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F ed er a l R e s e r v e B a nk O F 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 July 24, 1991 DALLAS. T E X A S O F F IC E R 75222 Notice 91-62 TO: The Chief Executive Officer of each financial institution in the Eleventh Federal Reserve District SUBJECT Amendments to the O f f i c i a l S t a f f Commentary on Regulation Z (Truth in Lending) DETAILS The Board of Governors of the Federal Reserve System has published amendments in slip-sheet form to the Official Staff Commentary on Regulation Z, effec tive April 1991. The new slip sheet should be inserted in your Regulations binder. ENCLOSURE The new slip sheet is enclosed. MORE INFORMATION For more information, please contact Eugene Coy at (214) 744-7480. For additional copies of this B a n k ’s notice or the slip sheet, 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 Intraslate (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) Board of Governors of the Federal Reserve System Amendments to the Official Staff Commentary on Regulation Z Truth in Lending April 1991* The following amendments are effective April 1, 1991, or, at the creditor's option, October 1, 1991. 1. Comments to 4(a) are am ended by adding a second bulleted paragraph after the first bul leted paragraph in com m ent 4(a)-2, and by adding new com m ent 4(a)-6 to read as follows: 4 (a ) Definition A tax also is not a finance charge if applica ble law imposes the tax solely on the credi tor, but directs or authorizes the creditor to pass the tax on to the consumer. (For pur poses of this section, if applicable law is si lent 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). 2. Costs o f doing business. * * * • A tax imposed by a state or other govern mental body on a creditor is not a finance charge if the creditor absorbs the tax as a cost of doing business and does not sepa rately impose the tax on the consumer. (For additional discussion of the treat ment 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 im poses the charge on the consumer. In con trast, a tax is not a finance charge (even if it is collected by the creditor) if applicable law imposes the tax: • Solely on the consumer; • On the creditor and the consumer jointly; or • On the credit transaction, without indi cating which party is liable for the tax. * The Regulation Z commentary, as amended effective April 1, 1991, consists of— • • the commentary pamphlet dated June 1990 (see inside cover) and this slip sheet. 2. Comment 5a(b)(2)-2 is revised to read as follows: 5a(b)(2) Fees fo r Issuance or Availability 2. Enhancements. Fees for optional serv ices in addition to basic membership privi leges in a credit or charge card account (for example, travel insurance or card-registration services) should not be disclosed in the table if the basic account may be opened without paying such fees. 3. 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 Solicitations Applications and 1. Accuracy. * * * (An accurate variable annual percentage rate is one in effect with in 60 days before mailing.) 2. M ailed publications. * * * In addition, a 1 R egulation Z card issuer may use a single application form as a “take-one” (in racks in public locations, for example) and for direct mail ings, 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 presenting the required section 226.5a disclosures in a tabular format. When used in a direct mailing, the creditterm disclosures must be accurate as of the mailing date whether or not the section 2 2 6 .5 a (e )(l)(ii) and (iii) disclosures are included; when used in a take-one, the dis closures must be accurate for as long as the take-one forms remain available to the pub lic if the section 2 2 6 .5 a (e )(l)(ii) and (iii) disclosures are omitted. (If those disclo sures are included in the take-one, the cred it term disclosures need only be accurate as of the printing date.) 4. Comment 5a(e)(l)-2 is revised to read as follows: 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 expira tion. The new plan is subject to all open-end credit rules, including sections 226.5b, 226.6, and 226.15. 6. Comment 5b(d)(4)(iii)-l is amended by re vising the fourth sentence to read as follows: Paragraph 5b(d)(4)(iii). 1. Disclosure o f conditions. * * * As an al ternative to disclosing the conditions in this manner, the creditor may simply describe the conditions using the language in section 226,5b(f) (2), 2 2 6.5b (f)(3 )(i) (regarding freezing the line when the maximum annual percentage rate is reached), and 2 2 6 . 5 b ( f ) ( 3 )(v i) or language that is sub stantially similar. * * * 5a(e)(l) Disclosure o f Required Credit Information * * * * * 2. Form o f disclosures. The disclosures specified in section 2 2 6 .5 a (e )(l)(ii) and (iii) may appear either in or outside the table containing the required credit disclosures. 7. Comment 5b(d)(5)(iii)-4 is amended by re vising the fourth bulleted paragraph to read as follows: Paragraph 5b(d)(5)(iii) * * * * * 4. Reverse mortgages. * * * 5. Comments 5b-2 through Sb-5 are redesig nated as comments Sb-3 through 5b-6, re spectively, and new com m ent 5b-2 is added to read as follows: SECTION 226.5b— Requirements for Home-Equity Plans * * * * * 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, • Some reverse mortgages provide that some or all of the appreciation in the val ue of the property will be shared between the consumer and the creditor. The credi tor must disclose the appreciation fea ture, including describing how the credi tor’s share will be determined, any limita tions, and when the feature may be exercised. 8. Comment 5b(d)(8)-2 is am ended by revising the first sentence and by adding a new sen tence after the fourth sentence to read as follows: R egulation Z 5b(d)(8) Fees Imposed by Third Parties to Open a Plan * * * * 11. Comment 6(e)-4 is amended by revising the third sentence to read as follows: * 2. Itemization o f 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 in clude a disclosure about property insurance. 6(e ) Home-Equity Plan Information * Paragraph 5b(f)(3)(i) 1. Changes provided fo r in agreement. A creditor may provide in the initial agree ment that further advances will be pro hibited 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. * * * 10. Comment 5b(f)(3)(vi)-l is amended by re vising the first sentence and by adding a new sentence after the first sentence to read as follows: Paragraph 5b(f)(3)(vi) 1. Suspension o f credit privileges or reduc tion o f credit limit. A creditor may pro hibit additional extensions of credit or re duce the credit limit in the circumstances specified in this section of the regulation. In addition, as discussed under section 226.5b( 0 (3) (i), a creditor may contrac tually reserve the right to take such ac tions when the maximum annual percent age rate is reached. * * * * * * 4. Disclosures fo r the repayment period. * * * To the extent the corresponding an nual percentage rate, the information in footnote 12, and any other required dis closures are the same for the draw and repayment phase, the creditor need not repeat such information, as long as it is clear that the information applies to both phases. * 9. Comment 5b(f)(3)(i)-l is amended by re vising the first sentence and by adding a new sentence after the first sentence to read as follows: * * * * * 12. Comment 9(c)(l)-6 is revised to read as follows: 9(c)(1) Written Notice Required * * * * * 6. Changes to home-equity plans entered into on or after November 7, 1989. Section 226.9(c) applies when, by written agree ment under section 226 .5b(f)(3)(iii), a creditor changes the terms of a home-equity plan—entered into on or after No vember 7, 1989—at or before its sched uled expiration, for example, by renewing a plan on terms different from those of the original plan. 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 variablerate plans, the disclosures required by section 226.5b(d)(12 )(x) and (d) 3 Regulation Z (12) (x i)) unless the disclosures giv en earlier contained representative ex amples covering the new minimumpayment requirement. (See the com mentary to section 226.5b(d)(5) (iii), (d )(1 2 )(x ), and (d )(1 2 )(x i) for a discussion of representative examples.) When the terms are changed pursuant to a written agreement as described in sec tion 226.5b(f)(3)(iii), the advance-notice requirement does not apply. 13. Comment 12(a)(2)-2 is amended by revis ing the third bulleted paragraph to read as follows: 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. The substitute card might be usable, in addition, for obtain ing cash advances through automated teller machines. (If the substitute card constitutes an access device, as defined in Regulation E, then the Regulation E issuance rules would have to be fol lowed.) The “substitution” of one card with another on an unsolicited basis is not permissible, however, where in con junction with the substitution an addi tional credit card account is opened and the consumer is able to make new pur chases or advances under both the orig inal 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 trans actions by use of the new credit card, the card cannot be provided to a con sumer without solicitation. 4 14. Comment 16(d)-4 is amended by two sen tences after the second sentence to read as follows: 16(d) Additional Requirements for Home-Equity Plans * * * * * 4. Misleading terms prohibited. * * * In the case of property insurance, however, a creditor may state, for example, “no clos ing 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.) 15. Comment 17(a)(l)-5 is revised by adding a bulleted paragraph at the end to read as follows: Paragraph 17(a)(1) * * * * * 5. Directly related. * * * • A statement whether or not a subse quent purchaser of the property secur ing an obligation may be permitted to assume the remaining obligation on its original terms. 16. Comment 17(c)(1)-! is amended by revis ing the first sentence and adding a sen tence after the first sentence to read as follows: Paragraph 17(c)(1) 1. Legal obligation. The disclosures shall reflect the credit terms to which the par ties are legally bound as of the outset of the transaction. In the case of disclosures required under section 226.20(c), the dis closures shall reflect the credit terms to which the parties are legally bound when the disclosures are provided. * * * R egulation Z 17. Comment 17(c)(1)-11 is amended by revis ing the heading, the first sentence and the first bulleted paragraph to read as follows: scribed above. (This discussion does not apply to construction loans subject to section 226.17(c)(6).) * * * Paragraph 17(c)(1) * * * * * 11. Examples o f variable-rate transactions. Variable-rate transactions include: • Renewable balloon-payment instru ments where the creditor is both uncon ditionally obligated to renew the bal loon-payment loan at the consumer’s option (or is obligated to renew subject to conditions within the consumer’s control) and has the option of increas ing the interest rate at the time of re newal. Disclosures must be based on the payment amortization (unless the specified term of the obligation with re newals is shorter) and on the rate in effect at the time of consummation of the transaction. (Examples of condi tions within a consumer’s control in clude requirements that a consumer be current in payments or continue to re side in the mortgaged property. In con trast, 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, how ever, a creditor is not obligated to re new as described above, disclosures must be based on the term of the bal loon-payment loan. Disclosures also must be based on the term of the bal loon-payment loan in balloon-payment instruments in which the legal obliga tion provides that the loan will be re newed by a “refinancing” of the obliga tion, as that term is defined by section 226.20(a). If it cannot be determined from the legal obligation that the loan will be renewed by a “refinancing,” dis closures must be based either on the term of the balloon-payment loan or on the payment amortization, depending on whether the creditor is uncondition ally obligated to renew the loan as de 18. 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. Interm ediary agent or broker. * * * • The amount of work (such as docu ment preparation) the creditor expects to be done by the broker on an applica tion based on the creditor’s prior deal ings with the broker and on the creditor’s requirements for accepting applications, taking into consideration the customary practice of brokers in a particular area. The more 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 receiv ing an application, inquires about the credit terms of several creditors with whom the broker does business and sub mits the application to one of them. The broker is responsible for only a small per centage of the applications received by that creditor. During the time the broker has the application, it might request a credit report and an appraisal (or even prepare an entire loan package if custom ary in that particular area). 19. Comment 19(b)-5 is am ended by revising the first bulleted paragraph to read as follows: 5 R egulation Z 19(b) Certain Variable-Rate Transactions * * * * 22. Comment 28(a)-15 is added to read as follows: * 28(a) Inconsistent Disclosure Requirements 5. Examples o f variable-rate transactions. • * * • Renewable balloon-payment instru ments where the creditor is both uncon ditionally obligated to renew the bal loon-payment loan at the consumer’s option (or is obligated to renew subject to conditions within the consumer’s control) and has the option of increas ing the interest rate at the time of re newal. (See comment 1 7 (c)(1 )-l 1 for a discussion of conditions within a con sumer’s control in connection with re newable balloon-payment loans.) * * * 20. Comment 20(a)-3 is amended by revising the second sentence to read as follows: 20(a) Refinancings * * * * * 3. Variable-rate. * * * For example, a re newable balloon-payment mortgage that was disclosed as a variable-rate transac tion is not subject to new disclosure re quirements when the variable-rate feature is invoked. * * 21. Comment 20(c)-3 is added to read as follows: , * * * * * 15. Preemption determination— Wiscon sin. Effective October 1, 1991, the Board has determined that the following provi sions 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 per centage rate disclosed to consumers un der 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 the same term as the federal law to represent a different amount than the federal law. • Section 766.565(5)—the provision per mitting a creditor to include in an openend home-equity agreement authoriza tion 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. 23. Comment 30-1 is amended by revising the parenthetical text at the end o f the fourth bulleted paragraph to read as follows: 2 0(c) Variable-Rate Adjustments * * * * * 3. Basis o f disclosures. The disclosures re quired under this section shall reflect the terms of the parties’ legal obligation, as required under section 226.17(c)(1). Section 226.30— Limitation on Rates 1. Scope o f coverage. * * * (Contrast with the renewable balloon-payment mortgage instrument described in comment 17(c) (1 )-1 1.)
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