Such agreements are deemed to be “credit” as defined by section 226.2(a)(14), however they are described—as payday loans, cash advances, check advance loans, deferred presentment transactions, or by another name. Contemporaneous check-cashing transactions will not be affected where there is no agreement to defer presentment of the consumer's check; the routine delay in debiting a consumer's deposit account during the check collection process does not constitute credit.

TILA, as implemented by Regulation Z, reflects the intent of the Congress to provide consumers with uniform cost disclosures to promote the informed use of credit and assist consumers in comparison shopping. This purpose is furthered by applying the regulation to transactions, such as payday loans, that fall within the statutory definition of credit, regardless of how such transactions are treated or regulated under state law. The fact that some creditors may have to comply with state laws as well as with Regulation Z, and that creditors may bear compliance costs, is not a sufficient basis to disregard TILA's applicability to the covered transactions. Where a creditor is unable to determine if a transaction is primarily for an exempt purpose, such as business-purpose credit, the creditor is free to make disclosures under TILA, and the fact that disclosures are made would not be controlling on the question of whether the transaction was exempt. See Comment 3(a)-1.

A few commenters questioned the effect of the proposed comment on state laws that regulate payday loans and similar transactions. Section 226.28 of Regulation Z describes the effect of TILA on state laws. As a general matter, state laws are preempted if they are inconsistent with the act and regulation, and then only to the extent of the inconsistency. A state law is inconsistent if it requires or permits creditors to make disclosures or take actions that contradict the requirements of federal law. A state law may not be deemed inconsistent if it is more protective of consumers.

TILA does not impair a state's authority to regulate or prohibit payday lending activities. Persons that regularly extend payday loans and otherwise meet the definition of creditor (§ 226.2(a)(17)) are required, however, to provide disclosures to consumers consistent with the requirements of Regulation Z. The Board notes that a number of state statutes expressly require payday lenders to provide federal TILA disclosures. The Board will review any issues brought to its attention regarding the effect of TILA and Regulation Z on particular state laws. Appendix A to Regulation Z outlines the Board's procedures for making such determinations.

Some commenters expressed concern that by referring specifically to “payday loans,” the proposed comment might be limited to transactions labeled as such. Comment 2(a)(14)-2 has been modified to address this concern. Transactions in which the parties agree to defer payment of a debt are “credit” transactions regardless of the label used to describe them.

In describing payday loan transactions, the proposed comment referred to the fact that consumers typically must pay a fee. Some commenters questioned whether such fees are finance charges for purposes of Regulation Z. These commenters noted that under some state laws, the fees charged for payday loans and similar transactions are not considered interest or finance charges.

A fee charged in connection with a payday loan may be a finance charge for purposes of TILA pursuant to section 226.4 of Regulation Z, regardless of how the fee is characterized for state law purposes. Where the fee charged constitutes a finance charge under TILA, and the person advancing funds regularly extends consumer credit, that person is a creditor covered by Regulation Z. See § 226.2(a)(17). Comment 2(a)(14)-2 has been revised to reflect this guidance.

A few commenters sought clarification on whether payday lenders obtain a security interest in the check provided by a consumer. Under Regulation Z, the existence of a security interest is determined by the applicable state law. See § 226.2(a)(25). Once a security interest is determined to exist, it must be disclosed according to section 226.6(c) for open-end credit plans, or section 226.18(m) for closed-end transactions. If a creditor is unsure whether a particular interest is a security interest under applicable law, the creditor may at its option treat it as a security interest for purposes of TILA. See Comment 2(a)(25)-1.

Comment 2(a)(14)-2 has been added as an example of a specific type of transaction that involves an agreement to defer payment of a debt. Because such a transaction falls within the existing statutory and regulatory definition of “credit,” the comment does not represent a change in the law. Generally, updates to the Board's staff commentary are effective upon 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 their documents to accommodate TILA's disclosure requirements.

Subpart B—Open-End Credit

Section 226.13—Billing Error Resolution

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

A technical amendment has been made to comment 13(i)-3 to conform a citation to Regulation E with organizational changes made to that regulation. The reference to section 205.11(e) of Regulation E has been replaced with a reference to section 205.11(c).

Subpart C—Closed-End Credit

Section 226.19—Certain Residential Mortgage and Variable-Rate Transactions

19(b) Certain variable-rate transactions.

The Board is adopting technical amendments to comments 19(b)-5, 19(b)(2)-4, 19(b)(2)(vi)-1, and 19(b)(2)(vii)-1 to conform the citations in those comments to section 226.19(b)(2) of Regulation Z, as amended. No substantive change is intended.

Subpart E—Special Rules for Certain Home Mortgage Transactions

Section 226.32—Requirements for Certain Closed-end Home Mortgages

32(a) Coverage.

32(a)(1)(ii).

TILA, as amended by the Home Ownership and Equity Protection Act of 1994 (HOEPA), imposes additional disclosure requirements and substantive limitations on certain closed-end mortgage loans bearing rates or fees above a certain percentage or amount. See § 226.32. Such loans are covered by HOEPA if the total points and fees payable by the consumer at or before loan closing exceed the greater of $400 or 8 percent of the total loan amount. HOEPA requires the Board to adjust the $400 amount annually on January 1 by the annual percentage change in the Consumer Price Index (CPI) that was reported on the preceding June 1. (15 U.S.C. 1602(aa)(3) and 12 CFR 226.32(a)(1)(ii)). The adjusted amount for 2000 ($451), published on November 5, 1999 (64 FR 60335), is added to comment 32(a)(1)(ii)-2.

32(c) Disclosures.

32(c)(4) Variable-rate.

The Board is revising comment 32(c)(4)-1 to conform the citations in the comment to section 226.19(b)(2) of Regulation Z, as amended. No substantive change is intended.

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 12 CFR part 226 as follows:

PART 226—TRUTH IN LENDING (REGULATION Z)

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

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

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

Subpart B—Open-End Credit

By order of the Board of Governors of the Federal Reserve System, acting through the Director of the Division of Consumer and Community Affairs and the Secretary of the Board under delegated authority, March 24, 2000.