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F ederal R eserve Bank
OF DALLAS
ROBERT

D. M c T E E R , J R .

P R E S ID E N T
AND

C H IE F

E X E C U T IV E

O F F IC E R

April 24, 1991

DALLAS. TEXAS 75222

Noti c e 91-32
TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Official S taff C o m m e n t a r y on Regulation Z
(Truth in Lending)
DETAILS

The Federal Reserve Board has issued revisions to its Official Staff
Commentary on Regulation Z (Truth in Lending).
The commentary applies and
interprets the requirements of Regulation Z and is a substitute for individual
staff interpretations.
The revisions address several issues, including
renewals of home equity lines of credit, credit card substitution, and
renewable balloon payment mortgages.
The revisions became effective April 1, 1991, but c ompliance is
optional until Octob er 1, 1991.
A TTACHMENT
A copy of the B o a r d ’s notice is attached.
MORE INFORMATION
Questions concerning the B o a r d ’s revisions should be addressed to
Eugene Coy at (214) 744-7480.
For additional copies of this B a n k ’s notice,
please contact the Public Affairs Department at (214) 651-6289.
Sincerely yours,

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

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 PART 226
[Reg. Z; TIL-1]
TRUTH IN LENDING
Update to Official Staff Commentary
AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Official staff interpretation.

SUMMARY:

The Board is publishing revisions to the official staff

commentary to Regulation Z (Truth in Lending).

The commentary

applies and interprets the requirements of Regulation Z and is a
substitute for individual staff interpretations.

The revisions

address several issues, including renewals of home equity lines,
credit card substitution,

and renewable balloon payment

mortgages.
DATES:

Effective April 1, 1991, but compliance optional until

October 1, 1991.
FOR FURTHER INFORMATION CONTACT:

The following attorneys in the

Division of Consumer and Community Affairs, at (202) 452-3667 or
(202) 452-2412:

Jane Ahrens, Sharon Bowman, Michael Bylsma,

Leonard Chanin, Adrienne Hurt, Kurt Schumacher, Mary Jane
Seebach, John Wood.

For the hearing impaired only.

Telecommunications Device for the Deaf (TDD), Dorothea Thompson,
at (202) 452-3544, Board of Governors of the Federal Reserve
System, Washington, DC

20551.

SUPPLEMENTARY INFORMATION:

(1) General.

The Truth in Lending

Act (15 U.S.C. 1601 et seq.) governs consumer credit transactions
and is implemented by the Board's Regulation Z (12 CFR Part 226).

-

2

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Effective October 13, 1981, an official staff commentary (TIL-1,
Supp.

I to 12 CFR Part 226) was published to interpret the

regulation.

The commentary is designed to provide guidance to

creditors in applying the regulation to specific transactions and
is updated periodically to address significant questions that
arise.

This update reflects material that was published for

comment at 55 FR 49392 (November 28, 1990).

Creditors are free

to rely on the revised commentary as of April 1, 1991, although
they need not follow the revisions until October 1, 1991.
(2) Revisions.

The following is a description of the revisions

to the commentary:
SUBPART A -- GENERAL
Section 226.4 -- Finance Charge
4(a) Definition
In the proposal, comment 4(a)-2 would have been revised to
say that a tax imposed on a creditor by a state is a finance
charge if the creditor separately imposes the charge on the
consumer in connection with a credit transaction (instead of
absorbing the charge as a cost of doing business), even if the
creditor is authorized by the state to pass the charge on to the
consumer.

A number of commenters opposed the proposed revision.

Some commenters felt that the relationship between the proposed
new language in comment 4(a)-2 and other comments dealing with
the treatment of taxes was not clear.

Others believed that the

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3

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proposal characterized taxes as finance charges in inappropriate
situations.
In response to comments, the position taken in the proposal
has been changed; it

is set forth as new comment 4(a)-6.

New

language in comment 4(a)-2 deals only with one situation in which
a tax is not a finance charge,

where the creditor absorbs the tax

as a cost of doing business.
New comment 4(a)-6 differs from the proposal in several
ways.

First, the position taken in the proposal that a tax

imposed solely on the creditor is a finance charge even if the
state permits the creditor to pass the tax on to the consumer is
changed.

If applicable law is

passing the tax on, the tax is

silent as to the permissibility
a finance charge.

of

If, however,

applicable law directs or authorizes the pass-on, the tax is not
a finance charge.
The new comment
constitute a finance

also clarifies that a tax does not
charge in several other situations.

For

example, if the law imposes a tax on the parties jointly or on
the credit transaction without indicating whether the creditor or
the consumer is to pay the tax, the tax is not a finance charge.
(This clarification harmonizes the new comment with comment 4(a)3, addressing concerns expressed by some commenters.)

Finally,

the comment clarifies that if a tax is excluded from the finance
charge by some other provision of Regulation Z or the commentary
(for example, traditional sales taxes or mortgage recording

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4

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taxes), the tax does not become a finance charge by virtue of
this new comment.
SUBPART B -- OPEN-END CREDIT
Section 226.5a -- Credit and Charge Card Applications and
Solicitations
5a(b) Required Disclosures
5a(b)(2) Fees for Issuance or Availability
Proposed comments 5a(b)(2)-l and 5a(b)(2)-2 provided
that certain membership fees and fees for enhancements should not
be presented in the tabular format.

Comment 5a(b)(2)-l

distinguishes between membership fees that result in the
automatic issuance of card accounts as a benefit of membership,
(which must be disclosed) and fees that merely result in
eligibility for a card (which may but need not be disclosed).
Commenters stated that when it is difficult to determine the
nature of the membership fee, an issuer ensures compliance by
being able to include the fee in the tabular format.

Therefore,

the proposed revision to comment 5a(b)(2)-l is withdrawn.
Because enhancement fees are not imposed for the issuance or
availability of a card, comment 5a(b)(2)-2 is revised as
proposed.
5a(c) Direct-mail Applications and Solicitations
Comment 5a(c)-l is revised to correct a drafting error.
Under section 226.5a(b)(1)(ii), for direct-mail applications and

-

solicitations,

5

-

an accurate variable annual percentage rate is one

in effect within 60 days before mailing.
Comment 5a(c)-2 is revised to clarify the dual use of a
single application form in direct mailings and public locations
as "take-ones."

The comment provides that if the issuer adheres

to requirements relating to the accuracy of the credit terms in
each case, creditors have the flexibility of including or
omitting the disclosures referred to in section 226.5a(e)(1)(ii )
and (iii)

(the printing date, the statement that the credit terms

are accurate as of that date and subject to change thereafter,
the statement that the consumer should contact the issuer for
updated information,

and a toll-free telephone number or a

mailing address).
5a(e) Applications and Solicitations Made Available to General
Public
5a(e)(l) Disclosure of Required Credit Information
Comment 5a(e)(1)-2 is revised to make a technical
correction.

The comment clarifies that disclosures specified in

section 226.5a(e)(1)(i i ) and (iii) may appear either in or
outside the table containing the credit term disclosures.
Section 226.5b -- Requirements for Home Equity Plans
Existing comments 5b-2 through 5b-5 are redesignated as
comments 5b-3 through 5b-6, respectively.

New comment 5b-2 is

added to provide guidance on when changes to a home equity plan
are governed by the change in terms rules in section 226.9(c),

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6

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and when changes constitute a new plan requiring completely new
disclosures.

The comment has been changed from the proposal to

clarify that section 226.9(c) applies when a plan is changed
prior to or at maturity.
5b(d) Content of Disclosures
5b(d)(4) Possible Actions by Creditor
Paragraph 5b(d)(4)(iii)
A technical change is made to comment 5b(d)(4)(iii)-1 to
provide guidance concerning the ability of a creditor to retain
the right to freeze a line of credit if the maximum annual
percentage rate is reached.
5b(d)(5) Payment Terms
Paragraph 5b(d)(5)(iii)
Comment 5b(d)(5)(iii)-4 is revised to clarify the
disclosures required for reverse mortgages with shared
appreciation features.

While the proposal gave general guidance

regarding reverse mortgages, the final comment provides greater
specificity about the information that should be provided.
5b(d)(8) Fees Imposed by Third Parties to Open a Plan
Comment 5b(d)(8)-2 is revised to clarify that creditors need
not include costs for property insurance in the total of third
party fees if the creditor discloses that such insurance is
required.

The proposed amendment to require creditors to include

another disclosure about property insurance in any itemization of

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third party fees provided in response to a consumer's request has
not been adopted.

Requiring creditors to repeat this information

is unnecessary since consumers already will receive information
under this section if property insurance is required.
5b(f) Limitations on Home Equity Plans
Paragraphs 5b(f)(3)(i) and (vi)
Comments 5b(f)(3)(i)-l and 5 b(f )(3)(vi)-l are revised to
provide additional guidance when a creditor provides in its
initial agreement that further advances will be prohibited or the
credit limit reduced when the maximum annual percentage rate is
reached.
Section 226.6 -- Initial Disclosure Statement
6(e) Home Equity Plan Information
Comment 6(e)-4 is revised to clarify that when disclosures
are the same for the draw and repayment phase, creditors need not
explicitly state that the information applies to both phases, as
long as this fact is clear.
Section 226.9 -- Subsequent Disclosure Requirements
9(c) Change in Terms
9(c)(1) Written Notice Required
Section 226.9(c)(1) requires creditors to provide a notice
whenever any term required to be disclosed under section 226.6 is
changed.

Section 226.6(e)(7) requires creditors to give certain

variable-rate and payment examples for home equity plans, unless

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8

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the disclosures provided with the application were in a form the
consumer could keep and included representative payment examples
covering the payment option chosen by the consumer.
Comment 9(c)(1)-6 is revised to clarify that if the index
is changed, the maximum annual percentage rate is increased, or a
variable-rate feature is added to a fixed-rate plan, the creditor
must give the maximum rate information required by section
226.5b(d)(12)(x) and the historical example required by section
226.5b(d)(12)(xi), unless these disclosures are unchanged from
those given earlier.

A parenthetical reference to section 226.30

is included to alert creditors to the fact that comment 30-11
limits a creditor's ability to increase the maximum rate on a
home equity plan when renewing the plan.

(Section 226.30

provides that the cap may be increased only when a plan is
renewed at maturity -- or before maturity, provided the new cap
is effective only after the original maturity of the plan.)

The

comment also clarifies that if the minimum payment requirement is
changed, the creditor must give the payment disclosures required
by section 226.5b(d)(5)(iii) (and, in variable-rate plans, the
disclosures required by section 226.5b(d)(12)(x ) and (d)(12)(xi))
unless the disclosures given earlier contained representative
examples covering the new minimum payment requirement.

This

comment only addresses changes specifically agreed to by the
consumer.

Therefore, as provided under section 226.5b(f)(3)(iv)

-

(discussing beneficial changes),

9

-

the requirements of the comment

do not apply if a creditor offers the consumer the option of
making lower payments.
Section 226.12 -- Special Credit Card Provisions
12(a) Issuance of Credit Cards
Card issuers are generally prohibited from issuing credit
cards on an unsolicited basis but may do so as a renewal of, or
substitute for, an accepted credit card.

Comment 12(a)(2)-2

provides that card issuers may substitute one credit card for
another even where the underlying credit card account
relationship has changed in some way, including situations where
credit features will be added or changed.

This comment is

revised to explain that a particular type of situation -- that
is, substituting a credit card on an existing account and at the
same time adding another credit card account (such that the
consumer is able to obtain future extensions of credit on both
the original and the new account) -- is not considered a
permissible substitution for purposes of section 226.12(a).
(There is, of course, no prohibition against doing this on a
solicited basis.)

An example is provided in the comment to

illustrate the point.

The language of the amendment differs from

that of the proposal in order to allay a misunderstanding of some
commenters.

The interpretation does not preclude the unsolicited

substitution of a card in connection with the conversion of a

-

10

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retail credit card program into a co-branded retail/bank card,
nor does it preclude the unsolicited substitution of a card in
connection with the transfer of future receivables to a successor
card issuer as set forth in comment 12(a)(2)-3; in both of these
cases only one account will be accessible for future extensions
of credit.
Section 226.16 -- Advertising
16(d) Additional Requirements for Home Equity Plans
Comment 16(d)-4 is revised to clarify that a creditor may
state, for example,

"no closing costs" in cases where property

insurance may be required as long as the creditor includes a
disclosure that such insurance may be required.
SUBPART C -- CLOSED-END CREDIT
Section 226.17 -- General Disclosure Requirements
17(a) Form of Disclosures
Paragraph 17(a)(1)
Comment 17(a)(1)— 5 is revised to indicate that a creditor
may disclose in the segregated disclosures ("federal box")
whether or not a secured credit transaction is assumable (even if
the transaction is not a residential mortgage transaction).
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)
Comment 17(c)(1)—1 is revised to address questions raised
by the addition of new comment 20(c)-3, which is added to

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11

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reiterate that the general principle of section 226.17(c)(1),
that disclosures reflect the terms of the legal obligation
between the parties,

also applies to the disclosures required

under section 226.20(c) for certain variable-rate transactions.
A few commenters expressed concern that the existing language in
comment 17(c)(1)-1, that disclosures should reflect the legal
obligation "at the outset of the transaction," would not permit
the disclosures under section 226.20(c) to accurately reflect
subsequent modifications or amendments to the legal obligation.
The revised comment, therefore, clarifies that the disclosures
required under section 226.20(c) must be based on the legal
obligation at the time disclosures are provided and "as of" the
outset of the transaction in all other cases.

This latter

revision reflects the fact that early disclosures provided under
Subpart C are based on what the legal obligation is expected to
be at consummation.

A technical change also has been made to the

first sentence of the comment (changing "should" to "shall") to
provide for consistency with the language used in the regulation.
Comment 17(c)(1)-11 is revised to provide guidance on when
a renewable loan with a balloon payment (formerly referred to as
a "renegotiable-rate mortgage") should be disclosed as a long­
term variable-rate loan as opposed to a short-term balloon loan.
The comment provides that disclosures must be based on the
payment amortization (or the specified term of the obligation

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12

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with renewals) when the creditor is either unconditionally
obligated to renew the loan or obligated to renew subject only to
conditions within the consumer's control.

The comment provides

examples of both conditions considered to be within the
consumer's control and those outside the consumer's control.

As

a variety of these products is available on the market, no one
product has been singled out as illustrative in the comment.

The

reference contained in the proposed comment to a creditor's
obtaining a credit report is not included in the revised comment
since it does not exemplify a condition on the obligation to
renew a loan,

The revised comment also provides that disclosures

for a renewable balloon-payment instrument that will be renewed
by a "refinancing" of the obligation (as that term is defined by
section 226.20(a)) must be based on the term of the balloonpayment loan.

In addition, the comment states that its

provisions do not apply to construction loans subject to section
226.17(c)(6).

Finally, the heading for comment 17(c)(l)^ll is

revised to parallel that of comment 19(b)-5.

The comment now

being revised was originally published to address disclosure of a
specific renegotiable-rate mortgage product which is no longer
widely available.

While the revisions have broadened the scope

of the comment, renegotiable-rate mortgages are still included
within the comment's coverage.

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13

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Section 226.19 -- Certain Residential Mortgage and Variable-Rate
Transactions
19(b) Certain Variable-Rate Transactions
Comment 19(b)-3 provides factors to determine whether or
not a transaction involves an "intermediary agent or broker,"
which affects the timing rules for certain disclosures.

The

factors look to whether there is a relationship between the
creditor and the broker in which the creditor has knowledge of
and exercises control over the broker's actions.

The third

factor describing the amount of work completed by the broker is
revised to recognize that a large amount of work performed by a
broker may not necessarily evidence this sort of relationship.
For example, for purposes of this factor, a broker's submission
of a completed loan package to a creditor may not indicate a
close relationship between the two if such a practice is
customary in a particular area.
Comment 19(b)-5 is revised to parallel the revisions to
comment 17(c)(l)-ll describing renewable balloon-payment mortgage
instruments.
Section 226.20 -- Subsequent Disclosure Requirements
20(a) Refinancings
Comment 20(a)-3 is revised to reflect the name change for
describing a renewable balloon-payment mortgage (formerly

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14

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referred to as a "renegotiable-rate mortgage") in comments
17(c)(1)-11 and 19(b)-5.
20(c) Variable-Rate Adjustments
Comment 20(c)-3 is added to reiterate that the general
requirement of section 226.17(c)(1), that disclosures reflect the
terms of the legal obligation between the parties,

applies to the

disclosures required under section 226.20(c) for certain
variable-rate transactions.

This clarification arises from

concerns raised recently that some creditors may not be adjusting
their variable-rate loans consistent with the terms of the
underlying legal obligation,
rate and payment adjustments.

resulting in inaccurate interest
Under section 226.20(c),

disclosures about the new interest rate and payment must be based
on the index type and index value specified in the legal
obligation.
SUBPART D -- MISCELLANEOUS
Section 226.28 -- Effect on State Laws
28(a) Inconsistent Disclosure Requirements
Comment 28(a)-15 is added to reflect the Board's recent
determination of the effect of the Truth in Lending Act and
Regulation Z on certain provisions of the law of Wisconsin
dealing with disclosures for home equity plans and the right of a
creditor to accelerate the outstanding balance when a

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nonapplicant spouse terminates a plan.

The notice of this

determination was published at 55 FR 31815 (August 6, 1990).
Section 225.30 -- Limitation on Rates
Comment 30-1 is revised to reflect the name change for
describing a renewable balloon-payment mortgage (formerly
referred to as a "renegotiable-rate mortgage") in comments
17(c)(l)-ll and 19(b)-5.
List of Subjects in 12 CFR Part 226
Advertising, Banks, Banking, Consumer protection, Credit,
Federal Reserve System, Finance, Penalties, Rate limitations,
Truth in Lending.
Certain conventions have been used to highlight the
revisions.

New language is shown underlined inside bold-faced

arrows, while language that is deleted is set off with brackets.
(3) Text of revisions.

Pursuant to authority granted in section

105 of the Truth in Lending Act (15 U.S.C.

1604 as amended), the

Board amends Part 226 as follows:
PART 226 -- TRUTH IN LENDING
1.

The authority citation for Part 226 is revised to read as

follows:
AUTHORITY: Truth in Lending Act, 15 U.S.C.

1604 and 1637

(c)(5); sec. 1204(c), Competitive Equality Banking Act, 12 U.S.C.
3806.
SUPPLEMENT I -- OFFICIAL STAFF INTERPRETATIONS

-

2.

16

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Supplement I to Part 226 is revised to read as follows:

SUBPART A -- GENERAL
Section 226.4 -- Finance Charge
a. Comments to 4(a) are amended by adding a second bulleted
paragraph after the first bulleted paragraph in comment
4(a)-2, and by adding new comment 4(a)-6 to read as follows:
4(a) Definition.
*

*

2. Costs of doing business.

*

*

*

*

*

*

A tax imposed by a state or other governmental body on a
creditor is not a finance charge if the creditor absorbs
the tax as a cost of doing business and does not
separately impose the tax on the

consumer.

(For

additional discussion of the treatment of taxes,

see other

commentary to section 226.4(a).)«
*

►6. Taxes.

*

*

*

*

A tax imposed by a state or other governmental body

solely on a creditor is a finance charge

if the creditor

separately imposes the charge on the consumer.
tax

In contrast, a

isnot a finance charge (even if it

is collected by

creditor) if applicable law imposes the

tax:

±

Solely on the consumer:

A

On the creditor and the consumer jointly: or

•

On the credit transaction, without indicating

the

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which party is liable for the tax.
A tax also is not a finance charge if applicable law imposes the
tax solely on the creditor, but directs or authorizes the
creditor to pass the tax on to the consumer.

(For purposes of

this section, if applicable law is silent as to such a pass-on.
the law does not authorize the pass-on.)

In addition, a tax is

not a finance charge under this comment if it is excluded from
the finance charge by any other provision of the regulation or
commentary (for example, if it is imposed equally in cash and
credit transactions).«
SUBPART B -- OPEN-END CREDIT
Section 226.5a -- Credit and Charge Card Applications and
Solicitations
b.

Comment 5a(b)(2)-2 is revised to read as follows:

5a(b) Required disclosures.
*

*

*

*

*

5a(b)(2) Fees for issuance or availability.
*

*

*

*

*

2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account (for
example, travel insurance or card-registration services) ► should*
[need] not be disclosed ►in the table* [under this paragraph]
the basic account may be opened without paying such fees.

if

-

*
c.

*

18

*

-

*

*

Comments to 5a(c) are amended by revising the second sentence

in comment 5a(c)-l, and by revising the third sentence and adding
a sentence and parenthetical text after the third sentence in
comment 5a(c)-2 to read as follows:
5a(c) Direct-mail applications and solicitations.
1. Accuracy. *

*

* (An accurate variable annual percentage rate

is one in effect within ►60«[30] days before trailing.)
2. Mailed publications. * * * In addition, a card issuer may use
a single application form as a "take-one" (in racks in public
locations,

for example) and for direct mailings,

if the card

issuer complies with the requirements of section 226.5a(c) even
when the form is used as a "take-one" -- that is, by [providing
current information and presenting the required disclosures in a
tabular format -- and eliminates the information required under
section 226.5a(e)(1)(i i ) and ( ii i).1►presenting the required
section 226.5a disclosures in a tabular format.

When used in a

direct mailing, the credit term disclosures must be accurate as
of the mailing date whether or not the section 226.5 a (e )(1)(ii )
and (iii) disclosures are included: when u sed in a take-one, the
disclosures must be accurate for as long as the take-one forms
remain available to the public if the section 226.5a(e)(1)(ii)
and (iii) disclosures are omitted .

(If those d isclosures are

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included in the take-one, the credit term disclosures need only
be accurate as of the printing date.)*
d.

Comment 5a(e)(l)-2 is revised to read as follows:

5a(e) Applications and solicitations made available to general
public.
*

*

*

Jc

*

5a(e)(l) Disclosure of required credit information.
*

2.

*

*

*

*

Form of disclosures. The disclosures specified in section

226.5a(e)(1)[(i ),](i i )[,] and (iii) may appear either in or
outside the table containing the required credit disclosures.
Section 226.5b -- Requirements for Home Equity Plans
e. Comments 5b-2 through 5b-5 are redesignated as comments 5b-3
through 5b-6, respectively, and new comment 5b-2 is added to read
as follows:
►2. Changes to home equity plans entered into on or after
November 7. 1989.

Section 226.9(c) applies if. by written

agreement under section 226.5b(f)(3)(iii). a creditor changes the
terms of a home equity plan -- entered into on or after November
7. 1989 -- at or before its scheduled expiration, for example, by
renewing a plan on different terms.

A new plan results, however,

if the plan is renewed (with or without changes to the terms)
after the scheduled expiration.

The new plan is subject to all

20

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open-end credit rules, including sections 226.5b. 226.6. and
226.15.*
"k

"k

•fe

*

k

f. Comment 5b(d)(4)(iii)-l is amended by revising the fourth
sentence to read as follows:
5b(d) Content of disclosures.
*

*

*

k

*

*

*

5b(d)(4) Possible actions by creditor.
*

*

*

Paragraph 5b(d)(4)(iii).
1. Disclosure of conditions.

*

*

*

As an alternative to

disclosing the conditions in this manner, the creditor may simply
describe the conditions using the language in section
226.5b(f)(2) ► . 226.5b(f)(3)(i Hr ega rd in g freezing the line when
the maximum annual percentage rate is reached).* and
226.5b(f)(3)(vi) or language that is substantially similar. * * *
ie

ie

ie

*

*

g. Comment 5b(d)(5)(iii)-4 is amended by revising the fourth
bulleted paragraph to read as follows:
5b(d)(5) Payment terms.
*

*

*

*

*

*

*

*

Paragraph 5b(d)(5)(iii).
*

4. Reverse mortgages.

*

*

*

*

•

Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared
between the consumer and the creditor.

[The appreciation

feature must be disclosed in accordance with section
226.5b(d)(12).]

►The creditor must disclose the appreciation

feature, including describing how the creditor's share will be
determined, any limitations,

and when the feature may be

exercised. ■*
*

*

*

*

*

h. Comment 5b(d)(8)-2 is amended by revising the first sentence
and by adding a new sentence after the fourth sentence to read as
follows:
5b(dH8)

Fees imposed by third parties to open a plan .
*

*

*

2. Itemization of third-party fees.

*

*

In all cases creditors must

state the total of third-party fees as a single dollar amount or
a range ►except that the total need not include costs for
property insurance if the creditor discloses that such insurance
is required* .

*

*

*

»Any itemization provided upon the

consumer's request need not include a disclosure about property
insurance.*
*

*

*

*

*

i. Comment 5b(f)(3)(i )—1 is amended by revising the first

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22

-

sentence and by adding a new sentence after the first sentence to
read as follows:
5b(f) Limitations on home equity plans.
*

*

*

*

*

Paragraph 5b(f)(3)(i).
1. Changes provided for in agreement.

A creditor may provide in

the initial agreement [for] ►that further advances will be
prohibited or the credit line reduced during any period in which
the maximum annual percentage rate is reached.

A creditor also

may provide for other* specific changes to take place upon the
occurrence of

specific events.

* *

*

*

*

*
*

*

j. Comment 5b(f)(3)(vi)-l is amended by revising the first
sentence and by adding a new sentence after the first sentence to
read as follows:
Paragraph 5 b ( f H 3 H v i ) .
1. Suspension of credit privileges or reduction of credit limit.
A creditor may prohibit additional extensions of credit or reduce
the credit limit in the circumstances specified in ►this section
of* the regulation.

► In addition, as discussed under section

226.5 b f f W 3 W i ). a creditor may contractually reserve the right
to take such actions when the maximum annual percentage rate is
reached.*

*

*
*

*
*

*

*

*

-

23

-

Section 226.6 -- Initial Disclosure Statement
k. Comment 6(e)-4 is amended by revising the third sentence to
read as follows:
6(e) Home equity plan information.
*

*

*

*

4. Disclosures for the repayment period.

*

*

*

*

To the extent

the corresponding annual percentage rate, the information in
footnote 12, and any other required disclosures are the same for
the draw and repayment phase, the creditor need not repeat such
information,

as long as ► it is clear* [the disclosure clearly

states] that the information applies to both phases.
*

*

*

*

*

Section 226.9 -- Subsequent Disclosure Requirements
1. Comment 9(c)(l)-6 is revised to read as follows:
9(c) Change in terms.
*

*

*

*

*

*

*

*

9(c)(1) Written notice required.
*

*

6. [Home equity plans.] ►Changes to home equity plans entered
into on or after November 7. 1989.*

[If a creditor renews the

draw period for a home equity plan] ► Section 226.9(c) applies
when, by written agreement under section 226.5b(f)(3)(iii). a
creditor changes the terms of a home equity plan -- entered into
on or before November 7. 1989 -- at or before its scheduled

-

expiration,

24

-

for example, by renewing a plan* on terms different

from those of the original plan [, the requirements of section
226.9(c) apply to such a change].
L

► In disclosing the change:

If the index is changed, the maximum annual percentage rate is
increased (to the limited extent permitted by section 226.30).
or a variable-rate feature is added to a fixed-rate plan, the
creditor must include the disclosures required by section
226.5b(d)(12)(x) and (d)(12)(xi). unless these disclosures are
unchanged from those given earlier.
If the minimum payment requirement is changed, the creditor
must include the disclosures required by section
226.5b(d)(5)(iii)

(and, in variable-rate plans, the

disclosures required by section 226.5b(d)(12)(x) and
(d)(12)(xi)) unless the disciosures given earlier contained
representative examples covering the new minimum payment
requirement.

(See the commentary to section

226.5b(d)(5)(iii). (d)(12)(x), and (d)(12)(xi) f o r a
discussion of representative examples.)*
When the terms are changed pursuant to a written agreement as
described in section 226.5b(f)(3)(iii), the advance-notice
requirement does not apply.
ie

ie

ie

i
e

Section 226.12 -- Special Credit Card Provisions

i
e

-

25

-

m. Comment 12(a)(2)-2 is amended by revising the third bulleted
paragraph to read as follows:
12(a) Issuance of credit cards.
*

*

*

*

*

*

*

*

*

Paragraph 12(a)(2).
*

2. Substitution - examples.
•

*

*

*

Changed the credit or other features available on the account.
For example, the original card could be used to make purchases
and obtain cash advances at teller windows.
card might be usable, in addition,
through automated teller machines.

The substitute

for obtaining cash advances
(If the substitute card

constitutes an access device, as defined in Regulation E, then
the Regulation E issuance rules would have to be followed.)
►The "substitution" of one card with another on an unsolicited
basis is not permissible, however, where in conjunction with
the substitution an additional credit card account is opened
and the consumer is able to make new purchases or advances
under both the original and the new account with the new card.
For example, if a retail card issuer replaces its credit card
with a combined retailer/bank card, each of the creditors
maintains a separate account, and both accounts can be
accessed for new transactions by use of the new credit card,

-

26

-

the card cannot be provided to a consumer without
solicitation. *
Section 226.16 -- Advertising
n. Comment 16(d)-4 is amended by adding two sentences after the
second sentence to read as follows:
16(d) Additional requirements for home equity plans.
*

*

*

4. Misleading terms prohibited.

*

*

*

*

*

K in the case of

property insurance, however, a creditor may state, for example,
"no closing costs" even if property insurance may be required, as
long as the creditor also provides a statement that such
insurance may be required.

(See the commentary to this section

regarding fees to open a plan.)*
*

*

*

*

*

SUBPART C -- CLOSED-END CREDIT
SECTION 226.17 -- General Disclosure Requirements
o.

Comment 17(a)(l)-5 is revised by adding a bulleted paragraph

after the thirteenth bulleted paragraph to read as follows:
17(a) Form of disclosures.
Paragraph 17(a)(1).
*

5.

Directly related. *

*

*

*

*

*

*

27

-

-

►! A statement whether or not a subsequent purchaser of the
__
property securing an obligation may be permitted to assume the
remaining obligation on its original terms.*
*

*

*

*

*

p. Comment 17(c)(1)—1 is amended by revising the first sentence
and adding a sentence after the first sentence to read as
follows:
17 (c) Basis of disclosures and use of estimates.
Paragraph 17(c)(1).
1.

Legal obligation.

The disclosures [should] ► shall* reflect

the credit terms to which the parties are legally bound [at] ► as
of* the outset of the transaction.

► In the case of disclosures

required under section 226.20(c). the disclosures shall reflect
the credit terms to which the pa rties are legally bound when the
disclosures are provided.* *
*

q.

*

*

*
*

*

*

Comment 17(c)(l)-ll is amended by revising the heading, the

first sentence and the first bulleted paragraph to read as
follows:
[11.

Other variable-rate transactions.

Examples of variable-

rate transactions include:
•

Renegotiable-rate mortgage instruments that involve a series
of short-term loans secured by a long-term obligation, where
the lender is obligated to renew the short-term loans at the

-

consumer's option.

28

-

At the time of renewal, the lender has the

option of increasing the interest rate.

Disclosures must be

given for the longer term of the obligation, with all
disclosures calculated on the basis of the rate in effect at
the time of consummation of the transaction.] *
►11•

Examples of variable-rate transactions.

*

*

Variable-rate

transactions include:
±

Renewable balloon-payment instruments where the creditor is
both unconditionally obligated to renew the balloon-pavment
loan at the consumer's option (or is obligated to renew
subject to conditions within the consumer's control) and has
the option of increasing the interest rate at the time of
renewal.

Disclosures must be based on the payment

amortization (unless the specified term of the obligation with
renewals is shorter) and on the rate in effect at the time of
consummation of the transaction.

(Examples of conditions

within a consumer's control include requirements that a
consumer be current in payments or continue to reside in the
mortgaged property.

In contrast,

setting a limit on the rate

at which the creditor would be obligated to renew or reserving
the right to change the credit standards at the time of
renewal are examples of conditions outside a consumer's
control.)

If. however, a creditor is not obligated to renew

as described above, disclosures must be based on the term of

-

the balloon-payment loan.

29

-

Disclosures also must be based on

the term of the balloon-payment loan in balloon-pavment
instruments in which the legal obligation provides that the
loan will be renewed by a "refinancing” of the obligation,
that term is defined by section 226.20(a).

as

If it cannot be

determined from the legal obligation that the loan will be
renewed by a "refinancing." disclosures must be based either
on the term of the balloon-pavment loan or on the payment
amortization, depending on whether the creditor is
unconditionally obligated to renew the loan as described
above.

(This discussion does not apply to construction loans

subject to section 226.17(c)(6).)* *
*

*

*

*

*

*
*

Section 226.19 -- Certain Residential Mortgage and Variable-Rate
Transactions
r.

Comment 19(b)-3 is amended by revising the third bulleted

paragraph and the last paragraph to read as follows:
19(b) Certain variable-rate transactions.
*

*

*

3. Intermediary agent or broker. *
•

*

*

*

*

The amount of work (such as document preparation) the creditor
expects to be done by the broker on an application based on
the creditor's prior dealings with the broker and on the
creditor's requirements for accepting applications ► . taking

-

30

-

into consideration the customarv practice of brokers in a
particular area* .

The more [preparation] ►work*

that the

creditor expects the broker to do on an application, ► in
excess of what is usually expected of a broker in that area.*
the less likely it is that the broker would be considered an
"intermediary agent or broker" of the creditor.
An example of an "intermediary agent or broker" is a broker who,
customarily within a brief period of time after receiving an
application, inquires about the credit terms of several creditors
with whom the broker does business and submits the application to
one of them.

The broker is responsible for only a small

percentage of the applications received by that creditor.
the time the broker has the application,

During

it might request a

credit report and an appraisal ► (or even prepare an entire loan
package if customary in that particular area)* .
*

s.

*

*

*

Comment 19(b)-5 is amended by revising the first bulleted

paragraph to read as follows:
5.

Examples of variable-rate transactions.

*

*

*

[• Renegotiable-rate mortgage instruments that involve a series
of short-term loans secured by a long-term obligation, where
the lender is obligated to renew the short-term loans at the
consumer's option.

At the time of renewal, the lender has the

option of increasing the interest rate.]

*

-

31

-

►• Renewable balloon-pavment instruments where the creditor is
both unconditionally obligated to renew the balloon-pavment
loan at the consumer's option (or is obligated to renew
subject to conditions within the consumer's control) and has
the option of increasing the interest rate at the time of
renewal.

(See comment 17(c)(l)-ll for a discussion of

conditions within a consumer's control in connection with
renewable balloon-pavment loans.)* *
k

t.

k

k

*

*
k

k

At the end of the comments to section 226.19, under the

heading "References," at the end of the paragraph designated
"1981 changes," the phrase "ection 226.20 —

Subsequent

Disclosure Requirements" is removed, and a new heading "Section
226.20 —

Subsequent Disclosure Requirementa" is added, directly

below that paragraph.

Section 226.20 -- Subsequent Disclosure Requirements
u.

Comment 2 0 (a)-3 is amended by revising the second sentence to

read as follows:
20(a) Refinancings.
*

3.

Variable-rate. *

pavment*

*

*

*

*

*

*

For example, a ►renewable balloon-

mortgage that was disclosed as a variable-rate

-

32

-

transaction is not subject to new disclosure requirements when
the variable-rate feature is invoked. *
*

*

*

*

*

*

*

*

*

*

20(c) Variable-rate adjustments.
*

*

v. Comment 20(c)-3 is added to read as follows:
► 3i
__

Basis of disclosures.

The disclosures required under this

section shall reflect the terms of the parties'

legal obligation,

as required under section 226.17 (c ) (1) .•*

SUBPART D -- MISCELLANEOUS
Section 226.28 -- Effect on State Laws
w. Comment 28(a)-15 is added to read as follows:
28(a) Inconsistent disclosure requirements .
ie

► 15.

ie

ie

i
e

Preemption determination -- Wisconsin.

i
e

Effective October

1. 1991. the Board has determined that the following provisions
in the state law of Wisconsin are preempted by the federal law:
±

Section 422.308(1) -- the disclosure of the annual
percentage rate in cases where the amount of the annual
percentage rate disclosed to consumers under the state law
differs from the amount that would be disclosed under federal
law, since in those cases the state law requires the use of

33

-

-

the same term as the federal law to represent a different
amount than the federal law.
Section 766.565(5) -- the provision permitting a creditor
to include in an open-end home equity agreement authorization
to declare the account balance due and payable upon receiving
notice of termination from a non-obligor spouse, since such
provision is inconsistent with the purpose of the federal
law. *
*

*

*

*

*

Section 226.30 -- Limitation on Rates
x.

Comment 30-1 is amended by revising the parenthetical text at

the end of the fourth bulleted paragraph to read as follows:
1.

Scope of coverage.

*

*

*

(Contrast with the [renegotiable

rate] ► renewable balloon-payment* mortgage instrument described
in comment 17(c)(l)-ll.)
Board of Governors of the Federal Reserve System, March
29, 1991.
(signed) Jennifer J. Johnson

Jennifer J. Johnson
Associate Secretary of the Board

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