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F ederal R eserve Bank o f Dallas DALLAS, TEXAS 75222 C irc u la r No. 78-132 September 19, 1978 CHANGES IN REGULATION Z —T R U T H -IN -L E N D IN G Disclosure of V a ry in g Payments and Minor Irre g u la ritie s ; Maximum Ir r e g u la r Period Units TO ALL BANKS, OTHER CREDITORS, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE D IST R IC T: T h e Board of Governors of the Federal Reserve System has announced two actions affecting its T r u th -in -L e n d in g Regulation Z. These are: 1. T h e Board adopted an amendment intended to facilitate the computation of the annual percentage rate in long-term cred it transactions involving minor irre g u la ritie s in the repayment schedule. An example would be graduated payment mortgages, in which mortgage payments in crease a n n u ally d u rin g the e a rly years of the mortgage. T h e amendment adopted applies to any c re d it transaction of 10 years or more with minor variations in the monthly repayment schedule. Adoption of this amendment w ill sim plify use of annual perce n t age rate (APR) computation tables p repared by HUD for homes bought on its plan for graduated payment mortgages. T h e Board proposed such an amendment to Regulation Z on May 24. T h e proposed amendment was adopted w ith certain changes, c h ie fly , to make it applicable to all long-term cred it transactions (not only mortgage cred it) with minor irre g u la ritie s in the repayment sched ule, and with a m aturity of 10 years or more (not 15 years) . 2. T h e Board amended Regulation Z w ith respect to the d is closure of the complete payment schedule in any c re d it transaction with monthly repayments that a re made in v a ry in g amounts (such as a mort gage with mortgage insurance in which the monthly payment amount de clines) . T h e amendment provides that the re q u ire d disclosure may be Banks and others are encouraged to use the follo w in g incoming WATS numbers in contacting this Bank: 1-800-492-4403 (intrastate) and 1-800-527-4970 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 - made on a separate sheet (or more than one sheet) of paper to be included in the disclosure document re q u ire d by T r u t h - in - L e n d in g . A proposed revision of an interpretation (No. 226.808) on this subject was published A p ril 24, 1978. T h e interpretation that would have been amended remains u nchanged. A copy of the Board's o rders as published in the Federal Re g is t er is enclosed, together with copies of the amendment to and interpretation of Regulation Z . Additional copies w ill be furnished upon request to the S e creta ry 's Office, Ext. 6267. Sincerely you rs, Robert H . Boykin F irst Vice President Enclosures [6 2 1 0 -0 1 ] Extract From Federal Register V O L . 43, NO. 170, T h u rs d a y , August 31, 1978 pp. 38811 - 38814 Title 12— Banks and Bonking CHAPTER II— FEDERAL RESERVE SYSTEM SUBCHAPTER A — BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM [Reg Z; Docket No. R-0152] PART 226— TRUTH IN LENDING Disclosure of Varying Payments Scheduled To Repay the Indebtedness AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final rule. SUMMARY: On April 24, 1978, th e Board of Governors published a pro posed revision of interpretation § 226.808 of regulation Z (43 FR 17363). It would have perm itted disclo sure of th e complete paym ent sched ule (as required by § 226.8(b)(3)) on th e reverse of th e disclosure document or on a separate page or pages in any transaction in which th e paym ent am ounts vary, or, in certain enum er ated transactions, disclosure of an ab breviated schedule th a t indicated the progression of th e paym ent amounts. T he Board has determined th a t the proposed revision of th e interpretation should be withdrawn and th e first al ternative. disclosure of a complete paym ent schedule on th e reverse of th e disclosure document or on a sepa rate page, should be incorporated into § 226.8(a) of regulation Z by am end m ent of th a t subsection, effective im mediately. The present interpretation will rem ain unchanged, and official staff interpretations and public infor m ation letters perm itting its use in types of transactions oth er th a n th a t described in th e present interpretation will rem ain in effect. T he proposed ab breviated paym ent schedules will not be perm itted. EFFECTIVE DATE: August 31. 1978. FO R FU RTH ER INFORMATION CONTACT: Dolores S. Sm ith. Section Chief, Di vision of Consumer Affairs. Board of Governors of th e Federal Reserve System, W ashington, D.C. 20551. 202-452-2412. SUPPLEMENTARY INFORMATION: th e disclosures to consumers. Com (1) In response to a num ber of inquir m ents were divided on w hether or not ies regarding th e proper m ethod of th ere would be operational difficulties disclosure (,,p ursuant to § 226.8(b)(3) of in providing a complete schedule of regulation Z) of paym ents scheduled paym ents to customers. I t should be to repay th e indebtedness in consumer pointed out th a t th e provision of a credit transactions in which the separate schedule of paym ents is an am ounts of such paym ents vary, th e alternative m ethod of disclosure; Board of Governors proposed a revi creditors th a t would encounter oper sion of interpretatio n § 226.808 for ational difficulties may continue to public comment. T he interpretation give th e schedule of paym ents with would have perm itted th e creditor (1) th e o th er required disclosures. in any transaction which th e am ounts T he Board also wishes to point out scheduled to repay th e indebtedness th a t th e bracketed words in the vary, to provide th e custom er with a am endm ent to § 226.8(a) are to be used complete paym ent schedule on th e re alternatively, i.e., th e inappropriate verse of th e disclosure statem en t or on bracketed words should be deleted a separate page or pages (conspicuous when making th e disclosure. ly referenced in th e disclosure sta te (3) T he Board finds th a t use of addi m ent), notw ithstanding th e require tional in th e interpretation m ent of § 226.8(a) th a t all disclosures would examples not serve to facilitate Compli be made on one side of a single page, ance with th e regulation’s require or (2) in certain enum erated transac m ents nor provide consumers w ith suf tions, to give th e custom er an abbrevi understandable inform ation ated schedule of paym ents th a t would ficient about th e ir credit transactions. T h ere disclose th e num ber of paym ents, th e fore, th e proposed revision of th e in am ount of certain payments, and a de terp retatio n is withdrawn. scription of th e variation in th e pay A num ber of significant problems m ent am ounts. In addition, th e in ter p retation would have provided th a t w ith respect to th e examples in the in non-credit items (such as certain terpretation were brought to the credit life and disability Insurance pre Board’s atten tio n by commenters. A miums) th a t are no t included in th e num ber of comments addressed the am ount financed or in th e finance need for more examples. First, gradu charge m ust be excluded from th e ated paym ent mortgages (such as the to tal o f paym ents scheduled to repay HUD-FHA program recently a u th o r th e indebtedness. Finally, a num ber of ized by section 245 of th e National public inform ation letters and official Housing Act) have increasing pay sta ff interpretations would have been m ents for th e first years of th e note and, in th e case of th e FHA program, rescinded. Eighty-two comments on th e propos decreasing paym ents after th e first 6 al were received by th e Board. A m a or 11 years (as a result of decreases in jority of th e comments favored adop required mortgage insurance premi tion of th e proposal with modifica ums). Comm enters expressed their tions, although a significant num ber desire for examples to fit such pro of th e comments expressed opposition grams. Second, th e examples did not incor to th e proposal for policy reasons. Based on th e comments received and porate one type of credit transaction its own analysis; th e Board has decid with mortgage insurance premiums for ed to withdraw th e proposed revision which disclosure in accordance with the present interpretation had been of th e interpretatio n (including the position stated therein concerning in approved in an official staff interpre clusion of noncredit items in th e total tation. T hird, example II, transaction of payments). Instead, th e Board is B perm itted th e use of an abbreviated amending regulation Z to perm it th e schedule in transactions with irregular first alternative (disclosure of a com first or last payments. Commenters plete paym ent schedule on as many felt th a t similar deviations should be pages as necessary) in any transaction perm itted for the other examples. Fi in which th e paym ent am ounts vary. nally, a num ber of commenters sug T he public inform ation letters and of gested other, more irregular transac ficial staff interpretations th a t th e tions (e.g., simple interest loans with Board had proposed to rescind will m onthly finance charge paym ents and rem ain in effect. These changes and quarterly principal payments) as th e reasons therefor are discussed in proper subjects for abbreviated sched greater detail below. ules. (2) T he disclosure of a complete pay T he Board has determ ined th a t even m ent schedule on th e reverse of the if additional examples were provided disclosure document or on a separate only for GPM transactions, for o ther page or pages was favored by th e m a mortgage insurance transactions and jority of commenters. The Board finds for irregular first or last paym ents in th a t provision of such a schedule th e enum erated transactions, th e would not d etract from, and in some num ber of examples would be a t least cases may even enhance, th e value of doubled. Such a result appears unw ar ranted, particularly in light of present efforts to simplify th e T ru th in Lend ing Act and regulation Z. F u rtherm ore, while examples could be adapted to accommodate th e pres en t programs of creditors, develop m ents in lending practices would in variably result in th eir inadequacy for disclosure under new programs. The Board would be faced with th e a lter natives of constant am endm ent of the interpretation or repetition of th e present situation, whereby staff in ter pretations have expanded th e scope of th e current § 226.808 to perm it its use in transactions o th er th a n those spe cifically set forth. Com menters noted th a t verification of th e accuracy of the annual percent age rate (APR) disclosure (either by th e enforcem ent authorities or con sumers) for creditors disclosing in ac cordance with th e proposed examples would be impossible because there would be no disclosure of actual pay m ent amounts. This verification prob lem exists now, but the proposal would have increased significantly the num ber of transactions in which ab breviated disclosures would be perm it ted. T he solutions to this enforcem ent problem (requiring complete paym ent schedules at consummation or the ability to reproduce th e estim ated pay m ent am ounts at a later date) would be extrem ely burdensome to creditors. Based on th e concerns raised by com m enters and its own opinion th a t th e examples provide insufficient flexibility for the development of new lending programs, th e Board has de term ined th a t withdrawal of th e pro posed interpretation, with provision of th e complete paym ent schedule as an alternative, will provide creditors with a simple m ethod of compliance in varing paym ent transactions. In addi tion. this alternative will provide the greatest am ount of inform ation to consumers in a readily understandable format. (4) The proposed interpretation stated th e position th a t th e “total of paym ents scheduled to repay th e in debtedness" included only th e am ount financed and th e finance charge. This position was contrary to a num ber of public inform ation letters issued by th e staff th a t perm it th e inclusion in th e total of paym ents of premiums for optional, cancellable credit life and disability insurance th a t are not fi nanced and th a t are excluded from th e finance charge by compliance with § 226.4(a)(5). T he comments on this portion of the proposal were negative. Commenters cited th e ir reliance on th e sta ff’s posi tion in developing th e ir loan programs and criticized th e disruption of these programs should the interpretatio n be adopted. Creditors th a t now offer these types of credit life and disability insurance program s stated th a t they would either begin requiring insurance coverage of th e custom er or finance th e premiums, which would result in increased finance charges to custom ers. Creditors also stated th a t calcula tion of th e am ounts of the varying paym ents a t consummation would be extrem ely difficult with existing rate and paym ent charts. T he Board has decided th a t th e per missibility of the inclusion of noncre dit items in th e total of paym ents will be given fu rth e r consideration by th e staff and will be addressed in an offi cial staff interpretation. (5) The Board had also proposed re scinding a num ber of public inform a tion letters and official staff interp re tations th a t would have conflicted with the proposed interpretation. None of these letters and interp reta tions will now be rescinded. T he let ters dealing with th e inclusion of credit life and disability insurance pre miums in th e total of paym ents (169, 632, 684, 735, 799, 833, th e final p a ra graph of 834, and 850) will rem ain in effect pending issuance of an official staff interpretation on th e subject. Public inform ation letters 1021 and 1186 will not be rescinded, as they are consistent with th e Board's position concerning th e treatm en t of mortgage insurance premiums. Public inform a tion letters 1158 and 1164 and official staff interpretations PC-0003, 0025, 0030, 0031, and 0104 will not be re scinded because th e Board is reluctant to disrupt creditor practices in th e dis closure of insurance premiums. It should be pointed out, however, th a t the Board believes th a t fu rth e r expan sion of th e scope of th e present inter pretation th ro u g h staff letters has been obviated by the am endm ent to § 226.8(a) perm itting the schedule to be placed on a separate page, and th e staff does not intend to respond favor ably to futu re requests for such ex pansion. (6) In accordance with 5 U.S.C. 553(d)(i), th e effective date of th e am endm ent need not be delayed be cause it is a substantive rule th a t re lieves a restriction. (7) Therefore, pursuant to th e au thority granted in 15 U.S.C. 1604 (1970), th e Board hereby amends 12 CFR P a rt 226, effective August 31, 1978, by adding th e following to the end of § 226.8(a): § 226.8 Credit other than open end—spe cific disclosures. (a) General rule. * * * N o tw ithstand ing th e provisions of paragraphs (a) (1) and (2) of this section, a creditor may, in any transaction in which th e paym ents scheduled to repay th e in debtedness vary, satisfy th e require m ents of § 226.8(b)(3) with respect to the number, amount, and due dates or periods of payments by disclosing the required inform ation on th e reverse of th e disclosure statem ent or on a sepa rate page(s): Provided, T h a t th e fol lowing notice appears with th e o th er required disclosures: “Notice: see (re verse side) (accompanying statem ent) for th e schedule of paym ents.” * * • * • By order of the Board of Governors, August 23, 1978. T h e o d o r e E. A l l i s o n , Secretary o f the Board. [PR Doc. 78-24598 Filed 8-30-78: 8:45 am] [6 2 1 0 -0 1 ] [Reg. Z: Docket No. R-0164] PART 226— TRUTH IN LENDING Minor Irregularities— Maximum Irregular Period Limits AGENCY: Board of G overnors of th e Federal Reserve System. ACTION: Final interpretation. SUMMARY: The Board hereby adopts an am endm ent to Interp retatio n § 226.503 of regulation Z, which per mits certain irregular paym ent am ounts and paym ent periods to be considered regular for purposes of cal culating th e annual percentage rate on consumer credit transactions. This am endm ent provides th a t in transac tions payable m onthly w ith a term of 10 years or more, an irregular first period of up to 62 days may be treated as though it were a regular period and the resulting paym ent irregularities may be disregarded. It is intended to simplify computation of th e annual percentage! rate in long term tran sac tions involving unequal payments, in cluding graduated paym ent mortgages. EFFECTIVE DATE: August 31, 1978. FOR FURTHER INFORMATION CONTACT: G lenn E. Loney. Section Chief, Divi sion of Consumer Affairs, Board of Governors of the Federal Reserve System, W ashington, D.C. 20551, 202-452-3867. SUPPLEMENTARY INFORMATION: On Ju n e 1, 1978, th e Board of Gover nors published for comm ent an am endm ent to regulation Z In terp re tation § 226.503 which would expand its coverage to include certain long term real property transactions, such as graduated payment mortgages. The form er version of § 226.503 allowed first paym ent periods between 20 and 50 days to be treated as if they were regular for purposes of th e annual percentage rate calculation, only in transactions otherwise payable in equal installments. Since graduated paym ent mortgages by th eir very natu re involve unequal installments, creditors offering such mortgages, for example, under th e HUD /FHA section 245 experim ental financing program, were formerly unable to take advan tage of th e minor irregularities provi sion. This am endm ent will not allow first periods of up to 62 days to be treated as if they were regular for purposes of computing annual percentage rates in all transactions which are payable m onthly and which have a scheduled term of 10 years or more, w hether or not the m onthly installm ents are equal. The Board believes th a t this ex pansion of the minor irregularities provision will simplify rate com puta tions in such transactions while having a negligible effect on the accu racy of th e rate. W hen the am endm ent was originally proposed, comment was specifically so licited on w hether the restrictions placed on application of th e am end m ent should be relaxed or stre n g th ened. In light of th e comments, th e am endm ent has been revised in its final form in four ways: (1) It has been expanded to apply to all types of transactions instead of being limited to real property transac tions. As pointed out by several com menters, th e accuracy of th e annual percentage rate depends on th e time periods and paym ent am ounts in volved ra th e r th a n on the character of th e underlying transaction. Therefore, th e Board sees no reason to limit this special rule to transactions secured by real property. (2) The minimum term of a transac tion qualifying for use of this special rule has been reduced from 15 years to 10 years. The Board considers th a t dis regarding these slight irregularities will have a negligible impact on the ac curacy of th e rate, even in transac tions with 10 year terms. (3) It has been expanded to apply to irregularities in paym ent am ounts re sulting from th e paym ent period irre gularities. The am endm ent as pro posed dealt only with irregular first periods and not with irregular pay m ent am ounts. However, the initial paym ent will often be irregular as a result of a first period irregularity, for example, when interest for the ex tra days in the first period is collected, not at closing, b ut eith er with th e first payment or one m onth prior to the first regular payment. T h e final am endm ent has been revised to pro vide th a t such paym ent irregularities may also be disregarded. (4) It has been revised to clarify th a t this special rule applies to certain long term transactions even if they convert to demand status in less th a n 10 years. As revised, the am endm ent applies when the “scheduled am ortization" of the obligation is a t least 10 years. This revision was felt necessary to clarify th a t th e special rule would apply to long term mortgages with demand fea tures, bu t would not apply to short term balloon paym ent mortgages. Some mortgages are due and payable a t th e end of a stated period, for ex ample, five years, but since th e pay m ents are based on a 20-year am ortiza tion schedule, a large “balloon pay m e n t” m ust be made at th e end of five years. Such transactions are not cov ered by th e amendment. O th e r m ort: gages, however, are w ritten for a stated period, for example, one year, w ith th e provision th a t they shall be payable on dem and th ereafter, pro vided th a t until demand is made, pay m ents based on a longer am ortization schedule shall continue to be made until th e obligation is paid in full. Creditors offering this type of transac tion are currently perm itted, pursuant to Board In terp retatio n § 226.816, to make disclosures based on th e longer am ortization schedule (provided it is also stated th a t th e loan is payable on demand after one year and th a t disclo sures are based on th e longer period). Creditors choosing to disclose on this basis, therefore, will be perm itted to take advantage of th e am endm ent to § 226.503, provided th e specified am or tization period is at least 10 years and th e o th er criteria are met. All of th e commenters who ad dressed th e question of w hether th e am endm ent should be lim ited to pro grams requiring customers to pay in terest for th e irregular portion of th e first period opposed such a restriction, and th e Board concurs. A lthough such a requirem ent would insure somewhat greater accuracy of th e calculated rate, th e Board believes it unwise to impose th a t restriction for several rea sons: (a) it does no t have a great impact on accuracy of th e rate, w heth er interest for th e irregular period is paid or not; (b) such a requirem ent does not apply to transactions falling w ithin th e original minor irregulari ties provisions; and, perhaps most im portantly, (c) it seems undesirable to require creditors to charge customers where they otherwise m ight not do so, in order to qualify for this special treatm ent. A few commenters questioned w hether th e am endm ent was intended to elim inate th e 20-day minimum for th e first period, and urged th a t this m inimum be kept so as to avoid any understatem ent of the annual percent age rate. T he Board believes th a t this restriction is unnecessary since tre a t ing even a first period of one day as if it were regular will have a negligible effect on th e ra te in long-term tra n s actions. T h e am endm ent, therefore, will allow any first period from zero to 62 days to be considered regular. Accordingly, in consideration of th e foregoing and pursuant to th e a u th o ri ty granted in 15 U.S.C. 1604 (1968), th e Board amends Official Board In terp re ta tio n of regulation Z, 12 CFR P a rt 226.503, effective immediately, by adding to th e end thereof th e follow ing: § 226.503 Minor irregularities—maximum irregular period limits. * • * * * N otw ithstanding th e above or the language in § 226.5(d) th a t limits the m inor irregularities provisions to transactions th a t are “otherwise pay able in equal installm ents scheduled at equal intervals,” th e following rule may apply. An initial paym ent period of 62 days or less may be treated as tho u g h it were regular and an irregular initial paym ent or any portion thereof resu lt ing from th e application of a rate to th e balance for such an irregular period may be disregarded if: (1) T he scheduled am ortization of th e obligation (th e date from which th e finance charge begins to accrue to th e date of th e final scheduled pay m ent) is a t least 10 years, and (2) T he obligation is otherwise pay able in m onthly installments. By th e order of th e Board of Gover nors, August 23, 1978. T h e o d o r e E. A l l i s o n , Secreta ry o f the B oard. [FR Doc. 78-24600 Piled 8-30-78: 8:45 am] BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TRUTH IN LENDING AMENDMENT TO REGULATION Z f Effective August 31, 1978, §226.8(a) is amended by adding the following: SECTION 226.8— CREDIT OTHER THAN OPEN END— SPECIFIC DISCLOSURES (a) General Rule. * * * Notwithstanding the provisions of paragraphs (1) and (2) of this subsection, a creditor may, in any transaction in which the payments scheduled to repay the indebtedness vary, satisfy the require ments of §226.8(b)(3) with respect to the number, amount, and due dates or periods of payments by disclosing the required information on the reverse of the disclosure statement or on a separate page(s), provided that the following notice appears with the other required disclosures: “NOTICE: See [reverse side] [accompanying statement] for the schedule of payments.” + For this Regulation to be complete effective August 31, 1978, retain the following: 1) Printed pamphlet as amended effective March 23, 1977; 2) Amendments effective April 11, 1977, Section 226.6, and October 10, 1977, Section 226.8; 3) Amendments effective July 20, 1977, Section 226.2, Section 226.4, Section 226.5, and Section 226.13; 4) Amendment effective March 28, 1978, Section 226.7(k)(3)(ii); 5) Amendment effective April 21, 1978r Section 226.1(d); 6) Amendment effective May 30, 1978, Section 226.6(i); 7) Amendment effective August 3, 1978, Section 226.9(g)(6); and 8) This slip sheet. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TRUTH IN LENDING INTERPRETATION OF REGULATION Z SECTION 226.503— MINOR IRREGULARITIES— MAXIMUM IRREGULAR PERIOD LIMITS * * * # * Notwithstanding the above or the language in §226.5(d) that limits the minor irregularities pro visions to transactions that are “otherwise pay able in equal instalments scheduled at equal intervals,” the following rule may apply. An initial payment period of 62 days may be treated as though it were regular irregular initial payment or any portion resulting from the application of a rate balance for such an irregular period may regarded if: or less and an thereof to the be dis 1) the scheduled amortization of the obliga tion (the date from which the finance charge begins to accrue to the date of the final scheduled payment) is at least 10 years, and 2) The obligation is otherwise payable in monthly instalments.
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