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FED ER AL RESERVE BANK OF DALLAS DALLAS, TEX A S 75222 Circular No. 77— 47 April 18, 1977 IN T E R P R E T A T IO N S TO R EG ULATIO N C (HOME MORTGAGE D ISCLO SURE) AN D R E G U LA TIO N Z (T R U T H IN LENDING) T O A L L BANKS AN D O THERS CO NCERNED IN T H E E LE V E N TH FE D E R A L RESERVE D IS T R IC T : T h e Board of G o v e rn o rs of the F e d e ra l R e s e rv e System has adopted th re e in te rp re ta tio n s intended to c la r i f y c e rta in aspects of its consumer c r e d it protection r e g u l a t i o n s . T h e Board adopted an in te rp re ta tio n to its T r u t h in L e nding R egulation Z stating th a t the am ount of a d e a le r 's p a r tic ip a tio n in the finance c h arg e on the c r e d it p u rc h a s e of an autom obile or o th e r d u r a b le goods need not be disclosed as a s e p a r ate p a r t of the fin a n c e c h a r g e . A t the same tim e , the Board w i t h d r e w a proposal tha t w ould have r e q u ir e d d is c lo s u re of the fact b u t not the amount of a d e a le r 's p a r tic ip a tio n . T h e Board took these actions because it d id not feel that d is c lo s u re of a d e a le r p a rtic ip a tio n in a fin a n c e c h arg e w ould s ig n ific a n tly b e n e fit consumers in shopping fo r c r e d it. A t the same tim e , the B oard adopted two technical in te rp re ta tio n s to its Home M o rtgage D is c lo s u re R e gulation C . T h e f i r s t in te r p r e ta tio n p e rm its a d e p o s ito ry in s titu tio n subject to the A ct that is m a jo rity -o w n e d b y a n o th e r d e p o s ito ry to disclose its m ortgage loan data s e p a ra te ly from th a t of the p a r e n t . T h e second in te r p r e ta tio n of R egulation C c la r ifie s w h a t dis clo s u res must be made b y de pos itorie s that w e r e e xe m p t from the p ro v is io n s of the A c t , b u t lose t h e i r e xe m p tio n . A d e p o s ito ry is e xe m p t if (a) it does not have an office in a s tandard m etropolitan statistical area ( S M S A ) , (b ) does not ha ve assets on the Banks and others are encouraged to use the fo llo w in g to ll-fr e e incoming WATS numbers in contacting th is Bank: 1 -8 0 0-492-4403 (intra s ta te ) and 1 -8 0 0 -52 7 -4 97 0 (in te rs ta te ). For c a lls placed lo c a lly , p lease use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 - last d ay of its fiscal y e a r of $10 m illio n o r m o re , o r (c) is a S ta te -c h a r te r e d ins titu tio n subject to a State d is c lo s u re law that the Board has d e te rm in e d imposes d is c lo s u re re q u ire m e n ts s u b s ta n tia lly s im ila r to those o f the Home M o rtgage D is c lo su re A c t. T h e B oard's in te r p r e ta tio n makes it c le a r th a t p r e v io u s ly exem pt ins titutions w h ic h become subject to the A c t (b y extension of an SMSA to c o v e r one o r more of its offices o r by g r o w th of its assets) may r e p o r t on t h e i r m ortgage len d ing d u r i n g t h e ir last fu ll fiscal y e a r by Postal ZIP code areas and th e re a fte r by Census B u re a u census t r a c t s . T h is is the same tre atm en t accorded to depositories in the f i r s t y e a r a fte r R egulation C became e ffe ctive (June 28, 1976) . A copy of each of the th r e e in te rp re ta tio n s is a tta ch ed . In q u ir ie s r e g a r d in g this m atter should be d ir e c te d to R ic h a rd West of o u r Regulations D e p a r t m ent, E x t. 6171. A d d itio n a l copies of these in te rp re ta tio n s w i ll be fu r n is h e d upon re q u e s t to the S e c r e ta r y 's Office of this B a n k , E x t. 6267. S in c e r e ly y o u r s , R obert H . B oy k in F i r s t V ic e P re s id e n t Attachm ents BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM HOME MORTGAGE DISCLOSURE TEC HN IC A L IN TERPRETATIO NS OF R EG U LA TIO N C S E C T IO N 203.001 — T R E A T M E N T O F M A JO R IT Y -O W N E D , D E PO SIT O R Y SU B SID IA R IE S O F D E PO SIT O R Y IN S T IT U T IO N S T he Board has been asked w hether a majorityowned, depository subsidiary of a depository insti tution should be treated in the same way as a n on depository subsidiary. T he first sentence of §203.2 (c) defines a depository institution as “ any com mercial bank, savings bank, savings and loan asso ciation, building and loan association, hom estead association (including cooperative b an k s), or credit union, w hich makes federally related m o rt gage loans.” The second sentence deals with sub sidiaries: “A ny m ajority-owned subsidiary of a depository institution shall be deemed to be p art of its p aren t depository institution for the purposes of this P a rt.” T he purpose of the subsidiary provision is to provide a m ore com plete picture of a p arent’s lending patterns by including inform ation regard ing the lending activities of any non-depository, m ajority-owned subsidiary. A few depository institutions, however, have majority-owned subsidiaries that are themselves depository institutions. This raises the issue of how a depository institution as defined in the first p art of §203.2 ( c ) , which is also a m ajority-owned sub sidiary of a depository institution, should be treated for R egulation C disclosure purposes. If, absent the second p art of §203.2 ( c ) , the depository subsidiary otherwise would m ake separate disclosures under Regulation C, then com bining the subsidiary’s loan data w ith the p aren t’s into a single statem ent would reduce public disclosure, contrary to the intent of §203.2(c) and the purpose of the H om e M ortgage Disclosure Act. T herefore, to fu rth er the intent o f the act and the regulation, a paren t depository institution may draw a distinction fo r disclosure purposes between depository and non-depository, majority-owned subsidiaries. A majority-owned, non-depository subsidiary of a depository institution should be treated as an integral p art of its parent, w ith no distinction m ade between them for reporting p u r poses, in accordance w ith the second sentence of §203.2 ( c ) . O n the other hand, at the parent’s op tion, a majority-owned, depository subsidiary o f a depository institution may be treated as a distinct, unaffiliated entity since it is a depository institution as defined in th e first sentence of §203.2 ( c ) . S E C T IO N 203.002 — D IS C L O SU R E A F T E R LOSS O F E X E M P T IO N The B oard has been requested to clarify the Regulation C disclosure requirem ents that apply to a depository institution th at ceases to be exempt from the H om e M ortgage Disclosure Act. Section 203.3(a) of Regulation C describes the three classes of depository institutions that are exem pt from the regulation’s disclosure require ments. T hey are: (1 ) institutions th a t have assets of $10,000,000 or less as of the last day of their fis cal year; (2) institutions that do not have an office in a standard m etropolitan statistical area; and (3 ) S tate-chartered institutions th at are subject to a State disclosure law that the Board has determ ined imposes substantially sim ilar requirem ents to those m andated by the H om e M ortgage D isclosure Act. Section 2 0 3 .3 (b ) sets forth the initial disclosure requirem ents applicable to an exem pt institution that subsequently loses its exemption. It states: A depository institution that was exem pt on or after the effective date of this P art on the basis of paragraph (a ) o f this section and that sub sequently becomes no longer exem pt shall com pile the d ata described in section 203.4 of this P a rt for each fiscal year beginning w ith its last full fiscal year ending prior to the date it was no longer exempt, and that last full fis cal year shall be deemed to be a “full fiscal year ending prior to July 1, 1976” for the p u r poses of section 203.4 of this Part. T he first point on w hich clarification has been sought is the m eaning of the language “last full fis cal year ending prior to the date it was no longer exem pt . . F o r any depository institution that loses its exem ption under §203.3 (a ) (2) because of the re-definition of a standard m etropolitan statis tical area or loses its exem ption under §20 3.3 (a) (3 ) because applicable State disclosure law is found not to be substantially sim ilar to the Federal act, “its full fiscal year ending prior to the date it was no longer exem pt” is its fiscal year im m edi ately preceding the fiscal year during which the exem ption was lost. F o r example, a depository in stitution having a calendar fiscal year that ceases to be exempt during 1977 w ould have to disclose relevant 1976 data. F o r any depository institution that loses its ex em ption u n d er §203.3 ( a ) ( 1 ) because its assets exceeded $10,000,000 on the final day of its last fiscal year, the period to be covered by its initial disclosure statem ent is that last fiscal year. F o r example, a calendar fiscal year institution that has assets of m ore th an $10,000,000 on D ecem ber 31, 1977, would have to disclose relevant 1977 loan inform ation. T he B oard also has been asked to explain the significance of the phrase “ ‘full fiscal year ending prior to July 1, 1976 . . .’ ” The purpose in §203.3 (b ) of equating an institution’s “last full fiscal year ending prior to the date it was no longer exem pt” with a “ ‘full fiscal year ending p rio r to July 1, 1976’ ” is to m ake available to an institution that loses its exemption the same disclosure options that were available to institutions when Regulation C becam e effective. T hus, fo r the purposes of §203.4, a depository institution th at ceases to be exempt m ay compile the necessary mortgage and home im provem ent loan d ata by U nited States Postal Service Z IP codes, in lieu of Census Bureau census tracts, for its last full fiscal year and any p o rtio n of its current fiscal year ending prior to the loss of exemption. In addition, such an institution may exercise the options and rely on th e presum ption contained in paragraphs ( a ) ( 4 ) ( ii) and (c) of §203.4 as if it has lost its exem ption and become subject to the regulation on July 1, 1976. T he following examples illustrate the points made in this interpretation. A ssume th a t a deposi tory institution having a calendar fiscal year ceases to be exem pt u nd er §203.3 ( a ) (2) on A pril 1, 1977, because of the enlargem ent o f a standard m etropolitan statistical area to include a county in which the institution has an office. P u rsu an t to §203.5 ( a ) (1) (iii), that institution w ould be re quired to prepare and m ake available publicly a disclosure statem ent by Jun e 29, 1977, ninety days after its loss of exemption. U nder §203.3 ( b ) , the disclosure statement would have to cover the institution’s “last full fiscal year ending p rior to the date it was no longer exem pt,” which, as indicated previously, w ould be 1976. P ursuant to §203.4 ( a ) (2 ) ( i), read in view of §203.3 ( b ) , the institution could compile the necessary loan inform ation fo r 1976 by Z IP code if it chose. Also, under §203.4 ( a ) (2 ) (ii), it could elect to issue a separate disclosure statement, com piled on a ZIP-code basis, fo r the first three m onths o f its current fiscal year — January, F ebruary, M arch 1977 — if it also m ade that statem ent available on June 29, 1977. If it chose that option, then it would report on its relevant lending activities fo r the re m ainder of 1977 by census tract on M arch 31, 1978. T he alternative to this latter option would be for the institution to report on all of its relevant lending activities during 1977 by census tra c t on M arch 31, 1978. Finally, the institution m ay exer cise the reporting options and rely on the residence presum ption set forth in §§20 3.4 (a) (4) (ii) and 203 .4(c) for its 1976 disclosure statem ent and the January through M arch 1977 statem ent if that option is chosen. T he second example assumes that a depository institution having a calendar fiscal year ceases to be exempt under §203.3 ( a ) ( 1 ) because its assets exceed $10,000,000 as of D ecem ber 31, 1977. P u r suant to the applicable provisions of the regulation as outlined in the preceding example, the institu tion would have to prepare a disclosure statement by M arch 31, 1978, covering its relevant lending activities during 1977 on a ZIP-code basis. Since the loss of exem ption w ould not have occurred d u r ing the course of its fiscal year, no partial fiscal year report would be possible. T he options and presum ption contained in §§203.4(a) (4 ) (ii) and 2 0 3 .4 (c ), respectively, could be used, however, in preparing the 1977 disclosure statement. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TRUTH IN LENDING IN TER PR ETA TIO N OF R E G U LA T IO N Z SEC T IO N 226.821 — D ISC L O SU R E O F D E A L E R P A R T IC IP A T IO N (a) Section 226.8(c)(8)(i) requires the itemiza tion of each com ponent of a finance charge con sisting of m ore than one type of charge. Section 226.4(a)(3) lists am ong the types o f charges to be included in the finance charge a “finder’s fee or similar charge.” In certain credit transactions, such as the sale of automobiles and other con sum er goods, where the finance charge is deter mined by application of a percentage rate or rates to the am ount financed, a portion of that charge may be allocated to the dealer by the finan cial institution as a dealer participation. T he ques tion arises w hether such allocations m ust be itemized as a separate com ponent of the total finance charge in the nature o f a finder’s fee. (b) The requirem ent for itemization o f a fi nance charge w hich includes a finder’s fee or oth er elements in addition to an interest com po nent is intended to assure th at the total finance charge disclosed to th e custom er properly reflects all com ponents which m ust be included in that am ount. Any com ponent of the finance charge which is com puted by the application of a per centage rate or rates to the am ount financed con stitutes a single charge of the type described in §226.4(a)(l). As such, it m ust be included in the finance charge calculation and disclosure. A po r tion of such single com ponent of the finance charge which is distributed to a dealer is not considered a “finder’s fee or similar charge” and need not be separately identified or disclosed. The concept o f a “finder’s fee,” as that term is used in §226.4(a)(3), is intended to cover certain charges in the nature of brokerage fees which are imposed in addition to th at portion of the finance charge attributable to the application of a percentage rate or rates to the am ount financed. A ny such separate fee must, o f course, be sep arately itemized.