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Federal R eserve Bank
OF DALLAS
WILLIAM H. W ALLACE
F IR S T V ICE P R E S ID E N T

December 3 0 , 1986

d a lla s , te x a s

75222

C i r c u l a r 86-118

TO:

The Chief Executive O f f i c e r o f a l l
member banks and o t h e r s concerned in
t he Eleventh Federal Reserve D i s t r i c t

SUBJECT
Issuance of final rule, withdrawal of a proposed rule, and request
for comment on amendment to official staff commentary, all pertaining to
Regulation Z--Truth in Lending
DETAILS
The Board o f Governors of t he Federal Reserve System has i s sue d a
f i n a l r u l e t h a t would modify th e Regul ati on Z p r o v i s i o n g r a n t i n g exemptions t o
t he r i g h t to r e s c i s s i o n . As a r e s u l t o f t h e change, t h e funding o f nonfinance
charges would not be c on si de r ed t o c o n s t i t u t e t he advance o f "new money" in
t h e cas es o f c e r t a i n r e f i n a n c i n g s .
The Board o f Governors had p r e v i o u s l y proposed t h a t th e exemption
from th e Regulati on Z r e s c i s s i o n r u l e a p p l i c a b l e t o c e r t a i n r e f i n a n c i n g s by
t he same c r e d i t o r be extended t o apply to c e r t a i n " r e f i n a n c i n g s " by a
d i f f e r e n t c r e d i t o r . This proposal has been withdrawn.
The Board o f Governors a l s o has p ubl is he d f o r comment a proposed
r e v i s i o n t o the o f f i c i a l s t a f f commentary r e g a r d i n g th e r e s c i s s i o n r u l e .
Comments on t h e proposed amendment should be a ddre ss ed to
Mr. William W Wi les, S e c r e t a r y , Board o f Governors o f the Federal Reserve
.
System, Washington, D.C. 20551. All correspondence should r e f e r t o Docket
No. R-0577, and must be r e c e i v e d on or b e fo re J anua ry 30, 1987.

ATTACHMENTS
The m a t e r i a l as p ub l is he d in th e Federal R e g i s t e r i s a t t a c h e d .

MORE INFORMATION
For f u r t h e r i n f o r m a t i o n , p l e a s e c o n t a c t David Dixon o f t h i s Bank's
Legal Department a t (214) 651-6228.
Sincerely yours,

For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL RESERVE SYSTEM
12 CFR P a r t 226
[ R e g u l a t i o n Z; Docket No. R-0577]
TRUTH IN LENDING
Right of R es ci ss i on
AGENCY:

Board o f Governors of t h e Federal Reserve System.

ACTION:

Final r u l e and withdrawal o f proposed r u l e .

SUM ARY:
M

The Board i s p u b l i s h i n g a f i n a l r u l e r e v i s i n g Regulation Z, i t s

r e g u l a t i o n implementing t h e Truth in Lending Ac t.

The r u l e modif ies t h e

e x i s t i n g p r o v i s i o n t h a t exempts o r i g i n a l c r e d i t o r s from p r ov i di n g t h e r i g h t
of r e s c i s s i o n in c e r t a i n r e f i n a n c i n g s secured by t h e consumer's p r i n c i p a l
dwelling.

The r e g u l a t i o n p rovide s t h a t t he r i g h t of r e s c i s s i o n wi ll not apply

i f t h e o r i g i n a l c r e d i t o r f i n a n c e s nonfinance charges such as a t t o r n e y ' s f e e s ,
t i t l e examination f e e s , and i n s u r a n c e premiums.
The Board has decided t o withdraw i t s proposal t o amend Reg ul ati on Z
t o exclude c e r t a i n t r a n s a c t i o n s by a c r e d i t o r o t h e r than th e o r i g i n a l c r e d i t o r
from t h e r i g h t of r e s c i s s i o n .

The proposal would have excluded from t h e r i g h t

of r e s c i s s i o n e x t e n s i o n s of c r e d i t t h a t r e p l a c e a t r a n s a c t i o n secured by t h e
consumer's p r i n c i p a l dwelling where (1) no new advances of money are made t o
t he consumer, (2) t he annual p e rc en t ag e r a t e on t h e new o b l i g a t i o n i s not
s u b j e c t t o i n c r e a s e a f t e r consummation and i s th e same as or lower than t h e
annual p e rc en ta ge r a t e on t h e o b l i g a t i o n being r e p l a c e d , and (3) t h e new t r a n s ­
a c t i o n does not have a b alloon payment f e a t u r e .
In l i g h t of s i g n i f i c a n t concerns e xpre ss ed by a number of persons
commenting on t h e p r o p o s a l , i nc l u d i n g s i g n i f i c a n t consumer o p p o s i t i o n t o any
expansion of t h e r e s c i s s i o n exemptions, d i s s a t i s f a c t i o n with t h e l i m i t e d n a t u r e

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of t h e proposed exemption, the complexity a s s o c i a t e d with a r u l e t h a t might
accommodate a l l i n t e r e s t s , and t h e s t a t u t o r y concerns accompanying any at tempt
t o accommodate t ho s e i n t e r e s t s , t h e Board has decided not t o c r e a t e a new
r e s c i s s i o n exemption f o r n o n o r igi n al c r e d i t o r s .
EFFECTIVE DATE:

December 16, 1986, but r e l i a n c e o p ti on a l u n t i l October 1, 1987.

FOR FURTHER INFORMATION:

Contact Adrienne Hurt o r Leonard Chanin, S t a f f

A t t o r n e y s , (202) 452-3867 or (202) 452-3667, Division of Consumer and Community
A f f a i r s , or f o r t h e he ar in g impaired o n l y , Telecommunications Device f o r t h e
Deaf (TDD) E a r n e s t i n e Hill o r Dorothea Thompson, a t (202) 452-3544, Board of
Governors of t he Federal Reserve System, Washington, D.C. 20551
SUPPLEMENTARY INFORMATION:

(1) Background.

Sect ion 125 of t h e Truth in Lending

Act (TILA) p ro v i de s t h a t consumers have t h e r i g h t t o r e s c i n d c e r t a i n c r e d i t
t r a n s a c t i o n s in which a s e c u r i t y i n t e r e s t i s taken in t he consumer’s p r i n c i p a l
dwelling.

The r i g h t of

r e s c i s s i o n was e s t a b l i s h e d t o

provide consumers an

o p p o r t u n i t y t o reexamine t h e i r c r e d i t c o n t r a c t s and c o s t d i s c l o s u r e s in o r d e r
t o r e c o n s i d e r t h e i r d e c i s i o n t o p la ce an important a s s e t - - t h e home - - a t r i s k
by o f f e r i n g i t as s e c u r i t y f o r t h e c r e d i t e x t e n s i o n .

The r e s c i s s i o n p e r i o d

runs f o r t h r e e b u s in es s

days ending on midnight of t h e t h i r d b us i nes s day

f ol lowi ng consummation,

d e l i v e r y of m a t e r i a l Truth i n

Lending d i s c l o s u r e s ,

or

d e l i v e r y t o t h e consumer of t h e n o t i c e of t he r i g h t to r e s c i n d , whichever
occurs l a s t .

Under s e c t i o n 226.23 of Regul ation Z, which implements t h e a c t ' s

r e s c i s s i o n p r o v i s i o n , a c r e d i t o r i s p r o h i b i t e d from performing s e r v i c e s or
d i s b u r s i n g funds , o t h e r than in escrow, during the r e s c i s s i o n p e r i o d .

A

consumer may waive t h e r i g h t t o r e s c i n d where t h e consumer has a bona f i d e
personal f i n a n c i a l emergency.

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C u r r e n t l y , both th e a c t and Regul at i on Z provide t h a t r e f i n a n c i n g s ^ /
by th e same c r e d i t o r of c r e d i t a l r e a d y secured by th e consumer's p r i n c i p a l
dwe ll in g are exempt from t h e r i g h t of r e s c i s s i o n where no "new money" i s
advanced t o t he consumer.

The r e g u l a t i o n t r e a t s as new money t h e d i f f e r e n c e

between t h e new "amount fi nanced" and t h e unpaid p r i n c i p a l bal ance p lu s any
earned unpaid f i na n ce charges on t he o b l i g a t i o n being r e f i n a n c e d .

Under t h i s

r u l e , nonfinance c h ar g e s , such as a t t o r n e y ' s f e e s , t i t l e examination fees and
in su ra n ce premiums, i f f inanced by t he c r e d i t o r , a r e added t o t h e old debt t o
a r r i v e a t t h e new amount f i n an c ed .

The p r o v i s i o n s in e x i s t i n g s e c t i o n 226.23

( f ) ( 2 ) provide t h a t t h e t r a n s a c t i o n is r e s c i n d a b l e t o t h e e x t e n t of t h e s e
charges.
In l i g h t of t h e s u b s t a n t i a l i n c r e a s e in consumer a p p l i c a t i o n s t o
r e f i n a n c e r e s i d e n t i a l mortgage l o a n s , t he Board r e cei ve d a number of i n q u i r i e s
and complaints about t h e a p p l i c a b i l i t y of th e r e s c i s s i o n r u l e s t o r e f i n a n c i n g s .
As a r e s u l t of consumer and c r e d i t o r c o nc er ns , t he Board publis hed f o r p u b l i c
comment on August 6, 1986 (51 FR 28245) a proposal t o c r e a t e a new exemption
from the r i g h t of r e s c i s s i o n f o r t r a n s a c t i o n s in vo lv in g th e n o no r ig i na l
c r e d i t o r , and t o r e v i s e t h e d e f i n i t i o n of new money f o r purposes of t he
c u r r e n t exemption f o r o r i g i n a l c r e d i t o r s .

The Board re ceive d approximately

165 comments on t h e proposed amendments.

The Board has decided not t o c r e a t e

Although t h e term " r e f i n a n c i n g " in § 226.23 o f Regul ati on Z r e f e r s only t o
new t r a n s a c t i o n s by t he same c r e d i t o r t h a t had made t h e o r i g i n a l e x t e ns io n of
c r e d i t , t h e term in t h i s d i s c u s s i o n i s used in a g e n er i c sense t o r e f e r t o a
t r a n s a c t i o n by any c r e d i t o r t h a t s a t i s f i e s and r e p l a c e s an e x i s t i n g o b l i g a t i o n .

\[

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a new exemption f o r n o n o r igi n a l c r e d i t o r s , but has decided t o r e v i s e i t s d e f i n i ­
t i o n of new money f o r purposes of t h e e x i s t i n g exemption from t h e r e s c i s s i o n
right for original c r e d ito r s .
(2) Proposal t o exempt "refinanci ngs' * by t h e n o n o ri g i n al c r e d i t o r .
Se cti on 125(e) of

t h e TILA exempts from

original creditor

where no new advances

r e s c i s s i o n only r e f i n a n c i n g s by t h e
of money are made.

The proposed

amendment t o Regulation Z would have expanded t h e c l a s s of t r a n s a c t i o n s exempt
from t h e r e s c i s s i o n p r o v i s i o n s t o i n c lu de c e r t a i n t yp es of r e f i n a n c i n g s by
c r e d i t o r s o t h e r than t he o r i g i n a l c r e d i t o r .

The expansion of t h e r e s c i s s i o n

exemption t o exempt c e r t a i n a d d i t i o n a l t yp e s of r e f i n a n c i n g s was based on t h e
idea t h a t i t would b e n e f i t both consumers (in all owi ng f o r immediate a cc ess t o
c r e d i t ) and c r e d i t o r s ( i n r e l i e v i n g some compliance c o s t s ) and, i f l i m i t e d ,
would be c o n s i s t e n t with c on gr e ss i on a l i n t e n t in c r e a t i n g t he r i g h t of r e s c i s ­
sion.

In an e f f o r t t o ensur e t h a t t r a n s a c t i o n s remain s u b j e c t t o t h e r i g h t

of r e s c i s s i o n where t he consumer arguably needs th e r i g h t , and in view of t h e
e x i s t i n g s t a t u t o r y exemption a p p l i c a b l e t o t h e o r i g i n a l c r e d i t o r on ly , t h e
proposal would have l i m i t e d t he t yp e s of r e f i n a n c i n g s o f f e r e d by a new c r e d i t o r
t h a t could be exempt from t h e r i g h t of r e s c i s s i o n .

Under t h e p r o p o s a l , a

r e f i n a n c i n g by a new c r e d i t o r would have q u a l i f i e d f o r t h e exemption only i f :
(1)

no new advances of money were o b t ai ne d by t h e consumer,

(2)

t h e annual pe rc en t a g e r a t e (APR) on t h e new t r a n s a c t i o n was
not s u b j e c t t o i n c r e a s e a f t e r consummation and was t h e same
as

or lower than t h e APR on t he o b l i g a t i o n being r e f i n a n c e d , and

(3) t h e new t r a n s a c t i o n did not have a b alloon payment f e a t u r e .
A ft e r c a r e f u l c o n s i d e r a t i o n of t h e comment l e t t e r s and f u r t h e r
e v a l u a t i o n of t h e p r o p o s a l , t h e Board has decided not t o amend Regu lat i on Z

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t o c r e a t e a new exemption from th e r i g h t of r e s c i s s i o n f o r r e f i n a n c i n g s by a
new c r e d i t o r .

The Boar d's d e c i s i o n i s based on s ev e ra l c o n s i d e r a t i o n s .

First,

t h e r e was a s t r o n g b e l i e f among persons opposed t o expanding t he r e s c i s s i o n
exemptions - - p a r t i c u l a r l y t ho s e r e p r e s e n t i n g t h e consumer i n t e r e s t - - t h a t t h e
Board's proposed amendment would e l i m i n a t e an impor tant consumer r i g h t .

These

commenters f e l t t h a t t h e purpose of t h e r i g h t of r e s c i s s i o n - - t o allow consu­
mers time t o r e c o n s i d e r t h e r i s k s in encumbering t h e i r homes f o r an e x t e n s i o n
of c r e d i t - - i s c r u c i a l , p a r t i c u l a r l y a t a time when so many consumers are
refinancing loans.

The opponents b e li e ve d t h a t t h e p r o p o s a l , even with i t s

l i m i t a t i o n s aimed a t exempting only loans t h a t would pose no g r e a t e r r i s k than
t he o r i g i n a l l o a n s , was not s u f f i c i e n t t o ensur e t h a t consumers wil l have t h e
r i g h t of r e s c i s s i o n in a l l t r a n s a c t i o n s when i t would be d e s i r a b l e .

In a d d i t i o n

t o t h e concerns about t h e l o s s of a s u b s t a n t i v e consumer p r o t e c t i o n , t ho s e
opposing t h e proposed amendment o f t en c i t e d t h e i r b e l i e f t h a t t h e Board would
be exceeding i t s rulemaking a u t h o r i t y under t h e TILA i f i t were t o exempt
t r a n s a c t i o n s by a c r e d i t o r o t h e r than t h e o r i g i n a l c r e d i t o r because t h e c u r r e n t
s t a t u t e e x p r e s s l y exempts only r e f i n a n c i n g s by t he same c r e d i t o r .
While most commenters g e n e r a l l y favored expansion of t he cat eg ory of
r e f i n a n c i n g s t h a t would be exempt from th e r e s c i s s i o n p r o v i s i o n s , many commenters
did not f a vo r t h e Boar d' s s p e c i f i c p r o p o s a l .

A number of c r e d i t o r s , f o r example,

urged t he Board t o adopt s i m i l a r exemption r u l e s f o r o r i g i n a l and n o n or ig i na l
c r e d i t o r s by d e l e t i n g t h e v a ri ou s q u a l i f i c a t i o n s from t h e proposed amendment.
They argued t h a t where a consumer r e f i n a n c e s a l oa n, r e g a r d l e s s of who t h e
c r e d i t o r i s , th e r i g h t t o r e s c i n d i s an unnecessary p r o t e c t i o n because t h e r e i s
adequate time between a p p l i c a t i o n and c l o s i n g f o r r e c o n s i d e r a t i o n of a c r e d i t
decision.

They a l s o claimed t h e r e i s l i t t l e s upport f o r t h e idea t h a t a consumer

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u ndertakes l e s s r i s k when r e f i n a n c i n g a loan with t h e same c r e d i t o r , or t h a t
t h e consumer needs th e a d d i t i o n a l r e s c i s s i o n p r o t e c t i o n s only when d e al i n g with
a different creditor.
While t h e Congress' r a t i o n a l e f o r r e s t r i c t i n g t h e e xce ption t o t h e
o r i g i n a l c r e d i t o r may be u n c l e a r , t he s t a t u t e unambiguously exempts r e f i n a n c i n g s
only with t he o r i g i n a l c r e d i t o r .

I t i s t h e Board's view t h a t adopting a broad

exemption t h a t would t r e a t new c r e d i t o r s t h e same as o r i g i n a l c r e d i t o r s would
be i n c o n s i s t e n t with t h e s t a t u t o r y i n t e n t of t he r e s c i s s i o n p r o v i s i o n s .
exemption would have t o be t a i l o r e d t o ensur e t h a t the r e s c i s s i o n
apply t o t r a n s a c t i o n s where t h e r i g h t of

Any

provisions

r e s c i s s i o n i s arguably a needed pro­

tection.
With regard t o t h e exemption as proposed, many commenters urged t h a t
v ari ous m o d i f i c a t i o n s be made in t h e proposal t o exempt a d d i t i o n a l t r a n s a c t i o n s
t h a t they b e l i e v e d would impose no i nc r e a s e d r i s k t o consumers.

For i n s t a n c e

s ev er a l commenters suggested t h a t :
- - The r e f i n a n c i n g of a v a r i a b l e r a t e loan with no caps t o a v a r i a b l e
r a t e loan with caps should be exempt from the r i g h t of r e s c i s s i o n .
- - The r e f i n a n c i n g of a f i x e d r a t e loan t o a v a r i a b l e r a t e loan with
a r a t e cap t h a t i s equal t o or l e s s than t he APR (or i n t e r e s t r a t e )
on t h e e x i s t i n g loan should be exempt from th e r i g h t of r e s c i s s i o n .
- - Only where a b alloon payment f e a t u r e i s added
or where a ba llo on
payment on t h e r e f i n a n c i n g i s h i gh er than t h e
b alloon payment on
an e x i s t i n g loan should t he t r a n s a c t i o n remain s u b j e c t t o th e r i g h t
of r e s c i s s i o n .
The Board b e l i e v e s t h a t modifying t h e proposal t o expand t h e r e s c i s s i o n
exemption t o i n c lu d e more t r a n s a c t i o n s in which a d d i t i o n a l r i s k i s not an ap par en t
concern would l i k e l y r e s u l t in a very t e c h n i c a l and complex r u l e .
Several commenters, in response t o t he Board's s o l i c i t a t i o n f o r
comment as t o whether a d d i t i o n a l l i m i t a t i o n s should be c on t ai ned in t h e p r o p o s a l ,

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f e l t t h a t a d d i t i o n a l c o n d i t i o n s should be imposed b ef or e a t r a n s a c t i o n i s
exempt from t h e r i g h t of r e s c i s s i o n .

Most of th o se a d d r e s s i n g t h e q u e st i o n

s t a t e d t h a t r e f i n a n c i n g s with a demand f e a t u r e should be s u b j e c t t o t h e r i g h t
o f r e s c i s s i o n on t h e ground t h a t a demand loan i s j u s t as r i s k y , i f not more
s o, than a loan with a ball oon payment f e a t u r e .

Others s t a t e d t h a t scheduled

payments on t h e r e f i n a n c i n g should be lower than scheduled payments on t h e
e x i s t i n g loan b ef or e t h e r i g h t of r e s c i s s i o n i s e l i m i n a t e d .
suggested a d d i t i o n a l c o n d i t i o n s .

Other commenters

The Board b e l i e v e s t h a t d r a f t i n g a r u l e

accommodating t h e s e concerns would c r e a t e a very t e c h n i c a l r e g u l a t i o n , and
would s i g n i f i c a n t l y l i m i t t h e number of t r a n s a c t i o n s t h a t would be covered
by t h e amendment.
In l i g h t of t h e s t r o n g o p p o s i t i o n t o any expansion of t h e r e s c i s s i o n
exemptions from a number of commenters, t h e d e s i r e of many commenters t o have
t h e r e s c i s s i o n exemption expanded beyond t h a t which was proposed by t h e Board,
t he complexity a s s o c i a t e d with a r u l e t o accommodate a l l i n t e r e s t s , and t h e
s t a t u t o r y c o n s t r a i n t s , t h e Board has decided not t o adopt t h e proposed amendment
t o c r e a t e a new r e s c i s s i o n exemption r e g a r di ng r e f i n a n c i n g s by a c r e d i t o r o t h e r
than t h e o r i g i n a l c r e d i t o r .
(3)

New money p r o p o s a l .

In a d d i t i o n t o proposing t o amend Regul ati on

Z t o exempt c e r t a i n r e f i n a n c i n g s by a n o n o ri g i n al c r e d i t o r , t h e Board proposed
t o r e d e f i n e what c o n s t i t u t e s a new advance of money ob ta in ed by a consumer f o r
purposes of t h e e x i s t i n g exemption f o r r e f i n a n c i n g s .

The Board has deci ded t o

adopt t h e proposed amendment t o Reg u l ati on Z t h a t would r e d e f i n e a new advance
of money.

Se cti on 2 2 6 . 2 3 ( f ) ( 2 ) c u r r e n t l y pro v id e s t h a t a consumer s h a l l r e c e i v e

t h e r i g h t of r e s c i s s i o n in a r e f i n a n c i n g by t h e o r i g i n a l c r e d i t o r i f t h e consumer
r e c e i v e s "new money."

Under t h i s r u l e , new money has been t r e a t e d as t h e

d i f f e r e n c e between t h e new amount f inanced and t h e o u t s t a n d i n g balance pl us any

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earned unpaid f i n a n c e c h a r g e s .

8

-

Because of t h i s d e f i n i t i o n , t h e r i g h t of r e s c i s ­

s ion o f t e n would be t r i g g e r e d i f t h e consumer merely f i n a n c e s c o s t s t h a t a re not
f in a n c e c h a r g e s , such as a t t o r n e y ' s f e e s , t i t l e examination f e e s , and i n s u r a n c e
premiums, even where a consumer does not get a d d i t i o n a l money f o r o t h e r p ur po se s.
The Board proposed f o r comment a r e v i s i o n t o t h i s r u l e t o pro vid e t h a t i f t h e
new money r e s u l t s s o l e l y from a d e c i s i o n by t h e consumer t o f i n a n c e nonfinance
charges such as a t t o r n e y ' s f e e s , t i t l e examination f e e s , and i n s u r a n c e premiums,
t h e s e c o s t s would not t r i g g e r t h e r i g h t o f r e s c i s s i o n .

(Under t h e e x i s t i n g

r u l e , p o i n t s and o t h e r f i n a n c e c h a r g e s , even i f fi n a nc ed by t h e c r e d i t o r , would
not t r i g g e r t h e r i g h t of r e s c i s s i o n s i n c e t hey a r e not p a r t o f t h e "amount
fi nanced.")
Over t w o - t h i r d s of t h e commenters supported t h e Boar d' s proposal t o
r e v i s e t h e d e f i n i t i o n of new money.

The m a j o r i t y o f commenters s t a t e d t h a t

most consumers ask t o f i n a n c e t h e s e c o s t s when r e f i n a n c i n g t h e i r mortgage, t hu s
t r i g g e r i n g t he r i g h t of r e s c i s s i o n in a l a r g e number of r e f i n a n c i n g s .

While

commenters v a r i e d in t h e e s t i m a t e s of t h e s e c o s t s , i t appears t h a t t h e s e c o s t s
a r e g e n e r a l l y below $1,000 o r 3% or l e s s o f t h e p r i n c i p a l loan amount.

Most

commenters s t a t e d t h a t t h e s e c o s t s were not s i g n i f i c a n t enough t o j u s t i f y t h e
consumer r e c e i v i n g t he r i g h t of r e s c i s s i o n s o l e l y f o r t h e s e c h a r g e s .
Several commenters opposed t o r e v i s i n g t h e d e f i n i t i o n of new money
s t a t e d t h a t c o s t s such as a t t o r n e y ' s f e e s , t i t l e examination f e e s , and
i n s u r a n c e premiums can be s i g n i f i c a n t , and t h a t consumers need an o p p o r t u n i t y
t o r e c o n s i d e r a t r a n s a c t i o n when t h e s e c o s t s a r e fi n a n ce d by a c r e d i t o r .
A few commenters f e l t t h e Board should not t a k e any a c t i o n t h a t may reduce
consumer p r o t e c t i o n s in t he r e s c i s s i o n a r e a .
A f t e r c a r e f u l c o n s i d e r a t i o n of a l l comments r e c e i ve d and f u r t h e r
examinat ion of t h e p r o p o s a l , t h e Board has deci ded t o adopt t h e new money

-

proposal.

9

-

The Board b e l i e v e s t h a t consumers do not need t h e r i g h t of r e s c i s s i o n

when r e f i n a n c i n g with an o r i g i n a l c r e d i t o r i f th e only reason f o r r e c e i v i n g t he
r i g h t i s due t o a d e c i s i o n t o f in a n c e nonfinance charge c l o s i n g c o s t s .

Such

amounts do not appear t o be s i g n i f i c a n t , in l i g h t o f t h e p r i n c i p a l loan amount
being r e f i n a n c e d , and thus do not put th e consumer's p r i n c i p a l dwelling a t any
significan tly greater risk.
The Board a l s o b e l i e v e s t h a t t h e requirement in s e c t i o n 2 2 6 . 4 ( c ) ( 7 )
t h a t common c l o s i n g c o s t s must be bona f i d e and re a so n a b le t o be excluded from
t h e f in a n c e charge should a l l a y concerns e xpressed by some commenters t h a t
c r e d i t o r s may use t h i s r e v i s i o n t o add unre aso n a ble charges t o th e new t r a n s ­
action.

Fur ther more, i t should be noted t h a t i f th e consumer r e s c i n d s a

t r a n s a c t i o n i n vo lv in g new money, s e c t i o n 226.23(d) provi des t h a t t h e consumer
i s not l i a b l e t o pay any amount, i n c l u d i n g t h e c o s t of t he r e f i n a n c i n g .
Minor e d i t o r i a l

r e v i s i o n s have been made t o t he proposal so t h a t t h e

p r o v i s i o n will be phrased in terms of what t r a n s a c t i o n s a re s u b j e c t t o t h e
r i g h t of r e s c i s s i o n r a t h e r than what t r a n s a c t i o n s a re covered by t he exemption.
These r e v i s i o n s were made t o more c l e a r l y s t a t e t h e r u l e t h a t , where a t r a n s a c t i o n
inv ol ve s new money, only t h e new money is r e s c i n d a b l e .
In a d d i t i o n t o i t s f i n a l r u l e , t h e Board i s a l s o p u b l i s h i n g f o r p u b l i c
comment in t h i s i s s u e of t h e Federal R e g i s t e r a proposal t o amend t he o f f i c i a l
s t a f f commentary t o ad dre ss i s s u e s t h a t may a r i s e as a r e s u l t of t h e new r u l e .
(4)

Regul atory i m pa c t.

The r e v i s i o n t o t h e r e s c i s s i o n p r o v i s i o n in

Reg u l ati on Z would reduce t h e number of t r a n s a c t i o n s f o r which c r e d i t o r s would
need t o provide consumers with a n o t i c e of t h e i r r e s c i s s i o n r i g h t s and an
opportunity to rescind.

T h e r e f o r e , i t appears t h a t c r e d i t o r s , i n c l u d i n g small

e n t i t i e s , would not i n c u r any a d d i t i o n a l c o s t s as a r e s u l t of t h e proposed changes.

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10

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L i s t of S ub je ct s in 12 CFR 226
A d v e r t i s i n g ; Ranks; Ranking; Consumer p r o t e c t i o n ; C r e d i t ; Federal
Reserve System; Finance; P e n a l t i e s ; Truth in l e n d i n g .
Pursuant t o a u t h o r i t y gra nt ed in § 105(a) of t h e Tr uth in Lending
Ac t, 15 U.S.C. § 1604(a), t h e Board i s amending Regul ati on Z (12 CFR P a rt 226)
as foll ows :
(1) The a u t h o r i t y c i t a t i o n f o r P a r t 226 c o nt in u es t o read: AUTHORITY:
Sec. 105, Tr uth in Lending Ac t, as amended by Sec. 605, Pub. L. 96-221, 945
S t a t . 170 (15 II.S.C. § 1604 e t s e q . ) .
(2) 12 CFR P a r t 226 i s amended by r e v i s i n g § 2 2 6 . 2 3 ( f ) ( 2 ) t o read as
fol 1 ows:
SECTION 226.23 — Right of R e s c i s s i o n
*

( f ) Exempt t r a n s a c t i o n s .
* *

*

*

*

*

The r i g h t t o r e sc in d does not apply t o t he foll owi n g :

*

(2) A r e f i n a n c i n g or c o n s o l i d a t i o n by t h e same c r e d i t o r of an e x te ns io n of
c r e d i t a l r e a d y secured by th e consumer' s p r i n c i p a l d w e l l i n g .

The r i g h t of

r e s c i s s i o n s h a l l a p pl y , however, t o t h e e x t e n t t h e new amount f inanced exceeds
th e unpaid p r i n c i p a l b a l a n c e , any earned unpaid f i n a n c e charge on t he e x i s t i n g
d e bt , and amounts a t t r i b u t e d s o l e l y t o t h e c o s t s of t h e r e f i n a n c i n g or c o n s o l i ­
dation.
*

*

*

*

*

Ry o r d e r of t h e Board of Governors of t h e Federal Reserve System, December 11,
1986.
( si gn e d) William W Wiles
.
Wil1iam W Wiles
.
S e c r e t a r y of t h e Board

FEDERAL RESERVE SYSTEM
12 CFR P a r t 226
[Reg. Z; R-0577]
TRUTH IN LENDING
Proposed Update t o O f f i c i a l S t a f f Commentary
AGENCY:

Board o f Governors of t he Federal Reserve System.

ACTION:

Proposed o f f i c i a l s t a f f i n t e r p r e t a t i o n .

SUM ARY:
M

The Board i s p u b l i s h i n g f o r comment a proposed r e v i s i o n t o t h e

o f f i c i a l s t a f f commentary t o Regul ati on Z (Truth in Lending) regardi ng
the r i g h t of r e s c i s s i o n in t h e r e f i n a n c i n g of a c l os ed - en d c r e d i t t r a n s a c t i o n .
The r e v i s i o n r e l a t e s to an amendment t o Reg ul ati on Z r e c e n t l y adopted by
t he Board t h a t r e d e f i n e s what c o n s t i t u t e s a new advance of money in a
r e f i n a n c i n g t h a t i s exempt from t h e r e s c i s s i o n p r o v i s i o n s .
amendment i s c o nt a in ed elsewhere in t h i s i s s u e . )

(The r e g u l a t o r y

The proposed commentary

p r o v i s i o n would r e v i s e e x i s t i n g comment 2 3 ( f )-4 which e x p l a i n s what
c o n s t i t u t e s a new advance of money in a r e f i n a n c i n g by t he o r i g i n a l
c r e d i t o r t h a t would r e q u i r e t he c r e d i t o r t o give a consumer t h e o p p o rt un i ty
t o r e s c i n d an e x t e n s i o n of a d d i t i o n a l c r e d i t .
DATE:

Comments must be re cei ve d on or b efore January 30, 1987.

ADDRESS:

Comments should be mailed t o William W Wile s, S e c r e t a r y , Board
.

of Governors of t h e Federal Reserve System, Washington, D.C. 20551, or
d e l i v e r e d t o t h e 20th S t r e e t mail s e r v i c e s c o u r t ya r d e n t r a n c e , 20th
S t r e e t between C S t r e e t and C o n s t i t u t i o n Avenue, N.W., Washington, D.C.,
between 8:45 a.m. and 5:15 p.m. weekdays.
r e f e r e n c e t o R-0577.

Comments should i n c l u d e a

Comments may be i n s p e c t e d in Room B-1122 between

8:45 a.m. and 5:15 p.m. weekdays.

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FOR FURTHER INFORMATION:

2-

Contact Adrienne Hurt o r Leonard Chanin, S t a f f

A t t o r n e y s , D i vi s io n of Consumer and Community A f f a i r s , a t (202) 452-3867
or (202) 452-3667; f o r t h e he ar in g impaired o n l y , Telecommunications
Device f o r t h e Deaf (TDD) E a r n e s t i n e H i l l or Dorothea Thompson, a t (202)
452-3544, Board o f Governors of t h e Federal Reserve System, Washington,
D.C. 20551.
SUPPLEMENTARY INFORMATION: (1) General .

The Truth in Lending Act (TILA)

p rovides t h a t , in a consumer c r e d i t t r a n s a c t i o n in which th e consumer' s
p r i n c i p a l dwelli ng s ec u re s an e x t en si on of c r e d i t , t h e consumer has t h r e e
b us in es s d a ys, g e n e r a l l y from t he d at e of consummation of t h e c r e d i t
t r a n s a c t i o n , in which t o r e s c i n d t h e t r a n s a c t i o n .

This r i g h t of r e s c i s s i o n

was c r e a t e d t o allow consumers time t o reexamine t h e i r c r e d i t c o n t r a c t s
and c o s t d i s c l o s u r e s and t o r e c o n s i d e r whether they want t o p lace an
i mpor tant a s s e t - - t h e home - - a t r i s k by o f f e r i n g i t as s e c u r i t y f o r t h e
credit.
Not a l l c r e d i t t r a n s a c t i o n s secured by a consumer's p r i n c i p a l
dwelling are s u b j e c t t o t h e r i g h t of r e s c i s s i o n .

Under s e c t i o n 125(e) of

t h e TILA a r e f i n a n c i n g by t h e same c r e d i t o r ( t h e o r i g i n a l c r e d i t o r ) i s
not s u b j e c t t o t h e r i g h t of r e s c i s s i o n i f no new advances of money a r e
made t o t h e consumer.

The Board has r e c e n t l y adopted an amendment t o

Regulati on Z t o r e d e f i n e what c o n s t i t u t e s a new advance of money o b t a i ne d
by a consumer f o r purposes of t h e r e s c i s s i o n exemption f o r r e f i n a n c i n g s .
The r e g u l a t o r y amendment i s c o nt a in e d elsewhere in t h i s i s s u e .

The amendment

r e d e f i n e s a new advance of money as only amounts above t h e c o s t s a t t r i b u t a b l e
t o t he r e f i n a n c i n g t h a t a r e in t h e amount f i n a n c e d .
Comment 2 3 ( f ) -4 would be r e v i s e d t o i n c o r p o r a t e t h e r e v i s e d
d e f i n i t i o n of a new advance of money in a r e f i n a n c i n g and t o f u r t h e r e x p l a i n

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3-

what amounts a r e i ncluded in determi ning what c o n s t i t u t e s a new advance.
In a d d i t i o n , a minor e d i t o r i a l change would be made in th e f i r s t sentence
of comment 2 3 ( f ) -4 t o c l a r i f y t h a t a c o n s o l i d a t i o n i s a type of r e f i n a n c i n g .
No s u b s t a n t i v e change i s i nt en de d.
I t i s expected t h a t r e v i s i o n s t o comment 2 3 ( f ) -4 w i l l be adopted
in f i n a l form in March 1987 (along with t h e f i n a l v er s io n of t h e s i x t h
general update t o t h e commentary t o Reg ul ati on Z, a proposal of which was
p ub l is he d a t 51 FR 43,37 2 on December 2, 1986).

Compliance would be

o pt i o n a l u n t i l t h e uniform e f f e c t i v e d at e of October 1, 1987, f o r mandatory
compliance.
revision.

Cer tain c onvent ions have been used t o h i g h l i g h t t h e proposed
New language i s shown i n s i d e b o ld -f a c e d arrows, and u n d e r l i n e d ,

while language t h a t would be d e l e t e d i s s e t o f f with b r a c k e t s .
Pursuant t o a u t h o r i t y gra nte d in s e c t i o n 105 o f t h e Truth in Lending
Act (15 U.S.C. 1604 as amended), t h e Board proposes t o amend t he o f f i c i a l
s t a f f commentary t o Regul ati on Z (12 CFR P a rt 226 Supp. I) as follows:
L i s t of Su b j e ct s in 12 CFR Pa rt 226
A d v e r t i s i n g ; Banks, Banking; Consumer p r o t e c t i o n ; C r e d i t ;
Federal Reserve System; Finance; P e n a l t i e s ; Truth in l e n d i n g .
For t h e reasons s e t f o r t h above, t h e Board proposes t o amend 12
CFR P a r t 226 as fo ll o ws :
(1) The a u t h o r i t y c i t a t i o n f o r P a r t 226 c o n t i n ue s to read as fol l ows :
AUTHORITY: Sec. 105, Truth i n Lending Act, as amended by s e c . 605, Pub.
L. 96-221, 94 S t a t . 170 (15 U.S.C. 1604 e t s e q . ) .
(2) Text of r e v i s i o n s .

The proposed r e v i s i o n s t o t h e O f f i c i a l S t a f f

Commentary (12 CFR Pa rt 226, Supp. I) read as follows:
SUPPLEMENT I - O f f i c i a l S t a f f I n t e r p r e t a t i o n s

-

4-

Sec ti on 226.23 - - Right of R es ci ss io n
*

*

*

*

*

★

*

★

*

*

2 3 ( f ) Exempt Tr a ns a ct i on s

4. New a dv an c es .

The exemption in s e c t i o n 2 2 6 . 2 3 ( f ) ( 2 ) a p p l i e s only t o

r e f i n a n c i n g s [ o r c o n s o l i d a t i o n s ] > ( i nc lud i n g c o n s o l i d a t i o n s ) <
original c r e d i t o r .

by t h e

[ I f t h e t r a n s a c t i o n inv ol ve s t h e advance of new

money, then only t h e amount of th e new money i s r e s c i n d a b l e .

For example,

i f t h e sum of t h e o u t s t a n d i n g p r i n c i p a l balance p lus t h e earned f i n a n c e
charge i s $1,000 and t h e new amount f inanced i s $1,000, then t h e r e f i n a n c i n g
would be exempt.

On th e o t h e r hand, i f t he new amount fi na nc ed exceeds

$1,000, then t h e amount in excess of t h a t $1,000 would be r e s c i n d a b l e . ]
>I f t h e r e f i n a n c i n g invo lv es a new advance of money, t h e amount of th e
new advance i s r e s c i n d a b l e .

For purposes of t h e r i g h t of r e s c i s s i o n , a

new advance does not i nc l u d e amounts a t t r i b u t e d t o t h e c o s t s of t h e
refinancing.

These amounts would i n c lu d e s e c t i o n 2 2 6 . 4 ( c ) ( 7 ) charges

(such as a t t o r n e y s f e e s and t i t l e examination and i n s ur a nc e f e e s , i f bona
f i d e and re a so n a b le in amount), as well as i ns u ra n ce premiums and o t h e r
charges t h a t a r e not f i n a n c e c h ar g e s .

(Finance charges on t h e new t r a n s a c t i o n

- - p o i n t s , f o r example — would not be c on si de re d in de te r mi ni ng whether

-------------- 1---------------------------

—

-X -

, -

-

.

.

-------

-

- _____ ____________ -

■

— — ■■

t h e r e i s a new advance of money in a r e f i n a n c i n g s i n c e f i n a n c e charges
are always excluded from t h e amount f i n a n c e d . )

To i l l u s t r a t e , i f

t h e sum of t h e o u t s t a n d i n g p r i n c i p a l balance pl us t h e earned unpaid
f in a nc e charge i s $50,000 and t h e new amount f inanced i s $51,000, then
t h e r e f i n a n c i n g would be exempt i f t h e e x t r a $1,000 i s a t t r i b u t e d s o l e l y
t o c o s t s financed in connection with t h e r e f i n a n c i n g t h a t a r e not fi n a nc e
c h ar g e s .

Of c o u r s e , i f new advances of money a r e made ( f o r example, t o

-

5-

pay f o r home improvements) and t h e consumer e x e r c i s e s t h e r i g h t of r e s c i s s i o n ,
t h e consumer must be placed in t h e same p o s i t i o n as he or she was p r i o r
t o e n t e r i n g i n t o t he new c r e d i t t r a n s a c t i o n . Thus, i f a p p l i c a b l e , a l l
amounts o f money (which would i n c l u d e a l l t h e c o s t s of t he r e f i n a n c i n g )
a l r e a d y paid by t h e consumer t o t h e c r e d i t o r or t o a t h i r d p a r t y as p a r t
of t h e r e f i n a n c i n g would have t o be refunded t o t h e consumer. (See t h e
commentary t o 2 2 6 . 2 3 ( d ) (2) f o r d i s c u s s i o n of refunds t o c on su me r s. )< A
model r e s c i s s i o n n o t i c e a p p l i c a b l e t o t r a n s a c t i o n s i n v o lv in g new advances
appears in appendix H.
Board of Governors of t h e Federal Reserve System, December 11, 1986.

(s i gn e d) William W Wiles
.
William W Wiles
.
S e c r e t a r y of t h e Board


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102