Regulation Z is the federal truth in lending statute governing disclosures for both "closed end" and "open end" credit transactions. In a "closed end" transaction, credit is extended just once, for instance, in the form of a car loan. In an "open end" transaction, credit is extended in an on-going way; a credit card agreement is a form of open end credit.
Closed End Credit
A creditor offering closed end credit must make certain disclosures before the transaction is consummated, clearly and conspicuously, in writing, and in a form the consumer may keep. The disclosures must appear in a table, and the table may not contain other information not directly related to the required disclosures.
Disclosures required include:
- the identity of the creditor
- the dollar amount being financed (the principal of the loan)
- the finance charge (the dollar amount that the credit will cost you)
- the annual percentage rate (the interest rate)
- the payment schedule (the number, amounts, and timing of payments)
- the total of payments (the dollar amount you will have paid when all payments are made)
- the total sale price (down payment, plus amount being financed, plus finance charge)
- any prepayment penalty (a fee charged if the consumer pays off the loan early)
- any charge for late payments
If the annual percentage rate may increase, the creditor must also disclose the circumstances under which the rate may increase, any limitations on the increase, the effect of an increase, and an example of the payment terms that would result from an increase. If the creditor reserves the right to demand repayment of the loan under certain circumstances, that must also be disclosed. The creditor's disclosures must include a statement that directs the consumer to the appropriate contract document for certain other information about the terms of the credit being extended.
The creditor must give the consumer a written itemization of the amount financed, including: the amount of any funds being distributed directly to the consumer; any amount credited to the consumer's account with the creditor; and any amounts being distributed to other persons (or creditors) on the consumer's behalf. These persons must be identified, either by name, or by such descriptions as "public officials or government agencies," "credit reporting agencies," "appraisers," or "insurance companies."
Open End Credit
In an "open end" credit transaction, the creditor must also make certain disclosures, clearly and conspicuously, in writing, in a form the consumer may keep. For a credit card solicitation or application to open a credit card account, the required disclosures must be made with the application or solicitation, in a table format.
The card issuer must disclose:
- the annual percentage rate of interest (If more than one rate may apply, the range of balances to which each rate is applicable must also be disclosed. If the account has a variable rate, the card issuer must also disclose the fact that the rate may vary, and how the rate is determined.)
- any annual or other periodic fee for the card, including any fee based on account activity or inactivity
- any minimum or fixed finance charge that could be imposed during a billing cycle
- any transaction charges imposed for the use of the card for purchases
- any cash advance fee
- any late payment fee
- any fee for charging over one's credit limit
- any "grace period," during which any credit used for purchases may be repaid without incurring a finance charge (If the length of the grace period varies, the card issuer must disclose the range of days, the minimum number of days, or the average number of days in the grace period.)
The card issuer must identify the method used to calculate the outstanding balance on the card. Examples include "average daily balance, including new purchases," and "two-cycle average daily balances, including new purchases." (This second method results in significantly higher finance charges.)
A credit card issuer must send the consumer a statement each billing cycle, which must state:
- the previous balance, if any, outstanding at the beginning of the billing cycle
- each credit transaction
- the date of the transaction or the date the consumer's account was debited
- credits to the account during the billing cycle, including the amount and date of crediting
- each interest rate used to compute the finance charge
- the balance on which each part of the finance charge is computed
- the amount of the finance charge and any other charges
- the closing date of the billing cycle
- the account balance outstanding on the closing date of the billing cycle
The card issuer must include an address to be used for notice of billing errors, and any grace period during which payment must be received to avoid additional finance charges.