Protecting Personal Information: Five Steps for Business

What’s in your file cabinet right now? Tax records? Payroll information? And what’s on your computer system? Financial data from your suppliers? Credit card numbers from your customers? To a busy marketer, those documents are an everyday part of doing business. But in the hands of an identity thief, they’re tools for draining bank accounts, opening bogus lines of credit, and going on the shopping spree of a lifetime — at the expense of your company, your employees, and the customers who trust you.

Sophisticated hack attacks make the headlines, but many security breaches could be prevented by commonsense measures that cost companies next to nothing. That’s why the Federal Trade Commission (FTC) has published Protecting Personal Information: A Guide for Business, a plain-language handbook with practical tips on securing sensitive data. The specifics depend on the size of your company and the kind of information you have, but the basic principles remain the same. Whether you work for a multinational powerhouse with branches around the world or a start-up based in a home office, a sound information security plan is built on these five key practices:

Take stock. Know what personal information you have in your files and on your computer. Understand how personal information moves into, through, and out of your business and who has access — or could have access to it.

Scale down. Keep only what you need for your business. That old business practice of holding on to every scrap of paper is “so 20th century.” These days, if you don’t have a legitimate business reason to have sensitive information in your files or on your computer, don’t keep it.

Lock it. Protect the information you keep. Be cognizant of physical security, electronic security, employee training, and the practices of your contractors and affiliates.

Pitch it. Properly dispose of what you no longer need. Make sure papers containing personal information are shredded, burned, or pulverized so they can’t be reconstructed by an identity thief.

Plan ahead. Draft a plan to respond to security incidents. Designate a senior member of your team to create an action plan before a breach happens.

Get your copy of Protecting Personal Information: A Guide for Business at http://www.ftc.gov/bcp/conline/edcams/infosecurity/index.html. While you’re there, download copies for your IT manager, your human resources department, your sales staff, and anyone else who comes in contact with customer or employee information.



Dennis Zabawa is an Leading Authority in Business Funding. Dennis is available to come and be a speaker at your next event. He has a great topic, "Why are you not wealthy?" For further information, please visit the website, www.creditiswealth.com

Disposing of Consumer Report Information? New Rule Tells How

In an effort to protect the privacy of consumer information and reduce the risk of fraud and identity theft, a new federal rule is requiring businesses to take appropriate measures to dispose of sensitive information derived from consumer reports.

Any business or individual who uses a consumer report for a business purpose is subject to the requirements of the Disposal Rule. The Rule requires the proper disposal of information in consumer reports and records to protect against “unauthorized access to or use of the information.” The Federal Trade Commission, the nation’s consumer protection agency, enforces the Disposal Rule.

According to the FTC, the standard for the proper disposal of information derived from a consumer report is flexible, and allows the organizations and individuals covered by the Rule to determine what measures are reasonable based on the sensitivity of the information, the costs and benefits of different disposal methods, and changes in technology.

Although the Disposal Rule applies to consumer reports and the information derived from consumer reports, the FTC encourages those who dispose of any records containing a consumer’s personal or financial information to take similar protective measures.

Who must comply?
The Disposal Rule applies to people and both large and small organizations that use consumer reports. Among those who must comply with the Rule are:
Consumer reporting companies
Lenders
Insurers
Employers
Landlords
Government agencies
Mortgage brokers
Automobile dealers
Attorneys or private investigators
Debt collectors
Individuals who obtain a credit report on prospective nannies, contractors, or tenants
Entities that maintain information in consumer reports as part of their role as service providers to other organizations covered by the Rule

What information does the Disposal Rule cover?
The Disposal Rule applies to consumer reports or information derived from consumer reports. The Fair Credit Reporting Act defines the term consumer report to include information obtained from a consumer reporting company that is used – or expected to be used – in establishing a consumer’s eligibility for credit, employment, or insurance, among other purposes. Credit reports and credit scores are consumer reports. So are reports businesses or individuals receive with information relating to employment background, check writing history, insurance claims, residential or tenant history, or medical history.

What is ‘proper’ disposal?
The Disposal Rule requires disposal practices that are reasonable and appropriate to prevent the unauthorized access to – or use of – information in a consumer report. For example, reasonable measures for disposing of consumer report information could include establishing and complying with policies to:
burn, pulverize, or shred papers containing consumer report information so that the information cannot be read or reconstructed;
destroy or erase electronic files or media containing consumer report information so that the information cannot be read or reconstructed;

conduct due diligence and hire a document destruction contractor to dispose of material specifically identified as consumer report information consistent with the Rule. Due diligence could include:
reviewing an independent audit of a disposal company’s operations and/or its compliance with the Rule;
obtaining information about the disposal company from several references;
requiring that the disposal company be certified by a recognized trade association;
reviewing and evaluating the disposal company’s information security policies or procedures.

The FTC says that financial institutions that are subject to both the Disposal Rule and the Gramm-Leach-Bliley (GLB) Safeguards Rule should incorporate practices dealing with the proper disposal of consumer information into the information security program that the Safeguards Rule requires (ftc.gov/privacy/privacyinitiatives/safeguards.html).

The Fair and Accurate Credit Transactions Act, which was enacted in 2003, directed the FTC, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, and the Securities and Exchange Commission to adopt comparable and consistent rules regarding the disposal of sensitive consumer report information. The FTC’s Disposal Rule became effective June 1, 2005. It was published in the Federal Register on November 24, 2004 [69 Fed. Reg. 68,690], and is available at ftc.gov/os/2004/11/041118disposalfrn.pdf.



Dennis Zabawa is an Leading Authority in Business Funding. Dennis is available to come and be a speaker at your next event. He has a great topic, "Why are you not wealthy?" For further information, please visit the website, www.creditiswealth.com

Slip Showing?

Federal Law Requires All Businesses to Truncate Credit Card Information on Receipts

What’s on the credit and debit card receipts you give your customers? The Federal Trade Commission (FTC), the nation’s consumer protection agency, says it’s time for companies to check their receipts and make sure they’re complying with a law that’s been in effect for all businesses since December 1, 2006.

According to the federal Fair and Accurate Credit Transaction Act (FACTA), the electronically printed credit and debit card receipts you give your customers must shorten — or truncate — the account information. You may include no more than the last five digits of the card number, and you must delete the card’s expiration date. For example, a receipt that truncates the credit card number and deletes the expiration date could look like this:

ACCT: ***********12345
EXP: ****

Why is it important for businesses to make sure they’re complying with this law? Credit card numbers on sales receipts are a “golden ticket” for fraudsters and identity thieves. Savvy businesses appreciate the importance of protecting their customers — and themselves — from credit card crime.

But there are other important reasons to make sure your slips are ship-shape. Noncompliance could open a company up to an FTC law enforcement action, including civil penalties and injunctive relief. In addition, the law allows consumers to sue businesses that don’t comply and to collect damages and attorney’s fees.

While Congress passed this provision in December 2003, it has been phased in gradually, requiring merchants with newer electronic card processing machines to comply by December 2004. Merchants with older machines were given until December 1, 2006. So now all companies that electronically print credit or debit card receipts must truncate the information on the copy they give their customers. That’s why it’s important to make sure all your equipment complies with the law.

Several details of the law are worth noting: It applies only to electronically printed receipts, not to handwritten or imprinted ones. And it applies only to receipts you give your customer at point of sale, not to any transaction record you retain. Be aware, however, that when you keep your customers’ personal information — including account data — you have an obligation to keep it safe. Read Protecting Personal Information: A Guide for Business, available at ftc.gov/infosecurity, for tips on safeguarding sensitive data.



Dennis Zabawa is an Leading Authority in Business Funding. Dennis is available to come and be a speaker at your next event. He has a great topic, "Why are you not wealthy?" For further information, please visit the website, www.creditiswealth.com

New ‘Red Flag’ Requirements for Financial Institutions and Creditors Will Help Fight Identity Theft

Identity thieves use people’s personally identifying information to open new accounts and misuse existing accounts, creating havoc for consumers and businesses. Financial institutions and creditors soon will be required to implement a program to detect, prevent, and mitigate instances of identity theft.

The Federal Trade Commission (FTC), the federal bank regulatory agencies, and the National Credit Union Administration (NCUA) have issued regulations (the Red Flags Rules) requiring financial institutions and creditors to develop and implement written identity theft prevention programs, as part of the Fair and Accurate Credit Transactions (FACT) Act of 2003. The programs must be in place by November 1, 2008, and must provide for the identification, detection, and response to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft.

Who must comply with the Red Flags Rules?
The Red Flags Rules apply to “financial institutions” and “creditors” with “covered accounts.”
Under the Rules, a financial institution is defined as a state or national bank, a state or federal savings and loan association, a mutual savings bank, a state or federal credit union, or any other entity that holds a “transaction account” belonging to a consumer. Most of these institutions are regulated by the Federal bank regulatory agencies and the NCUA. Financial institutions under the FTC’s jurisdiction include state-chartered credit unions and certain other entities that hold consumer transaction accounts.

A transaction account is a deposit or other account from which the owner makes payments or transfers. Transaction accounts include checking accounts, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts.

A creditor is any entity that regularly extends, renews, or continues credit; any entity that regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who is involved in the decision to extend, renew, or continue credit. Accepting credit cards as a form of payment does not in and of itself make an entity a creditor. Creditors include finance companies, automobile dealers, mortgage brokers, utility companies, and telecommunications companies. Where non-profit and government entities defer payment for goods or services, they, too, are to be considered creditors. Most creditors, except for those regulated by the Federal bank regulatory agencies and the NCUA, come under the jurisdiction of the FTC.

A covered account is an account used mostly for personal, family, or household purposes, and that involves multiple payments or transactions. Covered accounts include credit card accounts, mortgage loans, automobile loans, margin accounts, cell phone accounts, utility accounts, checking accounts, and savings accounts. A covered account is also an account for which there is a foreseeable risk of identity theft – for example, small business or sole proprietorship accounts.

Complying with the Red Flags Rules
Under the Red Flags Rules, financial institutions and creditors must develop a written program that identifies and detects the relevant warning signs – or “red flags” – of identity theft. These may include, for example, unusual account activity, fraud alerts on a consumer report, or attempted use of suspicious account application documents. The program must also describe appropriate responses that would prevent and mitigate the crime and detail a plan to update the program. The program must be managed by the Board of Directors or senior employees of the financial institution or creditor, include appropriate staff training, and provide for oversight of any service providers.

How flexible are the Red Flags Rules?
The Red Flags Rules provide all financial institutions and creditors the opportunity to design and implement a program that is appropriate to their size and complexity, as well as the nature of their operations. Guidelines issued by the FTC, the federal banking agencies, and the NCUA (ftc.gov/opa/2007/10/redflag.shtm) should be helpful in assisting covered entities in designing their programs. A supplement to the Guidelines identifies 26 possible red flags. These red flags are not a checklist, but rather, are examples that financial institutions and creditors may want to use as a starting point. They fall into five categories:
alerts, notifications, or warnings from a consumer reporting agency;
suspicious documents;

suspicious personally identifying information, such as a suspicious address;
unusual use of – or suspicious activity relating to – a covered account; and
notices from customers, victims of identity theft, law enforcement authorities, or other businesses about possible identity theft in connection with covered accounts. More detailed compliance guidance on the Red Flags Rules will be forthcoming. For questions about compliance with the Rules, you may contact RedFlags@ftc.gov.



Dennis Zabawa is an Leading Authority in Business Funding. Dennis is available to come and be a speaker at your next event. He has a great topic, "Why are you not wealthy?" For further information, please visit the website, www.creditiswealth.com

Getting Business Credit

Whether you're planning to start your own business or expand the one you own, you may be in the market for credit. When you shop for a loan or line of credit, remember that the law protects you against discrimination. The Equal Credit Opportunity Act (ECOA) prohibits creditors from denying you a loan based on reasons that have nothing to do with your credit-worthiness.

The Federal Trade Commission wants you to know that:
You cannot be denied business credit on the basis of your race, color, religion, national origin, sex, marital status, or age - or that of your customers. For example, if you request a loan to open a store, a creditor can't deny your application based on your race or your customers'.

If your application for business credit is rejected, you can find out why. You must submit a written request for the reasons within 60 days of the denial. The creditor must give you the specific reasons - in writing - within 30 days of your request. If you don't agree with the reasons, consider discussing your concerns with the lender; you may be able to resolve the issues.

If your business is small (less than $1 million in gross revenues), the lender must keep records of your credit application for one year after telling you of the credit decision. If your business grosses more than $1 million, the lender has to keep your records on file for only 60 days after denying you credit. If you ask that your records be kept longer, however, or if you ask for a written statement of the reasons for denial, the lender must keep your file for a year. If you don't ask about the reasons for denial within 60 days, the law permits the creditor to destroy your records. Note that these records could be important for any legal action you may consider against a lender.

You have the right to sue a creditor who doesn't comply with the law. If you have a complaint about a government lender, public utility company, small loan and finance company, travel and expense credit card company, or other non-bank creditor, you may want to file a complaint with the FTC.



Dennis Zabawa is an Leading Authority in Business Funding. Dennis is available to come and be a speaker at your next event. He has a great topic, "Why are you not wealthy?" For further information, please visit the website, www.creditiswealth.com

Complying with the Credit Practices Rule

Introduction
The Federal Trade Commission staff prepared this business booklet to help finance companies, retailers, and other creditors comply with the Credit Practices Rule, which went into effect March 1, 1985. This booklet tells you what the Credit Practices Rule requires, who must comply, and what transactions are covered. It also discusses liability for rule violations and how exemptions are granted.

How the Credit Practices Rule Affects Consumer Contracts

What the Rule Requires
The Credit Practices Trade Regulation Rule has three major provisions. First, it prohibits creditors from using certain contract provisions that the Federal Trade Commission found to be unfair to consumers. The prohibited contract provisions are confessions of judgment, waivers of exemption, wage assignments, and security interests in household goods. Second, the Rule requires creditors to advise consumers who cosign obligations about their potential liability if the other person fails to pay. Third, the Rule prohibits late charges in some situations.

Who Must Comply
This Rule applies to all creditors subject to the jurisdiction of the Federal Trade Commission. It includes all finance companies, retailers (such as auto dealers and furniture and department stores), and credit unions that offer consumer credit contracts. Similar rules have been passed by the Federal Reserve Board and the Federal Home Loan Bank Board for banks, savings and loan associations, and other institutions under their jurisdiction.

What Transactions Are Covered
The Rule covers all consumer credit transactions, except those involving the purchase of real estate. It covers loans made to consumers who purchase goods or services for personal, family, or household uses, even though those loans may be secured by real estate owned by the consumers. The Rule also applies to the sale of goods or services under lease-purchase plans.
However, contracts with your customers signed before March 1, 1985, which contain the four prohibited provisions -- confessions of judgment, waivers of exemption, wage assignments, or security interests in household goods -- are enforceable and not in violation of the Rule.

Similarly, you may collect debts from cosigners who became obligated before the effective date of the Rule, even though they did not receive the notice that the Rule requires. On the other hand, after March 1, 1985, you may not collect late fees that are prohibited by the Rule, even if the contract was signed before that date.

How Penalties Are Assessed
The Federal Trade Commission can sue violators of the Credit Practices Rule in federal court. The court can impose civil penalties of up to $10,000 for each violation and can issue an order prohibiting further violations.

How Exemptions Are Granted
A state may petition the Commission at any time for a state-wide exemption from any of the Rule's provisions, as noted under 16 C.F.R. Section 444.5 of the Rule. If the Commission finds that the state law affords a level of protection to consumers that is substantially equivalent to, or greater than the protection afforded by the Rule and the state has the ability to enforce and administer that law effectively, an exemption may be granted. Filing an exemption petition, however, does not stay the Rule, which remains in effect in that state until the exemption is granted.

Any person to who the Credit Practices Rule applies, including creditors, also may petition the Commission for exemption from any of the Rule's provisions (Federal Trade Commission's Rules of Practice, 16 C.F.R. Section 1.16).

How to Comply with the Rule
This section points out the important parts of the Rule and explains how to comply. It discusses the prohibition against certain contract provisions; the required use of a certain cosigner notice; and the prohibition against late charges in certain situations.

Prohibited Contract Provisions
Certain consumer provisions, which you may have used in consumer credit contracts, are now prohibited. These include: confessions of judgment; waivers of exemption; wage assignments; and security interests in household goods. If your consumer credit contracts contain language that requires a debtor to confess judgment, to waive exemptions, to assign wages or income, or to give you a blanket security interest in all household goods, you should remove that language from all contracts signed on or after March 1, 1985. If you have not done so, you are in violation of the Rule.

Confessions of Judgment
In states that have not specifically outlawed the practice, certain consumer credit contracts have contained language taking away certain rights that consumers being sued would ordinarily have. The include the right to receive notice of the suit, to appear in court, and to raise any defenses that they may have. This provision, usually called a "confession of judgment," allowed judgment to be entered for the creditor automatically when the creditor sued the debtor for breach of the contract. The Rule now prohibits creditors from including confession of judgment provisions, such as the following, in consumer credit contracts:
To secure payment hereof, the undersigned jointly and severally irrevocably authorize any attorney of any court of record to appear for any one or more of them in such court in term or vacation, after default in payment hereof and confess a judgment without process in favor of the creditor hereof for such amount as may then appear unpaid hereon, to release all errors which may intervene in any such proceedings, and to consent to immediate execution upon such judgment, hereby ratifying every act of such attorney hereunder.

The Rule's prohibition against "confessions of judgment," however, does not prohibit power-of-attorney provisions that allow you to repossess and sell collateral, as long as these provisions do not interfere with the consumer's right to be heard in court. The Rule also does not prohibit a consumer from acknowledging liability after suit has been filed and the consumer has been duly notified. The Rule is not intended to interfere with whatever rights you have to repossess secured property.

Waivers of Exemption
Previously, some consumer credit contracts contained "waiver of exemption" provisions that permitted creditors to seize (or threaten to seize) specific possessions or possessions of a specified value, even if state law treated them as exempt from seizure. Every state has a law that defines certain property (generally, property considered necessities) that a debtor is allowed to keep even if a creditor sues and obtains a judgment. By signing a waiver of exemption, a debtor made that property available to a creditor who obtained a judgment to satisfy a debt. Clauses such as the following are no longer permissible under the FTC Rule:
Each of us hereby both individually and severally waives any or all benefit or relief from the homestead exemption and all other exemptions or moratoriums to which the signers or any of them may be entitled under laws of this or any other State, now in force or hereafter to be passed, as against this debt or any renewal thereof.

The Rule's prohibition against "waiver of exemption" provisions does not prevent you from using particular kinds of collateral. However, if state law provides an exemption for certain kinds or amounts of property, the contract cannot contain a provision causing the consumer to give up that protection. In that case, an unsecured creditor who obtained a judgment could not seize that property. Nonetheless, if you have a valid security interest in property, your security interest would not be affected, even if that property is exempt by state law. However, this provision of the Rule should be considered with another Rule provision that prohibits the taking of a security interest in certain property defined as household goods.

Wage Assignments
Previously, if consumers did not pay as agreed, some consumer credit contracts permitted creditors to go directly to the consumers' employers to have their wages, or some part of them, paid directly to the creditors. Under the Rule's prohibition against "wage assignments," your consumer contracts may not provide for the irrevocable advance assignment to you of any money due consumers because of their personal services (usually through employment) if they do not pay as agreed. The Rule prohibits irrevocable assignments to creditors of salaries, commissions, bonuses, pensions, and disability benefits, as well as wages due to consumers.
Below is an example of a wage assignment provision that is no longer permitted in consumer credit contracts:

If default be made in payment of the above-described debt, which is the time balance (Total of Payments) due on a retail installment contract, each of the undersigned hereby assigns, transfers and sets over to the above-named assignee, wages, salary, commissions, bonuses and periodic payments pursuant to a retirement or pension plan due or subsequently earned from his present employer or from any future employer within a period of two (2) years from the date of execution hereof. This assignment shall remain effective as to all of the undersigned Debtors.
The amount that may be collected by assignee here on shall not exceed the lesser of (1) 15% of the gross amount paid assignor for any week, or (2) the amount by which disposable earning for a week exceed thirty times the Federal Minimum Hourly Wage in effect at the time the amounts are payable; and shall be collected until the total amount due under this assignment is paid or until expiration of employer's payroll period ending immediately prior to 30 days after service of the demand hereon, which first occurs. This Wage Assignment shall be valid for a period of three years from date hereof.

The term "disposable earnings" means that part of the earnings remaining after deduction of any amounts required by law to be withheld.

The assignor(s) hereby authorize, empower, and direct his/their said employer(s) to pay assignee any and all moneys due or to become due assignor(s)_ hereon, authorize assignee to receipt for the same and release and discharge employer from all liability to assignor(s) on account of moneys paid in accordance herewith. no copy hereof shall be served on employers(s) except in conformity with applicable law.

However, the Rule specifically permits you to use payroll deduction plans where consumers choose to pay by regular deductions from paychecks. Such payroll deduction plans may provide that, if borrowers change employers, final paychecks will be assigned to you to be credited toward balances due on loans, without notice to debtors and without allegations of default or delinquency. Your contracts also may provide for wage assignments that can be revoked at will by consumers and for assignments of wages already earned at the time of the assignment. In addition, you may require that the revocation of a voluntary wage assignment be in writing.

The Rule's prohibition against "wage assignments" does not prohibit garnishment. If a creditor obtains a court judgment against a debtor, the creditor may continue to use wage garnishment to collect that judgment, subject to the consumer protections provided by federal (and sometimes state) law.

Security Interests in Household Goods
Previously, some consumer credit contracts contained non-purchase money security agreements that allowed a creditor to repossess many household goods in the consumer's home if the consumer did not pay as agreed. Now your contracts cannot use language, such as the following, that provide for repossession of certain household goods specified in the Rule:
This not is secured by a security interest in consumer goods consisting of all household goods, furniture, appliances, and bric-a-brac, now owned and hereinafter acquired, including replacements, and located in or about the premises at the Debtor's residence (unless otherwise stated) or at any other location to which the goods may be moved. In addition, all other goods and chattels of like nature hereafter acquired by the Debtor and kept or used in or about said premises and substituted for any property mentioned. Proceeds and products of the collateral are also covered.

The Rule's definition of "household goods" includes household necessities such as clothing, appliances, and linens, and some items of little economic value to you, but of unique, personal value to the consumer .These may include items such as family photographs, personal papers, the family Bible, and household pets. Excluded from the definition of household goods are:
Works of art, electronic entertainment equipment (except one television and one radio), items acquired as antiques (more than 100 years old), and jewelry (except wedding rings).

The rule permits consumers to offer as security these valuable possessions to obtain credit as well as pianos or other musical instruments, boats, snowmobiles, bicycles, cameras, hoe workshops, and similar items.

Under the Rule, you may continue to take "purchase money security interests" in any household goods when the consumer uses the loan proceeds or the credit advanced to purchase the household goods. If you refinance or consolidate an agreement with a purchase money security interest in household goods, you may retain the purchase money security interest as a part of the refinanced or consolidated agreement to the extent permitted by state law. If you take possession of the secured property (as in pledge agreements that pawnbrokers commonly use), the Rule permits a security interest even if the property pledged is household goods.

Notice to Cosigners
If you require a cosigner for a loan applicant who does not meet your standards of creditworthiness or for debtors in default, the Rule requires you to inform each cosigner of the potential liability involved before the cosigner becomes obligated for the debt. You must use the following statement:

Notice to Cosigner
You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for debt.
If a state statute or regulation requires a different notice to cosigners, you may include that notice on the document if it is not inconsistent with the notice required by the Rule. If a statement in the FTC notice (such as one that says you can collect from the consigner without first trying to collect from the primary debtor) is inaccurate under sate law, you may omit it from the notice used in that state.

You need not give the notice to someone who signs a security agreement, when there is no personal liability for the debt. On a revolving charge account, you only need to give the notice to a cosigner once, when the account is opened.

You may print the cosigner notice on your letterhead and include identifying information, such as the credit account number, the name of the cosigner, the amount of the debt, and the date. You also may provide a signature line for the cosigner to acknowledge receipt of the notice. However, you may not include any additional statement in the notice that would distract the cosigner's attention from the message in the notice (But you may add whatever additional information you wish to your own file copy of the notice.) You may not attach the notice form to other documents unless is appears before any other document in the package.

The cosigner notice should be in the same language as the agreement to which it applies. For example, if the agreement is in Spanish, the cosigner notice also should be in Spanish.
If you use cosigners in your consumer credit contracts and these contracts were signed on or after March 1, 1985, you should provide those cosigners with the notice required by the Rule. If you are not doing so, you are in violation of the Rule.

A "cosigner" is different from a co-buyer, co-borrower, or co-applicant because a cosigner receives not tangible benefit from the agreement, but undertakes liability as a favor to the main debtor who would not otherwise qualify for credit. On the other hand, a co-buyer (one who shares in the purchased goods), a co-borrower (one who shares in the loan proceeds), or a co- applicant or co-cardholder (a person who is authorized to use a credit card account) do receive benefits. Therefore, they are not considered cosigners under the Rule, and you are not required to provide the notice to them.

Late Charges
Some creditors previously calculated late fees for delinquent payments using a practice called "pyramiding" of late charges. When one payment was made after its due date and a late fee was assessed but not paid promptly, all future payments were considered delinquent even though they were, in fact, paid in full within the required time period. As a result, late fees were assessed on all future payments. In other words, each successive payment was considered "short" by the amount of the previous late charge, with the result that another late charge was imposed.



Dennis Zabawa is an Leading Authority in Business Funding. Dennis is available to come and be a speaker at your next event. He has a great topic, "Why are you not wealthy?" For further information, please visit the website, www.creditiswealth.com

How to Write Readable Credit Forms

If your company offers consumer credit, you probably communicate with your customers using many different standardized forms and notices. These may range from short notices to complicated contracts that explain the terms of your credit plan. This manual is intended to help you write consumer credit contracts and other forms in "Plain English" so that your customers can easily understand them.

Over the past ten years, a number of major insurance companies, retailers, and banks have voluntarily redrafted their consumer communications into "Plain English."

Many other companies have simplified their forms in response to state law developments. Since 1974, seven states have adopted "plain language" laws covering consumer contracts, including credit agreements. A number of other states are considering similar legislation.

Why do creditors use "Plain English" language in consumer credit communications? Here are four reasons that companies have discovered:

"Plain English" is good for Customer Relations.When you communicate simply and directly with your customers, you show them that you value their business.

Customers expect to understand what you have to say.Consumers expect clear information about matters that affect their financial decisions.

Customers need to understand their obligations.Your customers can best understand credit terms that are easy to read and comprehend.

"Plain English" communications can save you money.Companies that use easy-to-understand forms report fewer inquiries and less litigation. They also say that it is easier to train staff and handle complaints.

Obviously, there is no "right" way to write a letter or credit document. Except for certain federal and state requirements, the substance of your communications with you customers -- and even your decision whether communicate with them -- are choices for you to make.

As you read on, you may wish to check some of your company's contracts and form letters to see how they measure up against the "Plain English" principles presented below.

Does your document contain everything you want your customer to know about your credit arrangements?

Is the document's content limited to what is essential to protect your company's interest?

Does your form say everything the law requires -- in the manner the law requires?

Are your ideas organized logically so that necessary information is easy to find? Is the language clear and concise?

Does your layout help the reader follow your organization? Is the typesize easy to read?

Please note: While this manual generally discusses some of the federal statutes that apply to the consumer credit process, it is not a guide to compliance with consumer credit laws. Consult a lawyer to ensure that your document complies with all the federal and state laws that govern your business.

Planning
Planning is critical to "Plain English" writing, especially for complicated credit documents.

Therefore, you should plan to:
determine the purpose of the document;
identify practical problems in existing forms;
eliminate superfluous provisions;
comply with legal requirements; and
organize the document logically.

Determine the Purpose of the Document
Think about the document from two points of view: your own and your customer's. Do you want the document to tell your customers how to take specific actions? Do you want it to define the rights and duties of both you and your customers? Make sure that the document says everything you want or need it to say.

Identify Practical Problems with Existing Forms
Ask your employees to tell you if and why they find certain sections of your current forms troublesome. For example, ask loan officers what problems they have explaining or interpreting credit agreement to prospective customers. Ask billing department and customer relations personnel how they would clarify your forms and letters to avoid or resolve problems. And then, check with your customers to get answers to the same questions.

Eliminate Unnecessary Provisions
Some credit contracts are more complicated than necessary because they cover contingencies that rarely occur in consumer credit transactions. Ask you lawyers how often the use protective clauses to collect debts and whether some or all of these clauses could be omitted to simplify the agreement.

Comply with Legal Requirements
As you plan any credit document, keep in mind applicable federal and state legal requirements. These laws often govern when you must communicate with your customers and determine the content and organization of the document.

Some laws determine when you have to disclose information to your customers. For example, the Equal Credit Opportunity Act requires a creditor to notify applicants of its action on their applications within 30 days after receipt of a completed application for credit. In addition, the federal Truth in Lending Act, Electronic Fund Transfer Act, Consumer Leasing Act, and comparable state laws require creditors to disclose specified information to the consumer in writing at specific times. These disclosures must be made before installment credit, electronic fund transfer, or lease agreements are entered into, or before the first transaction under an open-end credit plan or the first electronic fund transfer is made.

Some laws prescribe what information you must disclose or limit what information you may obtain. The Truth in Lending Act, for instance, requires creditors to inform consumers of credit costs for "closed-end" credit, such as a consumer loan or installment purchase. Required disclosures include the dollar amount of the finance charge, the "annual percentage rate," and the total cost of the credit transaction. That Act also requires creditors to use specific terms such as the "annual percentage rate" and the "finance charge" when making some of these required disclosures. (State laws governing credit cost disclosures may use different terminology and may require disclosure of additional information.

Regulation E, which implements the Electronic Fund Transfer Act, requires that certain disclosures, such as the "error resolution notice," must be said in a way that is "substantially similar" to the notice provided in the regulation.

Other laws, such as the Equal Credit Opportunity Act, limit the information you can get from your customers. That Act, for instance, generally prohibits creditors from asking about the applicant's sex, race, national origin, religion, marital status, or spouse. The Act also prohibits questions about income sources such as alimony, child support, or separate maintenance payments, except in specific circumstances.

Some laws also influence how you make certain disclosures. These laws may, for example, dictate the organization of the credit communication, including whether certain disclosures may have to appear in designated places in credit contracts or must be printed in specified typesizes. The federal Truth in Lending Act, for example, requires that specified credit-cost disclosures "shall be grouped together and segregated from everything else." In addition, some state laws specify that certain information must appear immediately above the space for the consumer's signature.

Remember: When planning any credit document, be sure it also complies with all state laws that apply to the credit plans you offer as well as with all applicable federal laws. State laws that govern the timing, content, and organization of credit communications vary considerably. In addition, more than one state law may apply to any particular credit plan. For this reason, when drafting credit contracts and disclosures, remember to review with your lawyer the requirements of all state laws that may apply. These include:
laws regulating small loans made by licensed lenders (usually called "small loan act");
laws regulating credit sales of goods or services to consumers (usually called "retail installment sales acts");
laws regulating credit sale of credit insurance (which may be part of the state insurance law, or a state credit statute); and
laws limiting the interest rates on credit that are not covered by small loan, retail installment sales, or other specialized state laws (usually called "usury laws").

Note that in some states all of the pertinent state requirements are codified under the Uniform Consumer Credit Code (U.C.C.C.).

5. Organize the Document Logically
Once you determine the purpose of the document and the information it must contain, organize the information clearly and logically. Divide the document into sections and put related information together.

Composing
The actual wording of a "Plain English" credit document is just as important as planning what it will say and how it will look. When you compose a "Plain English" credit document, be sure that you:
write for your customers;
use a personal writing style;
choose words and phrases that are simple, clear, and precise; and
organize your words simply and clearly.

1. Write for your customers
Your first step is to identify your customers. What do your marketing statistics tell you about the average age, educational level, income, and other characteristics of your customers? For example, approximately 54 percent of the adult in this country read below the 11th grade level; 20 percent do not read well enough to follow the cooking instructions on a frozen dinner. These considerations might affect the reading level you aim for and the style you use in your communications.

2. Use a personal writing style
A personal writing style allows your message to come through clearly. Whenever possible, you want to indicate:
who is doing the talking (for example, "we" -- the creditor);
who is being spoken to ("you" -- the borrower or cardholder); and
who is responsible for doing what ("we figure your finance charge in the following way...")
You can make your writing style more personal by using personal pronouns and the active voice.

Use Personal Pronouns
Using personal pronouns is an easy way to make your communication more readable. When you use personal pronouns, instead of words like :"the lender" and "the borrower," you make clear from the start which party is "we" and which party is "you." For example:
In this contract, "you" means anyone who signs this contract as a buyer, and any buyer's heirs or legal representatives. "We" means the seller and anyone to whom we assign (give or sell) this contract.

In addition, try to use pronouns and nouns consistently. For example, avoid using "you" and "the owner" to refer to the same person in the same document.

Use the Active Voice
Using the active voice also will make your writing more personal and direct. The active voice tells the reader immediately who is responsible for an action. For example, "We subtract payments and credits..." is clearer than "Payments and credits are then subtracted...."

3. Choose Words and Phrases that are Simple, Clear, and Precise
"Plain English" requires using language that consumers can easily understand. For example, the following paragraph from a creditor's letter denying an application for credit words and phrases that are difficult to understand:

It would be advantageous for you to contact the reporting agency mentioned and review your credit file for discrepancies. Should there exist a discrepancy, and a revision to the file is initiated, we will be pleased to reconsider our evaluation of your request for credit.

Written in "Plain English," this paragraph would read:
You may contact the credit bureau that gave us the credit report we used to review your credit file. If you find an error in your report and the credit bureau corrects it, we will be pleased to reconsider your application for credit.

When choosing the words for credit contracts, disclosures, and other communications with your customers, remember: use common words; avoid jargon, explain necessary technical terms; and eliminate unnecessary words.

Use Common Words
Writers of "Plain English" recommend replacing complicated or legalistic words and phrases with simple, everyday words whenever possible.

Avoid Jargon
Where possible, replace technical or commercial terms that lawyers and other specialists may use. Otherwise, your customers may not understand what you mean. This contract clause, which sets out the cosigner’s liability if the borrower defaults, sues legal jargon that is unfamiliar to many people:

It is understood that the licensee or holder shall not be compelled to resort first to the collateral securing this obligation, but may at his election require said obligation to be paid by any maker or makers, endorser or endorsers, surety or sureties hereon, and to this agreement said makers, endorsers, and sureties hereby specifically give their assent...

Compare the previous paragraph with this "Plain English" notice to cosigners that is required by the Federal Trade Commission’s Credit Practices Rule:

Notice to Cosigner
You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn’t pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility. You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for debt.
The following words are examples of legal jargon that you can simplify:
aforementioned
aforesaid
foregoing
herein
hereinabove
hereinafter
heretofore
Even when the words you use are common, you should be sure their meaning is clear in context. For example, some creditors use the phrase "excessive inquiries" to tell rejected applicants why the creditor denied them credit. What the creditor really means is "you have made too many recent applications for credit." Other creditors use phrases such as "residence too short" or "your residency is insufficient in duration" when what they really mean is "you have not lived at your current address long enough."

Explain Technical Terms
If you cannot avoid technical terms (for example, those that are required by state or federal law), explain the m in the text not in a separate "definitions" section. You might put the explanation in parentheses immediately after the technical term. For example, revised Regulation Z, which implements the 1980 Truth in Lending Simplification Act, suggests that creditors use the explanations shown here in parentheses:
Annual Percentage Rate (the cost of your credit as a yearly rate)
Finance Charge (the dollar amount the credit will cost you)

You can use other punctuation, such as dashes, to help the leader recognize and explanation, as show here:
If you have a credit balance -- that is, if you have paid us more than you owe on the charge account --

Be careful, however, not to replace technical words that have become widely understood. In fact, one study of a lease agreement showed that its simplified explanation of "security deposit" actually confused tenants.

Eliminate Unnecessary Words
Consumer Credit documents often contain unnecessary words. In the following example from a credit contract drafted before the FTC’s Credit Practices Rule became effective, all of the capital letter words could have been eliminated:

Each of us HEREBY BOTH INDIVIDUAL AND SEVERALLY waives ANY OR all benefit OR RELIEF from homestead exemption to which the signers OR ANY OF THEM may be entitled under the laws of this or any other state, NOW IN FORCE OR HEREAFTER TO BE PASSED, as against this debt or any renewal THEREOF.

Simply translated, this sentence means: "If I do not repay this loan, you can take the real estate that state law would otherwise allow me to keep."

To simplify credit documents and other communications, avoid using strings of words with similar meanings, such as "cease and desist" or "due and payable." Instead, choose one word that best expresses the idea.

Consider using action verbs instead of "verbal nouns" (or gerunds). For example, "describe" is shorter than "give a description"; "collect" is simpler than "make collection of."

4. Organize Your Words Simply and Carefully
How you put your words together is as important as the words you select.
For example, try to use the same words each time you express the same idea. If you use different words for similar concepts in legal documents, consumers may assume and courts may decide that you intended different meanings. For example, if you use the phrases "late payment" and "overdue payment" interchangeably, readers may think each phrase means something different.

In addition, as you draft your document, try to use short sentences, descriptive subtitles and headings appropriate lists, examples, and parallel construction.

Keep Sentences and Paragraphs Short
Long sentences with prepositional phrases and subordinate clauses are hard to follow. Try shortening sentences to an average of 25 words. Consider the following example that explains the "Average Daily Loan Balance." (It is part of the method used to compute finance charges in some open-end credit plans.)

To get the "Average Daily Loan Balance," the Bank took the unpaid cash advances balance at the beginning of the billing cycle, added to it any unpaid FINANCE CHARGE on cash advances from the prior billing cycle, then each day in the billing cycle, added any new cash advances, and subtracted any payments, credits, and unpaid finance charges. This gave the Bank the daily loan balance. Then, the Bank added up all the daily loan balances for the billing cycle and divided the sum by the number of days in the billing cycle. This gave the Bank the "Average Daily Loan Balance."

Compare it with this much simpler version:
We figure the Average Daily Previous Balance as follows:
We start with the Previous Balance shown on your statement.

Each day of the billing period, we subtract payments, credits, and unpaid finance charges, and add new purchases and debits, giving us the daily balance.

We then total the daily balances and divide that total by the number of days in the billing period to arrive at the Average Daily Balance.

The second example is easier to understand because the sentences are short, and they show the sequence of the calculations in a series of steps.

Make Subtitles and Headings Descriptive
Subtitles and headings are particularly important in long, complex documents, such as credit agreements. Titles and headings help the reader separate ideas, see the logical flow of the document, and locate specific information quickly.

Make sure the heading explains what the section contains. For example, a section that follows the heading: "What to do if there is an error in your bill" should only explain what the consumer must do to resolve a billing error.

In composing shorter, less complicated notices or letters, consider using typical consumer questions as titles or headings. For example:
What should I do if my card is lost or stolen?
How can I get an extra credit card?

Use Lists
Lists are useful for explaining complicated procedures and conditions. Be sure to introduce a list with a straightforward "Plain English" statement such as:
If you think your bill is wrong or if you need more information about an item on your bill, here is what you must do to preserve your rights under the Fair Credit Billing Act.

Use Examples
People better understand information when it refers to specific situations. The following paragraph from a credit card agreement explains what happens when a customer has a "credit balance."

For example:
People better understand information when it refers to specific situations. The following paragraph from a credit card agreement explains what happens when a customer has a "credit balance."

For example: Your billing date is the first of each month, and you paid your August balance in full. In early September, you returned charged merchandise that cost $150.00. Because your balance was zero, we owe you $150.00. Your October 1 billing statement will show that we owe you $150.00. You may then choose to: (1) leave the money in your account and we will apply it against future purchases; or (2) ask us to return the money to you.

Use Parallel Construction
Parallel construction in "Plain English" documents basically requires agreement of phrasing in clauses and lists. For example, this list does not use parallel construction:
If you think there is an error on your bill, write to use and include:
Name and account.
Could you give us a description of the error?
How big the error is.
Please give us any other information to help us identify the transaction.
A simple adjustment is usually all that is needed to make the structure of a sentence or list parallel:
your name and account number
a description of the error
the amount of the suspected error; and
any other information that identifies the transaction.

Whenever possible, avoid inserting sentences in the middle of a list. They may break the reader’s concentration and leave the rest of the list unconnected to its introduction. For example:
You may use the automobile in any way that you wish, as long as you do not:
use the automobile for illegal purposes;
use the automobile for hire (for example, as a taxicab);
permanently change the place where you told us you would keep the automobile. You must notify us if you want to permanently move the automobile;
sell or otherwise transfer your interest in the automobile to someone else. You must notify us if you want to sell or transfer the automobile.

Designing
Making your document visually clear and attractive will help your customers understand it better. If your "Plain English" forms have narrow margins, small type, and a sea of uninterrupted text, they could still be as difficult for your customers to read as if you had not made any improvements.

Good graphic design in a printed document involves a number of elements, including:
type,
white space,
capital letters, and
color (of both type and paper).

1. Choose Type that is Easy to Read
Credit contracts and disclosures will be easier to read if you pay particular attention to typesize, typeface, and weight of the type. Remember that some federal and state consumer credit laws require using certain typesizes. Other laws require using larger or boldface type to emphasize key disclosures.

Typesize
Typesize greatly affects the legibility of written communications. The size of type is measured in "points." For example, 6-point type is used in classified newspaper advertising and 10-point type is used in newspaper articles. The size of type you choose to use in your credit documents can help make them easier to read.

Typeface
Typeface also affects readability. There are two classes of typeface: serif (letters with small extensions) and sans-serif (letters without extensions). Whichever typeface you select, choose one that is easy to read. And, try not to mix typefaces; consistency aids the reader.

Weight of Type
Type comes in several weights (or thicknesses). A medium-weight type may be best for ordinary text. Boldface can be used for headings, emphasis, and for certain disclosures, as required by law.

2. Use White Space Effectively
White space can add to the attractiveness and legibility of your printed document. This involves use of margins, "leading" (space between lines), and line length.

Margins
Generous margins and ample space between paragraphs can make your text easier to read and call attention to your message. You can place headings in the left margin for emphasis or you can also indent lists of items to make them stand out.

Leading
"Leading" is the amount of space between the lines of print. One to three points of leading with 10-point type is usually adequate. A little extra leading can make a printed credit document easier to read.

Line Length
The length of the lines of print also affects ease of reading. A printed line that is too short requires too much eye movement for easy reading. The optimum line length for reading ease usually is between 50 and 70 characters.

3. Use Capital Letters Selectively
Many contracts use all capital letters for emphasis. This technique, however, actually makes copy more difficult to read. Compare this paragraph from a collection letter:

YOUR PAYMENT IS OVERDUE. IF FOR ANY REASON YOU CANNOT MAKE PAYMENT NOW, PLEASE CALL US AT 123-456-7890 TO DISCUSS YOUR PLANS FOR PAYMENT. IF WE DO NOT HEAR FROM YOU WITHIN 20 DAYS, WE WILL REQUIRE PAYMENT OF THE ENTIRE OUTSTANDING BALANCE ON YOUR ACCOUNT AND WILL TAKE THE NECESSARY STEPS TO COLLECT IT.

with the following "Plain English" version of the same collection letter:
Your payment is late. If you cannot make your payment now, please call at 123-456-7890. If we do not hear from you WITHIN 20 DAYS, we will take the steps necessary to collect THE ENTIRE AMOUNT that you now owe us.

If you want to emphasize more than a few words in a printed document, you also can use another technique, such as boldface, italic, larger, or colored type.

4. Use Color Wisely
Choose color for paper and ink that produce enough contrast for easy reading. In addition, use colors for emphasis. For example, printing the "ANNUAL PERCENTAGE RATE" and "FINANCE CHARGE" disclosures in red ink, when the rest of your copy is in black or blue ink, will emphasize those terms. Too many colors, however, can confuse the reader.

Testing and Evaluating
To evaluate how well your new forms work, try testing them out. You can test your documents in several ways. Some companies use survey and "focus group" research to determine whether their revised forms meet their objectives. Others use readability formulas that evaluate the document based on the average number of words per sentence or the number of syllables for each 100 words. Generally, the shorter the words, sentences, and paragraphs, the easier the document is to read.

You also can informally measure your customers’ reactions to your new documents. Try showing the revised forms to a test group of customers, friends, and employees who fit your customer profile. To measure customer reaction, use criteria such as:
How long does it take people to read the forms?
How long does it take people to find the answer to a specific question?
How many times must people read the forms to paraphrase the information accurately?

This kind of testing can tell you if your revised forms meet your objectives, or whether they still need some adjustment before you use them. Finally, once you successfully simplify your letters and forms, you may find that publicizing your "Plain English" efforts attracts new customers to your services or products.



Dennis Zabawa is an Leading Authority in Business Funding. Dennis is available to come and be a speaker at your next event. He has a great topic, "Why are you not wealthy?" For further information, please visit the website, www.creditiswealth.com

How to Advertise Consumer Credit & Lease Terms

How To Use This Manual
This manual was prepared to help you, the advertiser, comply with requirements in federal law for advertising consumer credit and consumer leases. These requirements apply whenever you use specific terms in an advertisement promoting consumer credit or consumer leases. Although this manual is illustrated with newspaper advertisements, the law applies to all kinds of media advertisements for consumer credit and consumer leases.You may find it helpful to follow these steps in using this manual:

Read General Information, which will tell you whether your advertisement is covered by the Truth in Lending Act.

Determine whether you are advertising "Closed-End Credit," "Open-End Credit," or a "Consumer Lease." The definitions will help you decide.

Refer to the appropriate section for help in preparing or reviewing the advertisement. Note that the requirements differ substantially for each type of transaction.

The staff of the Federal Trade Commission's Division of Financial Practices based this manual on the Truth in Lending Act (which includes the Consumer Leasing Act); regulations adopted by the Federal Reserve Board known as Regulation Z (for consumer credit) and Regulation M (for consumer leases); and the Official Staff Commentaries accompanying those regulations that are revised annually by the Federal Reserve Board and made effective each October. The manual represents the Federal Trade Commission (FTC) staff's view of what the law requires, and it is not binding on the Commission.

This manual is intended to be a guide to the advertising requirements; it does not cover all contingencies. For further information, consult the Act, the regulations, and the staff commentaries directly. You also may want to discuss specific questions with your lawyer or with the federal agency (listed below) that has enforcement jurisdiction over your advertising.
The FTC enforces the Truth in Lending Act as to retailers, finance companies, creditors, lessors, and all other advertisers of consumer credit and consumer leases who are not regulated by other federal agencies. The other federal agencies with enforcement jurisdiction for the Act are:
Comptroller of the Currency—national banks;Federal Reserve Board—state member banks of the Federal Reserve System;Federal Deposit Insurance Corporation—FDIC-insured banks that are not members of the Federal Reserve System;Office of Thrift Supervision—insured savings institutions and members of the Office of Thrift Supervision System not insured by FDIC;Department of Transportation—air carriers;National Credit Union Administration—Federal credit unions;Farm Credit Administration—Federal land banks, Federal land bank associations, Federal intermediate credit banks, and production credit associations;Department of Agriculture—packers and stockyards.

Contact these other agencies directly for further information and assistance if you are subject to their jurisdiction.

General Information
The Truth in Lending Act and Advertising
The main purpose of the Truth in Lending Act is to assure the meaningful disclosure of consumer credit and lease terms, including those in advertisements, so that consumers can easily compare terms and shop wisely for credit.

Before passage of the Act, an advertiser might have used only the most attractive credit or lease terms, thus distorting the true cost of the credit or lease. For example, an advertisement might have read, "'63 Chevy, only $30 per month." Whether this is a bargain depends upon information missing from the advertisement, such as the downpayment and the number of payments. The ad also omits the annual percentage rate and does not state whether the transaction is a credit sale or a lease. The Act requires that the advertisement tell the whole story.

For example, if an advertisement contains any of a number of terms specified in the Act, then that advertisement must also include certain prescribed disclosures. In other words, the specified terms "trigger" the disclosures. If, on the other hand, the ad does not use "triggering" terms, it need not make the disclosures. The type of transaction you advertise—closed-end credit, open-end credit, or a consumer lease—determines whether a term is a "triggering term" and, if so, what disclosures are required.

If you, as an advertiser, are unclear about what type of plan is being advertised, or about any of the specific terms of the plan — including the annual percentage rate—you may want to contact the creditor directly to obtain this information. This may help ensure that the credit terms you advertise are accurate.

Who Must Comply
If you place an advertisement that promotes "consumer credit" or a "consumer lease" as defined in the Act, you must comply with the law. Thus, advertisers, not just creditors and lessors, must comply, including associations, manufacturers, real estate brokers, builders, and government agencies.

There is no liability under the Act for the media in which advertisements appear. The media can, however, protect their customers by screening advertisements to make sure that they comply with the law.

Oral Rate Disclosures
Certain rules apply only to creditors. If a consumer orally asks you, a creditor, about the cost of credit, you must state the annual percentage rate. For closed-end credit, you also may give a periodic or simple interest rate that is applied to an unpaid balance. For open-end credit, once you state the APR, you also may give the periodic rate.

If you cannot determine the annual percentage rate for the specific closed-end credit that the consumer asks you about, you may disclose instead the annual percentage rate in a sample transaction. You also may give other information that applies to the consumer's specific transaction, such as the contract interest rates and points.

Liability for Violations
If you fail to comply with the advertising requirements of the Act, you may be subject to law enforcement actions. Advertisers of consumer credit and consumer leases under the FTC's jurisdiction are subject to enforcement actions that could result in remedies such as:

Orders issued by the FTC to cease and desist from violating the Act. Subsequent violations of the FTC order may result in a civil penalty of up to $11,000 for each day the violation continues; or,

Injunctions issued by federal district courts against future violations. Violations of court-ordered injunctions may result in civil or criminal contempt proceedings.

If you are under the jurisdiction of a federal regulatory agency other than the FTC, you may wish to consult with that agency to determine your liability for placing a credit or lease
advertisement that fails to comply with the law.

In addition, anyone actually harmed by a non-complying consumer lease advertisement may sue you for:

actual damages;

25% of the total amount of monthly payments under the lease (but not less than $100 nor more than $1,000); and

court costs and a reasonable attorney's fee.

General Requirements
Keep the following principles in mind when you design or review an ad promoting consumer credit or consumer leases.

Clear and Conspicuous Disclosures
All advertising disclosures required by the Truth in Lending Act must be made "clearly and conspicuously." This means that disclosures must be legible and reasonably understandable.

Catalog and Other Multi-Page Advertisements
Under certain circumstances, a catalog or other multi-page advertisement may constitute a single advertisement. This means that only one set of advertising disclosures may be necessary.

If so, all required disclosures for the credit advertised must be provided clearly and completely in a table or chart in the catalog. Any credit or lease terms appearing elsewhere in the advertisement must include a clear and conspicuous reference to the page containing the table of disclosures.

Only credit or lease advertisements that consist of a series of sequentially numbered pages, such as a newspaper supplement, qualify as "multi-page advertisements." Separate pieces of paper, even those mailed in the same envelope, are separate ads. Thus, if a mailing consists of several pieces of paper and each promotes a different item of merchandise sold on credit or available by lease, each piece of paper containing a "triggering term" must include a full set of disclosures.

Actually Available Credit
You may advertise only credit or lease terms that are actually available to the consumer. "Bait and switch" credit or lease promotions are not allowed. For example, no advertisement may state that a specific installment payment or a specific downpayment can be arranged unless the creditor is prepared to make those arrangements. However, you may advertise terms that will be offered only for a limited time or terms that will become available at a known future date.
You need not, of course, promote every credit or lease plan that you offer.

Definitions
The following definitions may be helpful as you read this manual.
Advertisement: An "advertisement" subject to the Truth in Lending Act is any commercial message that promotes consumer credit or a consumer lease. "Advertisements" may appear:
(a) in newspapers, magazines, leaflets, flyers, catalogs, direct mail literature, or other printed material;
(b) on radio, television, or a public address system;
(c) on an inside or outside sign or display, or a window display;
(d) in point-of-sale literature, price tags, signs, and billboards; or
(e) online, such as on the Internet.

A "commercial message" is any message that promotes a sale or lease. Thus, materials that are educational and do not solicit business or that are required by law are not "advertisements." For example, a brochure issued by a bank explaining FHA mortgages is not a commercial message, nor is a rate sheet prepared and used solely for internal business purposes. A state-required sign posted by a finance company explaining credit terms is not an "advertisement," nor is a merchandise sales ticket that conveys no credit information. On the other hand, a brochure or sign that combines a sales message with educational or state-required information is an "advertisement."

Annual Percentage Rate: The "annual percentage rate" is the charge for credit, stated as a percentage, and expressed as an annualized rate.

Closed-End Credit: "Closed-end credit" includes all consumer credit that does not fit the definition of open-end credit (see below). Closed-end credit consists of both sales credit and loans. In a typical closed-end credit transaction, credit is advanced for a specific time period, and the "amount financed," "finance charge,' and "schedule of payments" are agreed upon by the lender and the customer.

Consumer Credit: "Consumer credit" may be either closed-end or open-end credit. It is credit that is extended primarily for personal, family, or household purposes. It excludes business and agricultural loans, and loans exceeding $25,000 that are not secured by real property or a dwelling. It also must be extended by a "creditor" (although it can be advertised by someone else, such as a builder, real estate broker, or advertising agency).

Consumer Lease: A "consumer lease" is a lease of personal property to a private individual. The lease must be for personal, family, or household purposes and must be for a term of more than four months. So, renting a car for a weekend is not a "consumer lease." The term excludes leases where the customer will have to pay a total of more than $25,000. The term includes leases under which the customer has the option to buy at the end of the lease. However, a "lease" in which the payments equal or exceed the value of the property and which allows the consumer to buy the property at the end of the lease term for a nominal payment or no further payment is actually a credit sale ("closed-end credit"), and not a consumer lease.

Credit Sale: A "credit sale" is a transaction in which the seller is also the creditor, at least initially. Often, the seller-creditor will later assign the installment sales contract to another entity, such as a finance company or a bank.

Creditor: A "creditor" is a person or organization (a) that regularly extends consumer credit for which a finance charge is required or that is repayable in more than four installments even without a finance charge, and (b) to whom the obligation is initially payable—for example, the finance company, bank, automobile dealer or other lender identified on the face of the credit agreement. A person or organization is considered to extend credit "regularly," if it has extended credit more than 25 times during the preceding year (or more than 5 times for transactions secured by dwellings).

Downpayment: A "downpayment" is an amount paid to reduce the cash price of goods or services purchased in a credit sale transaction. The value of a trade-in is included in the downpayment. It can include a "pick-up" or deferred downpayment that is not subject to a finance charge and is due no later than the second regularly scheduled payment. The downpayment does not include any prepaid finance charges such as points.

Finance Charge: The "finance charge" is the dollar amount charged for credit. It includes interest and other costs, such as service charges, transaction charges, buyer's points, loan fees, and mortgage insurance. It also includes the premiums for credit life, accident, and health insurance, if required, and for property insurance, unless the buyer may select the insurer.

Open-End Credit: In "open-end credit," the creditor:
(a) reasonably expects the customer to make repeated transactions;
(b) may impose a finance charge from time to time on the unpaid balance; and
(c) generally makes the amount of credit available again to the consumer as the outstanding balance is paid.

Examples of "open-end credit" are bank and retail gasoline credit cards, department stores' revolving charge accounts, and cash-advance checking accounts.

Terms of repayment: The phrase "terms of repayment" generally refers to the payment schedule, including the number, timing, and amount of the payments (including any final "balloon" payment) scheduled to repay the debt.

Closed-End Credit Disclosures
The main requirements governing advertising of closed-end credit concern "triggering terms" and "finance rates." These requirements may apply to a single ad. This section of the manual explains these basic requirements and offers additional guidance for special compliance issues.

Triggering Terms
If you advertise closed-end credit with a "triggering term," you also must disclose other major terms, including the annual percentage rate. This rule is intended to ensure that all important terms of a credit plan, not just the most attractive ones, appear in an ad.

The triggering terms for closed-end credit are:
(1) The amount of the downpayment (expressed as either a percentage or dollar amount), in a "credit sale" transaction.
Examples:
"10% down""$1000 down""90% financing""trade-in with $1000 appraised value required"

(2) The amount of any payment (expressed as either a percentage or dollar amount).
Examples:
"Monthly payments less than $250 on all our loan plans""Pay $23.44 per $1000 amount borrowed""$210.95 per month"

(3) The number of payments or the period of repayment.
Examples:
"Up to four years to pay""48 months to pay""30-year mortgages available"

(4) The amount of any finance charge.
Examples:
"Financing costs less than $300 per year""Less than $1200 interest""$2.00 monthly carrying charge"

Some statements about credit terms are too general to trigger additional disclosures. Examples of terms that do not trigger the required disclosures are:

"No downpayment""Easy monthly payments""Loans available at 5% below our standard APR""Low downpayment accepted""Pay weekly""Terms to fit your budget""Financing available."

General statements, such as "take years to pay" or "no closing costs," do not trigger further disclosures because they do not state or suggest the period of repayment or downpayment cost. In contrast, the statement "drive it home for $199," which implies that the required cash downpayment is no more than $199, does trigger full disclosure. Similarly, a statement such as "up to 48 months to pay" lists the period of repayment and triggers disclosure. In general, the more specific the statement, the more likely it is to trigger additional disclosures.

Required Disclosures
If your ad for closed-end credit uses a triggering term, it also must include the following information:

The amount or percentage of the down-payment;
The terms of repayment; and
The "annual percentage rate," using that term or the abbreviation "APR." If the annual percentage raw may be increased after consummation1 of the credit transaction, that fact also must be stated.

The amount or percentage of the "downpayment" need not be shown directly, as long as it can be determined from the ad. For example, "10% cash required from buyer" or "credit terms require minimum $1000 trade-in" would satisfy the disclosure requirement.

The "terms of repayment" may be expressed in a variety of ways, as long as they convey the required information. For example, an automobile finance company might use unit cost to disclose repayment terms: "48 monthly payments of $23.44 for each $1000 borrowed."

Similarly, the length of the loan can be expressed as the number of payments or the time period of the loan.

Sample Disclosure The following disclosure of car financing offered by the dealer would comply with the law if printed clearly and conspicuously:

Special close-out sale this weekend. Any in-stock Chevy Citation, only 5% down, 5.9% APR (on approved credit).

Example: 48 monthly payments of $224.95.

2 Advertising Finance Rates

Basic Rule
The second basic requirement for advertising closed-end credit is this: if your ad shows the finance charge as a rate, that rate must be stated as an "annual percentage rate," using that term or the abbreviation "APR." Your ad must state the annual percentage rate, even if it is the same as the simple interest rate. So, if you are a car dealer who wants to advertise low-rate financing made available by the manufacturer, your advertisement would read, for example, "5.9% annual percentage rate" or "5.9%APR." If you want to show only a rate, and the APR is stated in the ad, no other credit information need be included: the "triggering term" requirement does not apply because the rate and APR are not triggering terms. Thus, an advertisement could simply state, "Assume 10% annual percentage rate" or "10% annual percentage rate mortgages available."

You must state the annual percentage rate accurately. For example, some transactions, especially real estate loans, include other components in the finance charge besides interest, such as "points" and mortgage insurance premiums paid by the buyer.

3 As a result, the annual percentage rate may be higher than the simple interest rate, because the APR reflects the total cost of credit, including interest and other credit charges.

As long as you include the annual percentage rate in the ad, you also may state a simple annual rate or a periodic rate or both, applicable to an unpaid balance. However, the simple annual or periodic rate may not be more conspicuous in the advertisement than the annual percentage rate. For example, an advertisement for mortgage credit may include the contract rate of interest together with the annual percentage rate, as long as the contract rate is not more prominent than the APR.

No credit ad may state an "add-on" rate (for example, "6% add-on"). This rate is misleading because it is significantly lower than the annual percentage rate, and its use in an ad violates the law.

4 Variable Rates
A credit plan with an annual percentage rate that may fluctuate in the future (for example, based on market conditions) is a variable-rate transaction. For Truth in Lending purposes, a variable-rate plan involves one or more future interest rates that cannot be determined at consummation. This means that fixed-rate "buy-downs," "step-rate," and graduated payment mortgages are not, by themselves, variable-rate mortgages,

5 because the future interest rates applicable during the life of the loan are known at the time of settlement.

Ads for variable-rate credit must state that the rate may increase or that it is subject to change, but need not explain how changes will be made. The following statement would satisfy this requirement:

8.5% annual percentage rate subject to increase or decrease.

By contrast, an ad that promotes "9% APR graduated payment adjustable mortgages" (graduated payment mortgages plus an adjustable rate feature) would not comply with the law, because it does not state clearly that the rate may change.

WRONG
The annual percentage rate in variable-rate financing ads must be accurate. To help calculate the APR, keep two principles in mind. First, remember there is only one APR per loan, regardless of how many interest rates may apply during the term of the loan. Second, assume that any "index" rates, such as the prime rate or the 6-month Treasury bill, used to determine future interest rate changes will remain constant during the life of the loan.

For example, suppose the interest rate on a variable rate loan will be adjusted annually by adding 2½ percentage points to the 1-year Treasury-note rate, which is currently 8 percent. Also suppose there are no other special features in this plan, such as low introductory rates. For purposes of calculating the APR to be advertised for this plan, you should assume that the Treasury-note rate will remain at 8 percent during the life of the loan. If there were no other credit charges in this plan besides interest, the variable rate could be advertised as follows: "10.5% APR subject to increase or decrease."

6 Special Compliance Issues
Buydowns Special rules apply when you advertise a loan in which the seller or a third party "buys down" the interest rate during the early years of the loan. Suppose you want to advertise a plan in which the seller or a third party pays an amount to the creditor to reduce the effective interest rate on a 30-year real estate loan. Also suppose the rate would be reduced from 10½% to 8½% the first year.
Your ads may show the reduced simple interest rate or rates applicable during the buydown period. But if you advertise a lower interest rate, you also must show:
how long the rate will be in effect,
the simple interest rate for the remainder of the loan, and
the annual percentage ram.
To comply with this requirement, you must determine the accurate annual percentage rate. First, ascertain whether the lower rates are stated as part of the credit contract between the consumer and the creditor. If so, you should take the buydown into account in calculating the annual percentage rate for the advertisement.
If the lower rates are not part of the credit contract, the advertised annual percentage rate should not reflect the buydown. For example, suppose the seller agrees with the consumer to place funds in an escrow account. This escrow account will be drawn upon by the creditor to reduce the consumer's monthly payments during the term of the loan, but the consumer's credit obligation is not changed to reflect the lower effective rate and payments. In this situation, you should not consider the buydown in calculating the APR.
Assuming the reduced rates are part of the credit contract between the consumer and lender, your ad might read as follows:
This buydown reduces your interest rate from 10½% to 8½% for the first year of your loan. APR 10½%.

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If the interest rates in the buydown are not part of the credit agreement between the consumer and lender (because, for example, they are included in a separate contract between the consumer and the builder), you still may show the reduced interest rates in the ad. But, if you do so, you must include all the rates, the limited terms to which they apply, and the annual percentage rate for the loan. The annual percentage rate that you disclose will not be based on the reduced interest rates, and therefore will be higher than those rates, as in the following example:
With this buydown, your interest rate for the first year of your loan is only 8½%.Rate for remainder of term is 10½%. 10¾% APR.
If you show this information, you also may show the effect of a buydown on the monthly payments without triggering other disclosures. For example, an ad that states the above information also may say "with this buydown, your monthly payment for the first year of the mortgage will be only $615," or "save more than $100 per month the first year!" The use of these terms does not trigger disclosure of other information, other than the APR. But, if the ad shows the full term of the loan (such as "30-year financing"), other required disclosures—namely, the downpayment, the terms of repayment, and the APR—must be shown, because the time period is a triggering term.
Discounted Variable Rates
Adjustable rate mortgages (ARMs) often have a first-year "discount" or "teaser" feature in which the initial rate is substantially reduced. In these loans, the first year's rate is not computed in the same way as the rate for later years. Often, the "spread" or "margin" that is normally added to an "index" (such as the one-year Treasury-note rate) to determine changes in the interest rate in the future is not included in the first year of a discounted ARM offered by a creditor.
Special rules, similar to those for buydowns, apply to advertising a discounted variable rate. An ad for this type of plan can show the simple interest rate during the discount period, as long as it also shows the annual percentage rate. However, in contrast to buydowns, the ad need not show the simple interest rate applicable after the discount period. For example, a plan with a low first year's interest rate (8%), but with a 10.25% rate in subsequent years, and additional credit costs, could be advertised as follows:
8% first-year financing. APR 10.41%. APR subject to increase after closing.
As in buydowns, the annual percentage rate in discounted plans is a composite figure that must take into account the interest rates that are known at closing. In the above example, the disclosed APR must reflect the 8% rate for the first year, as well as, for example, the 10.25% rate applicable for the remainder of the term, plus any additional credit costs (such as buyer's points).7
An ad for a discounted variable-rate loan, like an ad for a buydown, may show the effect of the discount on the payment schedule during the discount period without triggering other disclosures. An example of a disclosure that complies with Regulation Z is:
Interest rate only 8% first year. APR 10.50% subject to increase.With this discount, your monthly payments for the first year will be only $587.
Payment or Effective Rates
In some transactions, particularly some graduated payment loans, the consumer's payments for the first few years of the loan may be based on an interest rate lower than the rate for which the consumer is liable. (This situation is referred to as "negative amortization.") As with buydowns, special rules apply when you advertise the "effective" or "payment" rates for these transactions. Specifically, you may advertise these effective rates if you show the following information:
the "effective" or "payment" rate,
the term of the reduced payments,
the "note rate" at which interest is actually accruing, and
the annual percentage rate.
The advertised annual percentage rate must take into account the interest for which the consumer is liable, even though it is not paid by the consumer during the period of reduced payments.

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This type of financing could be advertised as:
An effective first-year rate of only 7½ percent.Interest being charged at 10½ percent. 10¾% APR.
In contrast to an ad for a buydown or a discounted variable rate, an ad for an "effective" or "payment" rate may not show the monthly payments without triggering the other disclosures discussed [later on]. You can, however, show the range of payments without showing all the intermediate payment amounts. (This type of payment schedule disclosure is explained below in "Payment Schedules for Graduated Payment Loans and Loans with Mortgage Insurance.") In addition to the information about the interest rate and APR (shown above), a complying ad for a "payment rate" plan also could state:
Payments begin at $557.92 for the first year, ranging to$800.96 in years six through remainder of loan term.
Payment Schedules for Graduated Payment Loans and Loans with Mortgage Insurance
If you advertise a mortgage in which the payments vary either because (1) payments include mortgage insurance premiums payable monthly or annually, or (2) the loan has a "graduated payment" feature,8 the ad need not show all the different payments required during the life of the loan. These advertisements must state:
the number and timing of payments,
the largest and smallest payments, and
the fact that the other payments will vary between those amounts.
The following example, based upon a condominium with a $65,000 sale price, illustrates the terms of an advertisement for a loan with mortgage insurance. This example would comply with the disclosure requirements, assuming the information is printed clearly and conspicuously:
Downpayment $15,000; 9.5% APR360 monthly paymentsPayments 1-120 vary from $303.94 to $405.96Remaining 240 payments are $436.35.
Payment Schedules for Variable-Rate Loans
Suppose an advertisement promotes a variable-rate loan that is not a "discount" or a "buydown" and has no other special features. However, the advertisement contains triggering terms that require disclosure of the "terms of repayment" (which include the payment amounts). In this ad, only one payment amount need be disclosed to comply with the law.
To determine the proper payment disclosure, calculate the payment based on the interest rate that will be in effect initially during the loan, using the best information available at the time you run the ad. For example, suppose you want to determine the payments for a 30-year variable-rate mortgage in which rate changes will be based on the one-year Treasury bill index, and in which there is no discount and no additional "margin" added to the index.

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If that index is at 9.5% at the time you run the ad, you could disclose the payment amounts by developing an example, using 360 monthly payments based on the 9.5% rate. So, if you wished to offer a $100,000 condominium with a 20% downpayment (leaving an amount financed of $80,000), with no mortgage insurance and with all prepaid finance charges paid by the seller, the ad could state:
Payments as low as $673 monthly. 30-year loan.20% down. 9.5% APR subject to increase.
Payment Schedules for Discounted Variable-Rate Plans
When an advertisement requiring disclosure of the payment schedule promotes a discounted variable-rate loan, rather than a variable rate plan with no special features, the advertised payment schedule must show all payment amounts that can be determined before consummation of the loan. For example, if the discounted rate is applicable for only one year, the advertisement should show a payment for the first year based on the reduced interest rate in effect for that year. If the interest rate is subject to annual increases thereafter, the advertisement must show a second payment amount based upon the interest rate that would have been in effect at consummation, except for the discount feature of the loan. Thus, for example, the payment schedule portion of an advertisement for a discounted variable-rate loan with a one-year discount might state:1st year monthly payments .......................... $585 2nd and subsequent years' monthly payments ..........$700.
If the reduced rate plan has limits (or "caps") on the amount that the interest rate or payments may increase in any year, the payment schedule must also show the effect of those caps. Suppose the plan has a cap that limits interest rate increases each year to 2%. Also suppose that interest rates for the loan are determined by the Treasury bill rate plus a 2% margin and that the Treasury bill rate at the time of your ad is 10%. The rate determined by this formula would be 12% (10% plus the 2% margin). The creditor, however, has set the first-year rate at only 9% and the second-year rate can be no more than 11% because of the cap. In a 30-year loan for $100,000 with no other credit charges, your payment disclosures for this loan might read:1st year's monthly payment ........................ $ 804.62; 2nd year's monthly payments ....................... $ 950.09; 3rd year and subsequent year's monthly payments ... $1024.34.9
Other Considerations
Typical Terms
You may be able to simplify compliance with the law's advertising requirements by using examples of "typical credit terms" in the ad. Suppose a home builder wants to advertise credit terms for many houses, each with a different price, or a bank wants to offer mortgage loans in varying amounts, with different repayment terms. In these situations, if advertising disclosures are required, you may comply by showing one or more examples of a typical credit transaction, as long as each example contains all of the terms that are required to be disclosed. These examples must be labelled as such and must be representative of the credit that is actually available.
For instance, suppose an auto dealer has "60-month financing" available on various types of vehicles. The dealer could comply with the law by stating the credit terms available with 60-month financing based upon an automobile that a consumer could purchase on those terms, as follows:
60-month financing available. Example:1988 Olds Ciara 20% down, $289 permonth, 11% APR. On approved credit.
In some situations, you may have to include more than one sample loan in the advertisement to be sure of including the "typical" situations. For example, suppose you are advertising 30-year financing on several houses in a development. Some of the homes included in the ad are eligible for FHA financing, but others require larger loan amounts with higher financing terms. In this case, the ad would have to provide two examples, with each including the credit terms required by the Act (downpayment, terms of repayment, and APR).
Legal Obligation
Sometimes part of the cost of credit is paid by the seller. For example, a seller will often "discount" an auto installment agreement to another lender, such as a bank. If the amount financed is $9,000, the seller might only receive $8,750 from the lender.
Generally, credit advertisements (and Truth in Lending disclosures) should reflect the consumer's legal obligation to the creditor under the credit agreement. Thus, if the consumer is required under the installment agreement above to repay the $9,000 (plus finance charges), the terms included in the ad should be based on an amount financed of $9,000, not $8,750.
Similarly, the points a seller pays in closed-end credit transactions are not reflected in the loan agreement between the buyer and the lender and, therefore, should not be included in Truth in Lending disclosures or ads. The same is true for many "buy-downs" or below-market interest rate offers. On the other hand, points paid by the buyer to the lender are part of the buyer's legal obligation and must be reflected in Truth in Lending disclosures and advertising.

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[1] "Consummation" means the time at which a consumer becomes contractually obligated on a credit transaction. The time the obligation arises is a matter determined under state law.
[2] The examples in this manual are for illustrative purposes only. Be sure to check the annual percentage rates and other credit terms to be used in your advertisements for accuracy.
[3] Sections 226.4 and 226.22 of Regulation Z provide further information on the finance charge and annual percentage rate for closed-end credit.
[4] Some states permit the use of "add-on rates" as a method for calculating the yield to the lender in installment credit transactions (for example, in sales financing). Regardless of what method is used under state or other law to calculate the yield, the Truth in Lending Act requires that advertisements for a financing rate must show the "annual percentage rate."
[5] Special guidance for advertising buydowns and graduated-payment mortgages is provided [later] this manual.
[6] Even if there are caps in the loan, the APR should be based on the rate applicable at closing, if there are no special introductory features in the loan. However, if there is a low introductory rate in the loan (such as a discounted rate), the APR and disclosures should not be based solely on the initial rate. More information concerning special types of variable-rate financing, including discounted rates, is provided [in the text that follows].
[7] Note that in a variable rate loan with a low introductory rate, caps on rate changes also must be included in the APR and payment disclosures. An example of this type of transaction is provided [in the text that follows].
[8] In graduated payment loans, payments are relatively low in the early years of the loan. The payments rise gradually over a set period and then, if the interest rate is fixed, remain constant for the duration of the loan. If the rate is adjustable, interest rates and payment amounts can fluctuate over the loan term.
[9] The APR for this loan is 11.53%. It is a blended rate, based upon the 9% interest rate for year one (the discount period), 11% for year two (because the rate increase is limited by the 2% rate cap), and 12% for the remainder of the loan term (the rate at consummation). Note that if there was no low introductory (discounted) rate in the loan, the APR and payment schedule would not include the caps. In that event, the APR for this example would be "12% subject to increase" and the payment disclosures would be "360 monthly payments of $1028.61."
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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 DisclosureThe 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.)
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.

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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:
use an insert showing the current APR,
give the APR as of a specified date, or
disclose an estimated APR12
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.
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.

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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. However, if a balloon payment will occur if only the minimum monthly payments are made, the advertisement must state that a balloon payment "will" 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.



Dennis Zabawa is an Leading Authority in Business Funding. Dennis is available to come and be a speaker at your next event. He has a great topic, "Why are you not wealthy?" For further information, please visit the website, www.creditiswealth.com