credit practices

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Credit Practices & Procedures A Dealers Guide

Wisconsin Automobile & Truck Dealers Association

This manual is intended to help Wisconsin automobile and truck dealers to understand the laws that pertain to vehicle consumer credit. Opinions and interpretations expressed in this manual are those of the Wisconsin Automobile and Truck Dealers Association. These opinions and interpretations are intended to be general in nature and should not be used as a substitute for the advice of your own legal counsel or other professional counsel.

General questions or comments regarding this manual may be directed to:

Susan Miller, VP Knowledge Development & Delivery Wisconsin Automobile & Truck Dealers Association

150 East Gilman Street, Suite A P. O. Box 5345

Madison, WI 53705 (608) 251-5577

Credit Practices & Procedures A Dealers Guide

Prepared By:

Paul R. Norman, and Gary Antoniewicz

Boardman Law Firm, LLP Firstar Plaza 4 th Floor 1 South Pinckney Street

P.O. Box 927 Madison, WI 537010927

(608)2579521

For:

Wisconsin Automobile & Truck Dealers Association, Inc. 150 E. Gilman Street, Suite A

P.O. Box 5345 Madison, WI 537055345

(608)2515577

Copyright © 1999, 2003, 2006 by the Wisconsin Automobile & Truck Dealers Association, Inc. All Rights Reserved. No part of this work may be reproduced in

any form or by any manual, electronic, or mechanical means, without the express written permission of the Copyright holder

OPEN-END CONSUMER CREDIT TRANSACTIONS

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OPEN‑END CONSUMER CREDIT TRANSACTIONS

Definition Open-end credit means consumer credit extended by a creditor under a plan in which:

1. the creditor reasonably contemplates repeated transactions;

2. the creditor may impose a finance charge from time to time on an outstanding unpaid balance; and

3. the amount of credit that may be extended to the consumer during the term of the plan is generally made available to the extent that any outstanding balance is repaid.

In order for there to be a plan , there must be a contractual arrangement between the you and the consumer. The requisite plan does not necessarily need a formal written document executed by the parties. A plan will exist simply as a result of you giving notice of its intent to charge interest on an account after a certain date and acquiescing in the customer not paying the account by that date.

In order for there to be open-end credit, you must reasonably contemplate repeated transactions. This means that the credit plan must be usable from time to time and you must legitimately expect that there will be repeat business rather than a one-time credit extension. Since it is your belief at the time the credit is extended which is relevant, the fact that the consumer may not actually return for further credit extensions does not prevent the plan from being classified as open-end credit. For example, if you make credit available to your parts and service consumers and many consumers make repeat purchases under the credit plan, the fact that some consumers only use the plan once would not affect the characterization of your plan as open-end credit.

Some of the greatest confusion surrounding open-end credit is with the requirement that a finance charge might be imposed from time to time on the outstanding balance. In many dealerships, payment for parts and services is expected within a fixed time after the purchase. However, the dealer also provides on the purchase order that, if payment is not made within the time allotted, interest at a certain rate will be charged on the unpaid balance until paid in full.

If interest charged on overdue accounts is a charge for actual unanticipated late payment within the meaning of Sec. 226.4(c)(2), it need not be regarded as a finance charge and, therefore, does not trigger the need to give open-end credit disclosures. In consumer transactions, the amount of such a change would be limited to 12% per year (1% per month). However, if it is not a charge for actual unanticipated late payment , then it is a finance charge and the

Plan

Repeated Transactions

Finance Charge


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disclosures are required, assuming the other elements of open-end credit exist.

Whether or not an interest charge is for actual unanticipated late payment depends upon the particular circumstances of the agreement between the parties and the practices of the dealership in enforcing payment of its accounts. Even where the contract provides that the price will be paid in full by a certain date, if the dealership generally allows consumers to pay parts accounts over a period of time without demanding payment in full or taking other action to collect, the interest charged on unpaid accounts will probably be regarded as a finance charge.

The finance charge criterion is met in a particular case as long as a finance charge may be imposed. The fact that the consumer actually pays no finance charge because payment is made within the time necessary to avoid finance charges does not mean that open-end credit has not been extended.

This element requires simply that the dealer s consumers have a reasonable expectation of obtaining credit up to any pre-set limit as long as they remain current in payment of their accounts.

Licensing And Registrations Requirements You should refer to the Licensing and Registrations Requirements heading in the Closed-End Consumer Credit section of this manual for information on the licensing and registrations requirements for consumer credit transactions in Wisconsin.

Advertising The general rules against false, misleading or deceptive advertising discussed earlier in this manual with regard to closed-end consumer credit also apply to open-end consumer credit.

You should refer to the section on TILA Advertising Requirements for closed-end consumer credit for a discussion of the type of advertising that is subject to TILA.

Clear and Conspicuous Standard The advertising of open-end credit transactions is subject to the same clear and conspicuous standard in closed-end credit advertising. In other words, terms required to be disclosed in the advertisement must be reasonably understandable. The rule does not prescribe specific rules for the format of the necessary disclosures. Credit terms need not be printed in a certain type size or appear in any particular place in an advertisement.

Reusable Line of Credit

False, Misleading or Deceptive

TILA Advertising Requirements Reg. Z 226.16


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Actually Available Terms If an advertisement of credit states specific credit terms, it shall state only those terms that you are actually prepared to offer. For example, you may not advertise a very low annual percentage rate that will not in fact be available at any time. You may, however, advertise terms that will be offered for only a limited period or terms that will become available at a future date.

Advertisement of Terms That Require Additional Disclosure If any term required to be disclosed in the initial disclosure statement relating to the finance charge or other charges is set forth in an advertisement, the advertisement must also clearly and conspicuously set forth each of the following items:

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 as determined under Sec. 226.14(b) (the corresponding annual percentage rate ) and, if the plan provides for a variable periodic rate, that fact must also be disclosed; and

3. any membership or participation fee that could be imposed.

Whenever the annual percentage rate is used in an advertisement for open-end credit, it may be expressed using a readily understandable abbreviation such as APR.

An advertisement must state a credit term as a positive number in order to trigger additional disclosures. For example, no annual membership fee would not trigger the additional disclosures required by this section of the rule. However, the additional disclosures may be required even if the triggering term is not explicitly stated, as long as it may be readily determined from the advertisement.

TILA Disclosure Requirements Required open-end credit disclosures must be made clearly and conspicuously in writing in a form that the consumer may keep. The terms finance charge and annual percentage rate when required to be disclosed with a corresponding amount or percentage rate, shall be more conspicuous than any other required disclosure. The rules for open-end credit transactions, regarding the basis for disclosures, use of estimates, multiple creditors, multiple consumers, and the effect of subsequent events, are virtually the same as those involving closed-end credit transactions. You should refer to the Closed-End Consumer Credit section of this manual for a discussion of these rules.

Open-end credit transactions require two different types of disclosures, i.e., initial disclosures and periodic statements. The timing for both types of disclosures are discussed in this section.

Form of Disclosures Reg. Z 226.5(a)

Time of Disclosures Reg. Z 226.5(b)


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Initial Disclosures You must furnish the initial disclosure statement before the consumer becomes obligated under the plan. For example, the initial disclosures must be given before the consumer makes the first purchase, receives the first advance, or pays a fee under the plan. Delivery of the initial disclosure statement is timely even if a purchase has already been posted to the consumer s account, so long as the consumer may, after receiving the disclosures, reject the plan and have no further obligation beyond returning any money or acquired goods. If a consumer receives service on his or her vehicle and then asks for credit when the bill becomes due, you and the consumer may enter into a charge account agreement establishing an open-end plan which includes the charges for the previously rendered services as long as the consumer receives the initial disclosure statement before signing the agreement.

Periodic Statements Periodic statements must be mailed or delivered to the consumer for each billing cycle at the end of which an account has a debit or credit balance of more than $1.00 or on which a finance charge has been imposed. The periodic statement must be mailed or delivered at least 14 days prior to any date or the end of any time period by which the consumer must make payment to avoid an additional finance or other charge. If you fail to meet this requirement, you may not collect any finance or other charge imposed as a result of such failure.

See Appendix B, this manual, for an example of an approved Charge Account Agreement" which includes the initial open-end credit disclosures required under TILA.

To the extent applicable, the initial disclosure statement must make the disclosures discussed in this section. The disclosures must be made in language sufficiently consistent with the terminology that is also used in making periodic statement disclosures, so the consumer may relate the two sets of disclosures.

Accrual of Finance Charge A statement of when finance charges begin to accrue, including an explanation of whether or not any time period exists within which any credit extended may be repaid without incurring a finance charge (the free-ride period)

Periodic Rate/Range of Balances A disclosure of each periodic rate that may be used to compute the finance charge, the range of balances to which it is applicable, and the corresponding annual percentage rate. The term periodic rate means a rate of finance charge imposed on a balance for a day, week, month or other subdivision of a year. For example, an 18% APR would yield a periodic rate of 1-1/2% per month. Where you choose to use a daily periodic rate, such rate may be 1/360 of the annual rate. However, if you apply a 1/360 rate for 365 days, that fact and the true annual percentage rate must be disclosed.

Initial Disclosures Reg. Z 226.6(a)


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If only one periodic rate may be applied to the entire account balance, disclosure of the range of balances is inapplicable. If you are offering a variable rate plan, you must also disclose:

1. the circumstances under which the rate may increase;

2. any limitations on the increase; and

3. the effects of an increase.

A variable rate plan is one contemplating a series of rate changes in accordance with an index that is readily verifiable by the consumer and beyond the control of the lender. An example of such an index is the Treasury Bill rate.

Explanation of Balance Computation Method An explanation of the method used to determine the balance on which the finance charge may be computed. Because a shorthand phrase such as previous balance method does not suffice in explaining the balance computation method, the FRB has attached an appendix to Regulation Z which sets forth model clauses for explaining the following balance computation methods:

1. adjusted balance method;

2. previous balance method;

3. average daily balance method (excluding current transactions); and

4. average daily balance method (including current transactions).

These balance computation method model clauses are contained in Appendix D to this outline.

Caution: The previous balance method may not be used in Wisconsin.

Determination of Finance Charge An explanation of how the amount of any finance charge will be determined, including any finance charge determined other than through application of the periodic rate. Examples of finance charges determined other than through application of the periodic rate are minimum charges, required insurance, appraisal fees, or credit report fees.

Other Charges The amount of any charge, other than a finance charge, that may be imposed as part of the plan or an explanation of how such charge will be determined. Examples of other charges include late payment charges and over-the-credit limit charges.

Security Interests If applicable, the fact that you have, or will acquire, a security interest in the property purchased under the plan or in other property identified by item or type.


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Statement of Billing Rights The initial disclosure statement must include the long form Billing Error Rights Statement which outlines the consumer s rights and your responsibilities in the event of a billing error dispute. The long form Billing Error Rights Statement required to be given with the initial disclosure statement is included in this outline on the reverse side of the sample Consumer Charge Account Agreement and Initial Disclosure Statement. (Appendix B). The long form statement also may be provided annually to each open-end credit consumer as an alternative to giving the short form Billing Error Rights Statement with each periodic statement.

See Appendix C for an example of an approved Periodic Statement .

You must mail or deliver a periodic statement to each open-end credit consumer for each billing cycle on which an account has a debit or credit balance of more than $1.00 or on which a finance charge has been imposed. Billing cycles must be equal (give or take 4 days) and no longer than every three months.

To the extent applicable, the following disclosures are required to be made to the consumer on the periodic statement:

Previous Balance The account balance outstanding at the beginning of the billing cycle. The previous balance should reflect finance charges accrued since the last payment unless the amount of such finance charge is directly deducted from each new payment.

Identification of Transactions An identification of each credit transaction. The identification of transactions in the periodic statement may be accomplished in one of two different ways:

1. an actual copy of the receipt or other credit document reflecting the transaction may be included with the periodic statement, together with disclosure on the statement of the amount of the transaction and either the date of the transaction or the date of debiting the transaction to the consumer s account; or

2. the amount and date of the transaction and a brief identification of the property or services purchased may be disclosed on the periodic statement.

Credits Any credit to the account during the billing cycle, including the amount and the date of crediting. The date need not be provided if a delay in crediting does not result in any finance or other charge. The total figure for the amounts credited need not be disclosed.

Periodic Rates Each periodic rate that may be used to compute the finance charge, the range of balances to which it is applicable (unless only one periodic rate

Periodic Statement Disclosures Reg. Z 226.7


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is used), and the corresponding annual percentage rate. This requirement, which is also part of the initial disclosures, is discussed more fully in the section immediately prior to this one. If the plan includes a variable rate feature, each periodic rate applied during the billing cycle must be disclosed.

Balance on Which Finance Charge is Computed The amount of the balance to which a periodic rate was applied and an explanation of how the balance was determined. The FRB s Balance Computation Method Model Clauses, which may be used in explaining how the balance was determined, are set forth in Appendix D to this manual. The rule also requires that when a balance is determined, without first deducting all credits and payments made during the billing cycle, that fact and the amount of the credits and payments not deducted must be disclosed.

Under the WCA, the balance used to determine the finance charge in an open-end credit plan under the WCA must be one of the following:

1. the average daily balance of the account;

2. the unpaid balance of the account on the last day of the billing cycle after deducting all payments, credits and refunds during the billing cycle; or

3. a median amount within a specified range calculated in accordance with the rules set forth in Sec. 422.201(10m)(c).

Amount of Finance Charge The amount of any finance charge added to the account during the billing cycle, using the term finance charge. Each type of finance charge (i.e., periodic rate, transaction charge, and minimum charge) imposed during the cycle must be separately itemized. If different periodic rates are applicable to different balance ranges, you have the option of giving the finance charge attributable to each rate or giving a total finance charge amount. For example, if you charge 1.5% per month on the first $500 of a balance and 1% per month on amounts over $500, you may itemize the two components ($7.50 and $1.00) of the $8.50 charge, or may disclose $8.50. If the terms of the credit plan provide that the amount of a finance charge accrued since the consumer s last payment is directly deducted from each new payment, rather than being separately added to each statement and reflected as an increase in the obligation, no disclosure of the finance charge that has been accrued since the last payment is required. Finance charges relating to the opening of an account that are paid prior to the issuance of the first periodic statement need not be disclosed on the statement. However, if such charges are financed as part of the plan, the charges must be disclosed as part of the finance charge on the first statement.

Annual Percentage Rate When a finance charge is imposed during the billing cycle, the actual annual percentage rate must be disclosed using the term annual percentage rate . If the corresponding annual percentage rate disclosed with the periodic rate disclosure is the same as the actual


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annual percentage rate, you need disclose only one annual percentage rate using that phrase.

Other Charges The amounts, itemized and identified by type, of any charges other than finance charges debited to the account during the billing cycle. Other charges may include late payment charges, over-the-credit-limit fees, or membership fees. The date of imposing or debiting other charges need not be disclosed.

Closing Date of Billing Cycle; New Balance The closing date of the billing cycle and the account balance outstanding on that date. The new balance need not reflect finance charges accrued since the last payment if the credit plan provides that such charges will be directly deducted from each new payment rather than being separately added to each statement and reflected as an increase in the obligation.

Free Ride Period The date by which, or the time period within which, the new balance or any portion of the new balance must be paid to avoid additional finance charges. No specific wording is required for this disclosure, although it should be consistent with the language used to make the similar disclosure required on the initial disclosure statement. For example, a clause such as to avoid additional finance charges, pay the new balance before___________ will suffice.

Address for Notice of Billing Errors The address to which any billing error notice must be sent.

As a general rule, you must credit a payment to the consumer s account on the date of receipt. The date of receipt is the date that you receives the consumer s check, not when the funds are actually collected. If a finance or other charge is imposed due to your failure to credit a payment as of the date of receipt, you must adjust the consumer s account so that the charges imposed are credited to the account during the next billing cycle.

If you have specified a certain method of payment on the periodic statement, you have up to 5 days after receipt of a payment not conforming to the required method in which to credit the consumer s account.

Billing Error Rights Statements All open-end credit consumers must be given the long form Billing Error Rights Statement, in a form substantially similar to that shown on the reverse side of Appendix B to this outline, as part of the initial disclosure statement.

Thereafter, you have two alternative methods of giving periodic notice of billing error rights to the consumer. You may mail or deliver the long form Billing Rights Statement (reverse side of Appendix B) at

Crediting of Payments Reg. Z 226.10

Billing Error Resolution Reg. Z 226.13


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least once per calendar year, at intervals of not less than 6 months nor more than 18 months, either to all consumers or to each consumer entitled to receive a periodic statement for any one billing cycle. As an alternative, you may provide the short form Billing Error Rights statement, in a form substantially similar to that shown on the reverse side of Appendix C to this outline, with each periodic statement.

Definition of Billing Error Regulation Z gives seven examples of what constitutes a billing error for purposes of the Fair Credit Billing Act. These examples involve the following circumstances being reflected on the consumer s periodic statement:

1. an extension of credit that is not made to the consumer or to a person having authority to charge to the consumer s account;

2. a failure to properly describe a credit transaction;

3. an extension of credit for property or services not accepted by the consumer;

4. your failure to properly credit a payment or other credit to the consumer s account;

5. a computational or similar accounting error made by you;

6. an extension of credit for which the consumer requested additional clarification, including documentary evidence; and

7. your failure to mail or deliver a periodic statement to the consumer s last known address if that address was received by you in writing at least 20 days before the end of the billing cycle.

Rights and Obligations Pending Resolution of Billing Error Dispute If you receive a billing error notice from a consumer, you must mail or deliver an acknowledgment of receipt of the notice to the consumer within 30 days and comply with the appropriate resolution procedures of the rule within two complete billing cycles, but in no event, later than 90 days after receiving the notice.

Until the billing error is resolved, the consumer need not pay the disputed amount, you are prohibited from trying to collect the disputed amount from the consumer, and you may not make or threaten to make any adverse report regarding the consumer s credit standing due to the failure to pay the disputed amount.

Billing Error Notice In order for a billing error notice to trigger these rights and obligations, it must possess the following elements:

1. the notice must be in writing;

2. it must be received by you not later than 60 days after you transmitted the first periodic statement that reflects the alleged billing error;


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3. it must enable you to identify the consumer s name and account number; and

4. it must state the consumer s belief and the reasons for the belief that a billing error exists, and the type, date, and amount of the error.

Billing Error Resolution Procedures If you determine that a billing error, as asserted in the notice occurred, you must, within two complete billing cycles (but in no event later than 90 days):

1. correct the billing error and credit the consumer s account with any disputed amount and related finance charge, and

2. mail or deliver a correction notice to the consumer.

3. If, after conducting a reasonable investigation, you determine that no billing error occurred, you must, within the same time limits:

4. mail or deliver to the consumer an explanation that sets forth the reasons for your belief that the billing error alleged by the consumer does not exist, and

5. furnish copies of documentary evidence of the consumer s indebtedness at the consumer s request.

If the investigation reveals that a different billing error occurred from that asserted, you must also correct the billing error and credit the consumer s account with any disputed amount and related finance charge.

In order to collect any disputed amount and related finance charge determined to be owing after investigation of a billing error notice, you must promptly notify the consumer in writing of the time when payment is due and the portion of the disputed amount and related finance charge that the consumer still owes. The consumer must be given the same free ride period, as is normally allowed under the open-end credit plan, to pay the amount due without incurring additional finance charges.

You may not report the account delinquent until after the free ride period or 10 days, whichever is longer, has elapsed and the account remains unpaid. If the consumer gives written notice within this period that any portion of the billing error is still in dispute, you must also promptly report that the account is in dispute, provide the consumer with written notice of the name and address of the person to whom the credit report has been made, and must promptly report any subsequent resolution of the reported delinquency to all persons to whom you have made reports.

TILA governs the procedures for making changes to open-end consumer credit accounts. The WCA contains restrictions on the circumstances under which such changes may be made.

Changes in Terms Reg. Z 226.9(c)


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Procedures TILA provides that, whenever any term required to be disclosed on the initial disclosure statement is changed or the required minimum periodic payment is increased, you must give written notice of the change to each consumer who may be affected at least 15 days prior to the effective date of the change, unless the change has been agreed to by the consumer or the periodic rate or other finance charge is being increased due to the consumer s delinquency or default. In the case of previously agreed upon changes or rate increases due to default, the notice may be given at any time before the effective date of the change. Certain changes, such as those involving late payment charges, charges for documentary evidence, or over-the-limit charges, do not require notice.

No notice of a change in the rate of finance charge need be given if the specific change is set forth initially under a properly disclosed variable- rate plan. If a variable-rate plan is used, the initial disclosure statement must provide:

1. the circumstances under which the rate may increase;

2. any limitations on the increase; and

3. the effects of an increase. The plan must also provide for rate changes which are tied to an index or formula, such as the treasury bill rate, and this fact must be disclosed in the initial disclosure statement. If the plan simply provides that you reserve the right to raise its rates, this is not a variable-rate plan for TILA purposes and a change-of-rate notice is required in conjunction with a subsequent rate change.

Restrictions on Changes Under the WCA, you may make a change in the terms of an open-end credit plan that is adverse to the consumer, including a change that results in an increase in the rate of finance charge, periodic payment or other charges, only under one of the following conditions:

1. The change is required by legislation, regulations or administrative rules becoming effective after the date of the agreement with the consumer and creditor has mailed or delivered to the consumer written notice disclosing the proposed change at least 3 months prior to the effective date of the change, unless the change is required by law to be made sooner.

2. You mail or otherwise deliver to the consumer a written disclosure of the proposed change at least 90 days prior to its effective date.

3. The consumer agrees in writing to the change.

Regulation Z provides that any person, other than the issuer of a credit card, who imposes a finance charge at the time of honoring a consumer s credit card must disclose the amount of that finance charge prior to its imposition. Also, under the WCA, a surcharge is part of the finance charge for those consumers who use their credit cards.

Credit Card Surcharges; Cash Discounts Reg. Z 226.9(d)


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However, you may offer a discount from the regular price for the purpose of inducing payment by cash, check, or other means not involving the use of an open-end credit plan or credit card. If the discount is offered to all prospective buyers and its availability is disclosed clearly and conspicuously, the discount does not need to be treated as a finance charge to buyers who do use an open-end credit plan or credit card. This exemption requires that the discount be from your regular price and that you may not penalize the credit consumer by adding a surcharge for that consumer to your regular price. The regular price is either the posted price for the property for service or, if none, the price charged for the property or service when payment is made by use of an open-end credit account or credit card. The discount may be either a percentage of the regular price or a dollar amount. You must offer the discount to all prospective buyers , whether or not they are cardholders or have an open-end credit plan with the dealership. Finally, a sign indicating the availability of the discount must be posted on the premises where it is clearly visible to any consumer.

Degree of Accuracy An annual percentage rate is considered accurate if it is not more than 1/8th of one percentage point above or below the annual percentage rate determined in accordance with TILA.

Initial Disclosure Statements and Advertising For initial disclosures and for advertising purposes, the annual percentage rate is determined by multiplying the periodic rate by the number of periods in the year. For example, a periodic rate of 1-l/2 percent per month would be disclosed as an 18 percent annual percentage rate on the initial disclosure statement and in advertising the open-end credit plan. This is commonly referred to as the corresponding annual percentage rate.

Periodic Statements On periodic statements, two different disclosures of the annual percentage rate are sometimes required. First, the corresponding annual percentage rate must be given with respect to the disclosure of each periodic rate that may be used to compute the finance charge. The corresponding annual percentage rate is the same as that computed for disclosure on the initial disclosure statement and for advertising purposes. In other words, it is simply the periodic rate multiplied by the number of periods in the year.

The periodic statement must also reflect the annualized equivalent of the rate actually applied during that particular cycle, i.e. the historical rate . The historical rate may differ from the corresponding annual percentage rate because of the inclusion of charges other than the periodic rate (e.g., fixed, minimum, or transaction charges) in the finance charge.

If the only finance charge imposed is due to the application of a periodic rate to a balance, you may compute the historical annual percentage rate by multiplying each periodic rate by the number of

Determination of Annual Percentage Rate Reg. Z 226.14


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periods in the year. This method should compute a historical rate equal to the corresponding annual percentage rate.

When different periodic rates apply to different balances, you may, at your option, disclose the corresponding annual percentage rate for each periodic rate as the historical rate or compute the historical rate by dividing the total finance charge for the billing cycle by the sum of the balances to which the periodic rates were applied and multiplying the quotient (expressed as a percentage) by the number of billing cycles in a year (the quotient method). For example, if in a plan involving a periodic rate of 1-1/2 percent on balances up to $500 and 1 percent on balances over $500, the consumer had a balance of $800 in a given cycle, the finance charge would consist of $7.50 (500 x .015) plus $3.00 (300 x .01), for a total finance charge of $10.50. The historical annual percentage rate for this period would be disclosed either as 18 percent on $500 and 12 percent on $300, or as 15.75 percent on a balance of $800 (the quotient of $10.50 divided by $800, multiplied by 12).

If the finance charge imposed includes a charge not due to the application of the periodic rate (other than a charge with respect to a specific transaction), such as a minimum finance charge, the quotient method for determining the historical rate must be used. For example, if you impose a minimum $1.00 finance charge on all balance below $50, and the consumer s balance is $40 in a particular cycle, you would disclose an annual percentage rate of 30 percent (1/40 x 12). However, if the finance charge imposed during the billing cycle does not exceed 50 cents for a monthly or longer billing cycle period, you may, at your option, compute the historical rate by multiplying each applicable periodic rate by the number of periods in a year.

If the finance charge imposed during a billing cycle includes charges relating to a specific transaction during the billing cycle, the computation of the historical annual percentage rate involves a complex formula which will not be discussed here. If you impose transaction charges, such as a certain percentage of the amount of each transaction, you should consult Reg. Z 226.14(c)(3) and Appendix F of Reg. Z for specific information on how to compute the historical annual percentage rate.

Daily Periodic Rates As a general rule, if all or a portion of the finance charge has been determined by the application of one or more daily periodic rates, you may, at your option, determine the annual percentage rate by either:

1. dividing the total finance charge by the average of the daily balances and multiplying the quotient by the number of billing cycles in a year, or

2. dividing the total finance charge by the sum of the daily balances and multiplying the quotient by 365.

The rules for determining which charges are or are not included in the finance charge are generally the same for open-end credit transactions as for closed-end credit transactions. Accordingly, you should refer to

Determination of Finance Charge Reg. Z 226.4


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the Closed-End Consumer Credit section of this manual for information relating to the determination of the finance charge in open-end credit transactions.

As mentioned above, one difference between closed-end credit and open-end credit transactions relating to the finance charge is cash discounts. A discount from the regular price offered by the seller for the purpose of inducing payment by cash, check, or other means not involving the use of an open-end credit plan or a credit card may be excluded from the finance charge if the discount is offered to all prospective buyers and its availability is disclosed clearly and conspicuously. This exception for cash discounts does not apply in the case of closed-end credit transactions.

Additional Disclosures Required By WCA To the extent not disclosed in accordance with the TILA disclosure requirements, the WCA requires that the information discussed in this section be disclosed to the consumer in connection with an open-end consumer credit plan.

Every application for an open-end credit plan, including an application contained in an advertisement, must disclose the following information:

1. The annual percentage rate and, if the rate may vary, a statement that it may do so and circumstances under which the rates may increase, any limitations on the increase and the effects of the increase.

2. The date or occasion upon which the finance charge begins to accrue on a transaction.

3. Whether any annual fee is charged and the amount of the fee.

4. Whether any other charges or fees may be charged, what they may be charged for and the amounts of the charges or fees.

If the consumer is not required to complete a credit application, the consumer must be given a notice containing the above disclosures prior to entering into the plan. This notice must be "appropriately divided and captioned by its various sections . . ."

The DFI has issued the following example of the type of information which must be given with the credit application (or, if no application is required, by separate notice) with regard to retail open end credit accounts:

ANNUAL PERCENTAGE RATE: 18%

FINANCE CHARGE: Finance charge begins to accrue on a transaction which is not paid in full within 25 days after the first billing of the charge.

ANNUAL FEE: None

Disclosures in Credit Application WCA 422.308

Sec. 422.308(1)


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OTHER CHARGES: $.50 minimum finance charge on balances less than $33.34.

See Appendix B1.

You must furnish to the consumer, under an open-end credit plan, at any time the consumer requests in writing, a written statement specifying the dates and amounts of purchases and payments received during the previous 12 months, and the unpaid balance remaining at the time of the statement. The statement may consist of copies of the periodic statements furnished to the consumer under the plan. You must furnish one statement once every 12 months at a charge of $1.00 or less. The consumer may be required to pay your reasonable costs of preparing and furnishing any additional statements.

Other Open-End Consumer Credit Issues Where more than one person is obligated under an open-end credit plan, any such person may terminate his or her liability for future extensions of credit by giving written notice of such termination of liability to you. After the notice has been received by you, the person will be liable for purchases made under the plan for only the next 15 business days, and his or her liability may not exceed the balance outstanding under the plan when you received the notice plus $500, up to the plan s credit limit.

At present, there is no maximum rate of finance charge limit in Wisconsin. You and consumer may agree to payment by the consumer at any periodic rate.

With respect to an open-end credit plan, you may charge, in addition to the finance charge, other fees and charges that are agreed upon by you and the consumer and not include them as part of the finance charge, unless they fall within the definition of finance charge.

Purchases made under an open-end credit plan may be secured by the same property used to secure a closed-end plan. In addition, goods previously purchased by the consumer pursuant to an open-end credit plan may be used to secure the unpaid balance under the plan, provided that the security interest in each item terminates as the obligation incurred with respect to each item is paid. In determining the amount of the unpaid balance secured by the various security interests, payments are deemed to have been applied first to finance charges in the order of their entry to the account and then to the payment of the respective amounts financed in the order in which the entries to the account were made. If two or more obligations arose on the same day, payments are deemed to have been applied first to the payment of the smallest obligation.

Application of Closed-End Consumer Credit Rules The rules regarding Variable Rate Transactions discussed in the Closed-End Consumer Credit section of this manual also generally

Statements of Dates and Amounts of Purchases WCA 422.306(3)

Notice of Termination of Liability WCA 422.4155

Limitations on Finance Charges

Other Charges WCA 422.202(2m)

Restrictions on Security Interests WCA 422.417 and 422.418

Variable Rate Transactions WCA 422.421


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apply to open end consumer credit transactions. The differences and special rules applicable to open end transactions are discussed in this section.

Consummation As discussed before other adjustment provisions may not specify an increase in the rate of finance charge in excess of 2% for each 12-month period commencing with the consummation of a variable rate transaction and may not specify a date for adjustment earlier than 3 months after the date of consummation. In an open-end transaction, consummation means the time at which you accept a consumer s application and authorize the consumer s participation in the plan or the time at which an amendment to an existing open-end credit plan is accepted by or becomes binding on a consumer.

Notice of Adjustments You generally must give written notice to the consumer either, (i) at least 15 days prior (where the periodic payment is changed) or (ii) not later than 30 days after (in the case of other changes), the effective date of an adjustment. However, such notice is not required for adjustments under an open-end credit plan which are based upon changes in an approved index.

The discussion of many of the issues in the Closed-End Consumer Credit section of this manual also apply to Open-End Consumer Credit transactions. You should refer to the appropriate headings of the Closed-End Consumer Credit section for information regarding the following subjects:

1. Refinancing

2. Post-Maturity Interest

3. Deferral Charges

4. Advances to Perform Agreements of Consumers

5. Late Payment Charges

6. WCA Disclosure Requirements

7. WCA Form Requirements

8. Record Retention

9. Prohibition of Blank Writings

10. Notice to Obligors

11. Receipts, Accounting, Evidence of Payments

12. Release of Security Interests

13. Assignment of Earnings

14. Authorization to Confess Judgment

15. Negotiable Instruments

16. Assertion of Defenses Against Assignees

Other Issues Discussed In Closed-End Consumer Credit Section


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17. Attorneys Fees

18. Limitation on Default Charges

19. Use of Multiple Agreements

20. Waivers

21. Referral Transactions

22. Unconscionability

credit practices

Documents

credit plan

credit available

credit extensions

vehicle consumer credit

openend credit disclosures

consumer transactions

onetime credit extension

finance charge criterion