Board of Governors of the Federal Reserve System
Regulation Z
Truth in Lending
12 CFR 226; as ammended effective November 21, 1997
SECTION 226.14  Determination of Annual Percentage Rate
(a) General rule. The annual percentage rate is a
measure of the cost of credit, expressed as a yearly rate.
An annual percentage rate shall be considered accurate if it
is not more than 1/8 of 1 percentage point above or below
the annual percentage rate determined in accordance with
this section.^{31a}
(b) Annual percentage rate for section 226.5a
and 226.5b disclosures, for initial disclosures
and for advertising purposes. Where one or
more periodic rates may be used to compute
the finance charge, the annual percentage
rate(s) to be disclosed for purposes of sections
226.5a, 226.5b, 226.6, and 226.16 shall be
computed by multiplying each periodic rate by
the number of periods in a year.
(c) Annual percentage rate for periodic statements.
The annual percentage rate(s) to be disclosed for purposes
of section 226.7(d) shall be computed by multiplying each
periodic rate by the number of periods in a year and, for
purposes of section 226.7(g), shall be determined as
follows:
(1) If the finance charge is determined solely by
applying one or more periodic rates, at the creditor's
option, either 
(i) By multiplying each periodic rate by
the number of periods in a year; or
(ii) 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.
(2) If the finance charge imposed during the billing
cycle is or includes a minimum, fixed, or other charge
not due to the application of a periodic rate, other
than a charge with respect to any specific transaction
during the billing cycle, by dividing the total
finance charge for the billing cycle by the amount of
the balance(s) to which it is applicable^{32}
and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a
year.^{33}
(3) If the finance charge imposed during the billing cycle
is or includes a charge relating to a specific transaction
during the billing cycle (even if the total finance charge
also includes any other minimum, fixed, or other charge not
due to the application of a periodic rate), by dividing the
total finance charge imposed during the billing cycle by the
total of all balances and other amounts on which a finance
charge was imposed during the billing cycle without
duplication, and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a
year,^{34} except that the annual percentage rate
shall not be less than the largest rate determined by
multiplying each periodic rate imposed during the billing
cycle by the number of periods in a year.^{35}
Footnotes:
^{31a} An error in disclosure of the annual
percentage rate or finance charge shall not, in itself,
be considered a violation of this regulation if: (1)
the error resulted from a corresponding error in a
calculation tool used in good faith by the creditor:
and (2) upon discovery of the error, the creditor
promptly discontinues use of that calculation tool for
disclosure purposes, and notifies the Board in writing
of the error in the calculation tool.
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^{32} If there is no balance to which the finance
charge is applicable, an annual percentage rate cannot be
determined under this section.
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^{33} Where the finance charge imposed during the
billing cycle is or includes a loan fee, points, or similar
charge that relates to the opening of the account, the
amount of such charge shall not be included in the
calculation of the annual percentage rate.
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^{34} See appendix F regarding determination of the
denominator of the fraction under this paragraph.
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^{35} See footnote 33.
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Official Staff Commentary
on Regulation Z
Truth in Lending
As ammended effective March 31, 1999
SECTION 226.14  Determination of Annual Percentage Rate
. . .
5. Transaction charges. i. Section 226.14(c)(3) transaction
charges include, for example:
A. A loan fee of $10 imposed on a particular advance
B. A charge of 3 percent of the amount of each transaction
ii. The reference to avoiding duplication in the computation
requires that the amounts of transactions on which
transaction charges were imposed not be included both in the
amount of total balances and in the "other amounts on which
a finance charge was imposed" figure. In a multifeatured
plan, creditors may consider each bona fide feature
separately in the calculation of the denominator. A creditor
has considerable flexibility in defining features for open
end plans, as long as the creditor has a reasonable basis
for the distinctions. For further explanation and examples
of how to determine the components of this formula, see
appendix F.
6. Daily rate with specific transaction charge.
Section 226.1 4(c)(3) sets forth an acceptable method for
calculating the annual percentage rate if the finance charge
results from a charge relating to a specific transaction and
the application of a daily periodic rate. This section
includes the requirement that the creditor follow the rules
in appendix F in calculating the annual percentage rate,
especially footnote 1 to appendix F, which addresses the
daily rate/transaction charge situation by providing that
the "average of daily balances" shall be used instead of the
"sum of the balances."
7. Charges related to opening, renewing, or continuing
account. Footnote 33 is applicable to section 226.14(c)(2)
and (c)(3). The charges involved here do not relate to a
specific transaction or to specific activity on the account,
but relate solely to the opening, renewing, or continuing of
the account. For example, an annual fee to renew an openend
credit account that is a percentage of the credit limit on
the account, or that is charged only to consumers who have
not used their credit card for a certain dollar amount in
transactions during the preceding year. would not be
included in the calculation of the annual percentage rate,
even though the fee may not be excluded from the finance
charge under section 226.4(c)(4). (See comment 4(c)(4)2).
Inclusion of these charges in the annual percentage rate
calculation results in significant distortions of the annual
percentage rate and delivery of a possibly misleading
disclosure to consumers. The rule in footnote 33 applies
even if the loan fee, points, or similar charges are billed
on a subsequent periodic statement or withheld from the
proceeds of the first advance on the account.
8. Classification of charges. If the finance charge
includes a charge not due to the application of a periodic
rate, the creditor must determine the proper annual
percentage rate computation method according to the type of
charge imposed. If the charge is tied to a specific
transaction (for example, 3 percent of the amount of each
transaction), then the method in section 226.14(c)(3) must
be used. If a fixed or minimum charge is applied, that is,
one not tied to any specific transaction. then the formula
in section 226.14(c)(2) is appropriate.
9. Small finance charges. Section 226.14(c) (4) gives
the creditor an alternative to section 226.14(c)(2) and
(c)(3) if small finance charges (50 cents or less) are
involved; that is, if the finance charge includes minimum or
fixed fees not due to the application of a periodic rate and
the total finance charge for the cycle does not exceed 50
cents. For example, while a monthly activity fee of 50 cents
on a balance of $20 would produce an annual percentage rate
of 30 percent under the rule in section 226.14(c)(2), the
creditor may disclose an annual percentage rate of 18
percent if the periodic rate generally applicable to all
balances is 1 1/2 percent per month. This option is consistent
with the provision in footnote 11 to sections 226.6 and
226.7 permitting the creditor to disregard the effect of
minimum charges in disclosing the range of balances to which
periodic rates apply.

