OPEN-END
CREDIT DISCLOSURES
Rules for advertising open-end credit differ in important ways from those for advertising closed-end credit. This section of the manual explains the "triggering terms" and other rules that apply to open-end credit advertising and special rules applicable to home equity plans.
Triggering Terms for All Open-End Credit
If an advertisement promoting open-end credit contains any of the following triggering terms, three specific disclosures also must be included in the ad. The triggering terms are:
(1) The periodic rate used to compute the finance charge or the annual percentage rate.
Examples:
"Less than 1½% per month"
"14% APR"
(2) A statement of when the finance charge begins to accrue, including the "free ride period (if any).
Examples:
"Up to 30 days of free credit if you pay in full each month"
"We charge interest from the date we receive notice of your purchase"
(3) The method of determining the balance on which a finance charge may be imposed
Examples:
"A small monthly service charge on your remaining balance each month"
"Interest will be charged on your average daily balance each month"
(4) The method of determining the finance charge, including a description of how any finance charge other than the periodic rate will be determined.
Examples:
"You only pay $1.00 each time you write an overdraft check"
"Minimum finance charge: 50 cents per month"
(5) The amount of any charge other than a finance charge that may be imposed as part of the plan.
Example:
"There is a $25 annual membership fee to get your card"
These terms, in contrast, do not trigger the required disclosures:
"Charge Accounts Available"
"Open a Revolving Budget Account"
"Just Say 'Charge It'"
'1411 Major Credit Cards Honored"
"Charge Some Cash"
Required Disclosures
If any triggering term is used in an open-end credit advertisement, then the following three disclosures also must appear:
(1) Any minimum, fixed, transaction, activity, or similar charge that could be imposed;
(2) Any periodic rate that may be applied, expressed as an "annual percentage rate"10 The term "annual percentage rate" or an abbreviation such as "APR" must be used and, if the plan provides for a variable periodic rate, that fact must be disclosed; and
(3) Any membership or participation fee.11
| Sample Disclosure The following advertisement would comply with the law: Now pay only 14% APR on your credit card from XYZ Credit Services! (Annual fee $25; minimum monthly finance charge of 50 cents; $1 service charge on each cash advance.) |
[Fig. 8]
Advertising Finance Rates
In contrast to closed-end credit, the periodic rate and APR are tnggenng terms in open-end credit, and so require the disclosures discussed above. As with closed-end credit, however, an ad that complies with the triggering term rules may show a periodic rate as well as the APR. For example, an ad could show the rate as 1.17 percent per month, so long as the ad also showed the 14 percent APR and complied with the other triggering term rules.
Special Compliance Issues
Variable Rates
Requirements for advertising open-end, variable-rate credit plans differ in some ways from those for closed-end plans. In an advertisement for an open-end, variable-rate plan that contains a triggering term, there are several ways in which the annual percentage rate may be stated. The advertisement may:
In addition, the advertisement must disclose the variable-rate feature. You can satisfy this requirement with a statement that the "annual percentage rate may vary" or a similar statement. The advertisement need not explain the circumstances under which the rate may increase, the limitations on the increase, or the effects of an increase.
Discounted Variable Rates
Discounted variable-rate plans—a plan with an interest rate that is reduced by the lender for a short, introductory period—are also offered in open-end financing. If the advertisement for this plan contains a triggering term, the ad must show, in addition to the other required information, the introductory annual percentage rate and how long that rate is valid. It also must show the APR after the introductory period and indicate that the second rate may vary. The rate after the introductory period (called the "indexed rate") must be calculated using the current value of the index as of the time of placement of the ad, or as of a specified recent date, or must be clearly and conspicuously labeled as an estimate.
Suppose you wish to advertise a plan with a 7.5% APR for the first six months, and an indexed rate equal to the prime rate plus a margin of 1.5% after that introductory period If the prime rate as of the time the ad is run (say, November 1) is 10%, and the APR for the credit would be 10.5%, the plan could be advertised as follows:
7.5% APR FOR THE FIRST SIX MONTHS!
After first six months, APR is 10.5% (as of November 1),
subject to increase based on market conditions.
Note that the ad need not give details about the adjustments, such as the index used or the method of computing the rate. Nevertheless, you may want to provide that information as a convenience to consumers.
Other Considerations
You must state all required disclosures in specific terms. For example, if an advertisement contains a triggering term, a general statement that "the finance charge will be imposed on the opening balance less all appropriate credits" is not adequate to disclose the balance on which the finance charge is computed. The reason is that this statement does not inform the consumer of the size and nature of the credits.
[Fig. 9]
Home Equity Plans
Promotions for home equity financing are subject to special advertising requirements, as well as to the general open-end requirements discussed above. These special requirements apply to advertisements for home equity plans that involve open-end credit and are secured by the consumer's dwelling, including a vacation or second home.
If an advertisement promoting home equlty credit contains any of the following triggering terms, stated either affirmatively or negatively, three specific disclosures must be included in the ad. The home equity triggering terms are:
(1) The periodic rate used to compute the finance charge or the annual percentage rate.
Example:
"In our home equity plan, you pay only l/2% per month"
"We offer home equity loans for only 8% APR"
(2) A statement of when the finance charge begins to accrue, including the "free ride" period (if any).
Example:
"There is no free ride period in this home equity plan"
(3) The method of determining the balance on which a finance charge may be imposed
Example:
"In this home equity plan, we charge interest on your previous balance"
(4) The method of determining the finance charge, including a description of how any finance charge other than the periodic rate will be determined.
Example:
"You pay a charge of only $1.00 when you use your home equity line of credit"
(5) The amount of any charge other than a finance charge that may be imposed as part of the plan
Example:
"No annual fees on our super home equity line"
(6) The payment terms of the plan, such as the length of the draw period, the repayment period, and the minimum periodic payments.
Example:
"Only $100 per month in our home equity plan"
"Up to 10 years to repay"
Required Disclosures
If any of the above triggering terms are used in a home equity credit ad, then the following three disclosures must appear clearly and conspicuously in the advertisement:
(1) Any loan fee that is a percentage of the credit limit under the plan, and an estimate of any other fees for opening the plan stated as a single dollar amount or a reasonable range;
(2) Any periodic rate used to compute the finance charge, expressed as an annual percentage rate.
(3) The maximum annual percentage rate that may be imposed in a variable rate plan
Discounted Rates
If an advertisement for a home equity plan with a variable rate plan states a discounted rate (an initial annual percentage rate that is not based on the index and margin used for later rate adjustments), the ad must also state additional information. It must state the period of time the initial rate will be in effect. It must also show, with equal prominence to the initial rate, a reasonably current APR that would have been in effect using the index and margin
Balloon Payments
If a home equity advertisement contains a statement about any minimum periodic payment (only $150 per month), the ad must also disclose, if applicable, that a balloon payment may result.
Misleading Terms
Advertisements for home equity plans may not make misleading statements regarding the tax deductibility of any interest expense. For example, an advertisement referring to the tax deductibility of home equity credit would not be misleading if it includes a statement that the consumer should consult a tax advisor regarding the deductibility of interest costs.
Home equity ads may also not use the term "free money" or similarly misleading terms.
Other Considerations
Some home equity plans provide for conversion to a repayment phase in which additional advances are not permitted beyond a certain time period. Even if this information is included in the advertisement, the promotion is covered by the general open-end and special home equity rules discussed in this chapter, not by the closed-end (installment) advertising rules. For example, if the ad states "five-year draw period, with ten additional years to pay off the balance,' the ad would comply with the law if it also stated clearly and conspicuously:
"Only $500 to open this plan; 12% APR, subject to increase, maximum APR 20%" 13
[10]In open-end credit' the "annual percentage rate" for advertisements is found by multiplying the periodic rate by the number of periods in a year. Sections 2264 and 22614 of Regulation Z provide further information on the finance charge and annual percentage rate for open-end credit.
[11]Solicitations by card issuers that offer to open a credit or charge card account are subject to additional (non-advertising) disclosure requirements. Check Section 226.5a of Regulation Z directly for this information.
[12]If you disclose an estimated rate, the estimate must be based on the best information reasonably available at the time of the | advertisement, and the ad must state explicitly that the rate disclosed is an estimate.
[13]This disclosure assumes that in this home equity plan, there are no loan fees that are a percentage of the credit limit, no minimum, fixed transaction, or similar charges, and no membership or participation fees.
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