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Federal r ese r v e bank
OF DALLAS
W ILL IA M
H. W ALLACE
DALLAS, TEXAS 7 5 2 2 2
f i r s t v ic e p r e s id e n t
AND CH IEF O PER ATING O FFIC ER
April 16, 1987
C i r c u l a r 87-29
TO:
The Chief Executive O f f i c e r o f a l l
member banks and ot h e rs concerned in
the Eleventh Federal Reserve D i s t r i c t
SUBJECT
Final r e v is io n s to the o f f i c i a l s t a f f commentaries r e l a t in g to
consumer c r e d it p rotection reg u la tio n s
DETAILS
The Board of Governors o f t he Federal Reserve System has adopted
f i n a l changes to the o f f i c i a l s t a f f commentary f o r t h r e e o f i t s consumer
c r e d i t p r o t e c t i o n r e g u l a t i o n s - - Regul ati on B (Equal C re d i t O p p o rt u n i t y ),
Regulation E ( E l e c t r o n i c Fund T r a n s f e r s ) , and R egul ati on Z (Truth in Lending)
ATTACHMENTS
The Board' s press r e l e a s e and t he m a t e ri a l as p u b l i s h ed in t he
Federal R e g i s te r are a t t a c h e d .
MORE INFORMATION
Questions should be d i r e c t e d to Sharon Sweeney (Regu lati on B), John
Rogers ( Regulation E), and David Dixon (Regu lati on Z) o f t h i s Bank's Legal
Department a t (214) 651-6228.
S i n c e r e l y y o u rs ,
't/fa h A
/V -
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 press release
For immediate r e l e a s e
April 1 , 1987
The Federal Reserve Board has adopted f i n a l changes t o the o f f i c i a l
s t a f f commentaries t o i t s R eg ul a ti o ns B (Equal Credit Opportunity), E ( E l e c t r o n i c
Fund T r a n s f e r s ) , and Z (Truth in Lending).
The major changes t o the Regula ti on B o f f i c i a l s t a f f commentary p ert ai n
t o n o t i f i c a t i o n regarding d enial o f an Incomplete a p p l i c a t i o n and data c o l l e c t i o n
requirements f o r monitoring purposes.
The r e v i s i o n s t o t h e Regula ti on E o f f i c i a l s t a f f commentary address
systems f o r paying government b e n e f i t s by means o f e l e c t r o n i c te r m i n a l s ; coverage
o f d ividend or i n t e r e s t payments on s e c u r i t i e s ; r e s t r i c t i o n s on payments t o t h i r d
p a r t i e s from money market d ep o s i t acc ounts ; and the p r a c t i c e o f i nc l u di ng
promotional ma terial on ATM or POS r e c e i p t s .
The update t o t h e Regul ation Z o f f i c i a l s t a f f commentary c l a r i f i e s
p r o v is io n s a f f e c t i n g d i s c l o s u r e s f o r r e f i n a nc i n g t r a n s a c t i o n s and the r i g h t of
rescission.
In a d d i t i o n , t h e update c l a r i f i e s the e x c e pti o n from th e fi n a n ce
charge f o r p a r t i c i p a t i o n or membership f e e s and th e p r o h i b i t i o n a g a i n s t o f f s e t t i n g
a consumer's c r e d i t card in debt edne s s with funds from a d e p o s i t account held
with a c r e d i t card i s s u e r .
The changes t o t h e commentaries are a t ta c h e d .
-0 -
Attachments
10732
Federal Register / Vol. 52, No. 64 / Friday, April 3, 1987 / Rules and Regulations
q u e s tio n s th a t h a v e a r is e n a b o u t th e
re g u la tio n , a n d in c lu d e n e w m a te ria l
a n d c h a n g e s in e x is tin g m a te ria l
EFFECTIVE DATE: A p ril 1 ,1 9 8 7 .
FOR FURTHER INFORMATION CONTACT.
A d rie n n e H u rt o r L e o n a rd C h a n in , S ta ff
A tto rn e y s , D iv isio n o f C o n s u m e r a n d
C o m m u n ity A ffa irs, a t (202) 452-3867 o r
452-3667; fo r th e h e a rin g im p a ire d o n ly ,
T e le c o m m u n ic a tio n s D e v ic e fo r th e
D eaf, E a m e s tin e H ill o r D o ro th e a
T h o m p s o n a t (202) 452-3544, B o a rd o f
G o v e rn o rs o f th e F e d e r a l R e s e rv e
S y ste m , W a s h in g to n , D C 20551.
FEDERAL RESERVE SYSTEM
SUPPLEMENTARY INFORMATION: (1)
General. T h e E q u a l C re d it O p p o rtu n ity
A c t (15 U .S.C 1691 e t s e q .) m a k e s it
u n la w fu l fo r c r e d ito r s to d is c r im in a te in
a n y a s p e c t o f a c r e d it tr a n s a c tio n o n th e
b a s is o f ra c e , c o lb r, re lig io n , n a tio n a l
origin, se x , m a r ita l s ta tu s , a g e , re c e ip t o f
p u b lic a s s is ta n c e , o r th e e x e rc is e o f
rig h ts u n d e r th e C o n s u m e r C re d it
P ro te c tio n A c t. T h is s ta tu te is
im p le m e n te d b y th e B o a rd ’s R e g u la tio n
B (12 CFR P a rt 202).
O n N o v e m b e r 2 0,1985, a n o fficia l
s ta f f c o m m e n ta ry in te rp re tin g th e
r e g u la tio n w a s p u b lis h e d a lo n g w ith th e
fin a l ru le re v is in g R e g u la tio n B (50 FR
48018). T h e c o m m e n ta ry is d e s ig n e d to
p ro v id e g e n e ra l g u id a n c e to c re d ito rs in
a p p ly in g th e re g u la tio n to sp e c ific
tr a n s a c tio n s .
P e rio d ic u p d a te s p ro v id e t h e v e h ic le
fo r a d d itio n a l s ta f f in te r p r e ta tio n s th a t
m a y b e n e c e s s a r y a s n e w q u e s tio n s
a ris e (a lth o u g h e a c h u n iq u e s itu a tio n
c a n n o t b e in d iv id u a lly a d d r e s s e d in th e
c o m m e n ta ry ). T h is n o tic e c o n ta in s th e
firs t u p d a te , w h ic h w a s p r o p o s e d for
c o m m e n t o n D e c e m b e r 2 ,1 9 8 0 (51 FR
43371). T h e re v is io n s a re e ffe c tiv e on
A p ril 1 ,1 9 8 7 .
(2) E x p la n a tio n o f re v is io n s .
F o llo w in g is a b r ie f d e s c rip tio n o f the
re v is io n s to th e c o m m e n ta ry :
12 CFR Part 202
S e c tio n 202.2—D e fin itio n s .
[Reg. B; EC-1]
2(f) A p p lic a tio n
Equal Credit Opportunity; Official Staff
Commentary Update
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Final official staff
interpretation.
Summary: The Board is publishing in
final form revisions to the official staff
commentary to Regulation B (Equal
Credit Opportunity). The commentary
applies and interprets the requirements
of Regulation B and is a substitute for
individual staff interpretations of the
regulation. The revisions address
A c ro s s re fe re n c e to c o m m e n t 9 (a )(1 )(3) h a s b e e n a d d e d to c o m m e n t 2(f)-5.
C o m m e n t 2(f)-5 is a g e n e ra l s ta te m e n t of
a c re d ito r’s d u ty to e x e rc is e r e a s o n a b le
d ilig e n c e in o b ta in in g in fo rm a tio n from
a p p lic a n ts o r th ird p a r tie s in c o n n e c tio n
w ith a n a p p lic a tio n fo r c re d it. B e c a u se a
c re d ito r m a y d e n y a n a p p lic a tio n on th e
b a s is o f in c o m p le te n e s s , th e n e w c ro s s
r e f e r e n c e h e lp s c la rify th e re la tio n s h ip
b e tw e e n th is c o m m e n t a n d th e
tre a tm e n t o f in c o m p le te a p p lic a tio n s .
2(z) P ro h ib ite d B a sis
E d ito ria l c h a n g e s h a v e b e e n m a d e to
th e first a n d s e c o n d s e n te n c e s o f
Federal Register / Vol. 52. No. 64 / Friday, April 3, 1987 / Rules and Regulations
10733
wm—m m m
comment 2(z)-l for clarity. No
substantive change is intended.
Section 202.3— Lim ited Exceptions fo r
Certain Classes o f Transactions.
3(a) Public-Utilities Credit
New comment 3(a)-3 has been added
to explain that only telephone
companies that are regulated by or that
file certain information with a
government unit qualify for the public
utilities exceptions available under
§ 202.3(a)(2). The words “required to**
were deleted in the final comment to
conform to the regulation.
Section 202.9—N otifications.
9(a) Notification of Action Taken, ECOA
Notice, and Statement of Specific
Reasons
Paragraph 9(a)(1)
New comment 9(a)(l)-3 has been
added to explain that a creditor may
deny an application missing information
from the applicant on the basis of
incompleteness. Existing comments
9(a)(l)-3 through 9(a)(l>-6 are
redesignated as comments 9(a)(1)—4
through 9(a)(l)-7, respectively.
Section 202.13—Inform ation For
M onitoring Purposes.
13(a) Information to Be Requested
New comment 13(a)—5 has been added
to address transactions not covered by
the data collection requirements of
§ 202.13(a). Based on suggestions made
by commenters, the final comment
clarifies that the test for determining
whether an application is covered by
§ 202.13(a) focuses on the purpose of the
transaction. For example, second
mortgages and open-end home equity
lines obtained primarily for a purpose
other than the purchase or refinancing of
an applicant's principal residence are
not covered by § 202.13(a). Existing
comment 13(a)-5 is redesignated as
comment 13(a)-6.
Appendix B—Model Application Forms
Comments 1 and 2 to Appendix B
have been revised to address the proper
use of two mortgage application forms
issued in October 1986 by the Federal
Home Loan Mortgage Corporation
(FHLMC) and the Federal National
Mortgage Association (FNMA). The two
forms—FHLMC 65/FNMA 1003 and
FHLMC 703/FNMA 1012—contain a
section for collecting the monitoring
information required by section 202.13.
The forms do not, however, differentiate
between transactions th a t are covered
by § 202.13(a), which limits data
collection to applications for credit
primarily for the purchase or refinancing
of an applicant's principal residence,
and other transactions in which
collection is required for certain
creditors by an enforcement agency
under the substitute monitoring
provisions o f $ 202.13(d). The residential
loan application is typically used for
second mortgages as well as the more
limited class o f mortgage loans covered
by § 202.13(a) of the regulation, for
example.
Revised comments 1 and 2 provide
that creditors which are governed solely
by § 202.13(a) should delete, strike, or
modify the “Information for Government
Monitoring Purposes” section when
using the FHLMC/FNMA forms in
transactions in which they are not
permitted to collect the information.
Other creditors may use the forms as
issued in compliance with their
enforcement agency’s substitute
monitoring program.
List of Subjects in 12 CFR Part 202
Banks; Baaking; Civil rights;
Consumer protection; Credit; Federal
Reserve System; Marital status
discrimination; Minority groups;
Penalties; Religious discrimination; Sex
discrimination; Women.
(3) Text o f revisions. The revisions to
the commentary (12 CFR Part 202, Supp.
I) read a s follows;
PART 202—{AMENDED]
Supplem ent I—Official Staff Com m entary
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Section 202.2—D efinitions.
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2 (f) A pplication.
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5. C om pleted A pplication— diligence
requirem ent T he regulation defines a
completed application in term s that give a
creditor the latitude to establish its own
inform ation requirem ents. N evertheless, the
creditor m ust act w ith reasonable diligence to
collect inform ation needed to complete the
application. For exam ple, the creditor should
request inform ation from third parties, such
as a credit report, promptly after receiving
the application. If additional information is
needed from the applicant, such as an
address or telephone num ber needed to
verify em ploym ent the creditor should
contact the applicant promptly. (Bat see
comment 9(a)(l)-3, w hich discusses the
creditors’s option to deny an application on
the basis of incom pleteness.)
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2 (z) P rohibited basis.
1. P ersons a sso cia ted w ith applicant.
“Prohibited basis” as used in this regulation
refers not only to certain characteristics—the
race, color, religion, national origin, sex,
m arital states, o r age—o f an applicant (or
officers of a a appBcant in th e case o f a
corporation) but also to the characteristics o f
individuals w ith whom an applicant is
affiliated or w ith whom the applicant
associates. This m eans, for exam ple, that
under the general rule stated in $ 202.4, a
creditor m ay not discrim inate against an
applicant because of that person's personal
or business dealings w ith m em bers of a
certain religion, because of the national origin
of any persons associated w ith the extension
of credit (such a s the tenants in the
apartm ent complex being financed), or
because of the race of other residents in the
neighborhood w here the property offered as
collateral is located.
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Section 202.3—L im ited E xceptions fo r
C ertain C la sses o f Transactions.
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3(a) P ublic u tilitie s c re d it
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3. Telephone com panies. A telephone
com pany's credit transactions qualify for the
exceptions provided in $ 202.3(a)(2) only if
the company is regulated by a government
unit or files the charges for service, delayed
payment, or any discount for prompt paym ent
w ith a government unit.
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Section 202.9—N o tifica tio n s
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9(a) Notification of Action Taken. ECOA
Notice, a n d Statemen t o f Specific Reasons.
Current com m ents 9(a)(l)-3 through
9(a)(l)-6 a re redesignated comments 9(a)(l}-4
through 9{a)(l)-7, respectively.
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Paragraph 9(a)(1)
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3. Incom plete application— d en ia l fo r
incom pleteness. W hen an application is
incomplete regarding m atters that the
applicant c an complete and the creditor lacks
sufficient data for a credit decision, the
creditor m ay deny the application giving as
the reason for denial that the application is
incomplete. The creditor has the option,,
alternatively, of providing a notice of
incom pleteness under § 202.9(c).
Section 202.13— Inform ation F or M onitoring
Purposes
Current comment 13(a)-5 is redesignated
13(a)-6.
13(a) Information to Be Requested
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5. Transactions n o t covered. The
inform ation collection requirem ents of
§ 202.13(a) apply to applications for credit
primarily for the purchase or refinancing of a
dwelling that is or will becom e the
applicant’s principal residence. Therefore,
applications for home equity lines and other
applications for credit secured by the
applicant's principal residence but m ade
primarily for a purpose other than the
purchase or refinancing of the principal
residence (such as lo an s for home
improvement and debt consolidation] are not
10734
Federal Register / Vol. 52, No. 64 / Friday, April 3, 1987 / Rules and Regulations
subject to the information collection
requirem ents of § 202.13(a).
Appendix B— Model Application Forms
1 FHLM C/FNM A form —residential, loan
application. The residential loan application
form (FHLMC 65/FNMA 1003), including
supplem ental form (FHLMC 65A/FNMA
1003A), prepared by the Federal Home Loan
Mortgage Corporation and the Federal
National Mortgage Association an d dated
O ctober 1986, complies with the requirem ents
of this regulation in some transactions but
not others because of the form’s section on
“Inform ation for Governm ent Monitoring
Purposes.” Creditors that are governed by
§ 202.13(a) of the regulation (which limits
collection to applications primarily for the
purchase or refinancing of the applicant’s
principal residence) should delete, strike, or
modify the data collection section on the
form when using it for transactions not
covered by § 202.13(a) to assure that they do
not collect the information. Creditors that are
subject to more extensive collection
requirem ents by a substitute monitoring
program under § 202.13(d) may use. the form
as issued, in compliance w ith the substitute
program.
2. PHLM C/FNM A form — hom eim provem ent loan application. The homeimprovement and energy loan application
form (FHLMC 703/FNMA 1012), prepared by
the Federal Home Loan Mortgage
Corporation and the Federal National
Mortgage A ssociation and dated O ctober
1986. complies with the requirem ents of the
regulation for some creditors but not others
because of the form 's section on “Inform ation
for Governm ent Monitoring Purposes.”
Creditors that are governed by § 202.13(a) of
tbe regulation (which limits collection to
applications prim arily for the purchase or
refinancing of the applicant’s principal
residence) should delete, strike, or modify the
d ata collection section on the form when
using it for transactions not covered by
§ 202.13(a) to assure that they do not collect
the information. Creditors that are subject to
more extensive collection requirem ents by a
substitute monitoring program under
§ 202.13(d) may use the form as issued, in
compliance w ith that substitute program.
Board of Governors of the Federal Reserve
System, M arch 31,1987.
William W. Wiles,
S ecretary o f th e Board.
(FR Doc. 87-7409 Filed 4-2-87; 8:45 am)
BILLING COOC 6210-01-M
12 CFR Part 205
[R eg. E; EFT-2]
Electronic Fund Transfers; Official
Staff Com mentary Update
agency:
B o a rd o f G o v e rn o rs o f th e
F e d e ra l R e s e rv e S y s te m .
a c t io n t F in a l o ffic ia l s ta ff
in te r p r e ta tio n .
sum m ary;
T h e B o a rd is p u b lis h in g
re v is io n s to th e o fficia l s ta f f
commentary to Regulation E (Electronic
Fund Transfers). T^e commentary
applies and interprets the requirements
of Regulation E and is a substitute for
individual staff interpretations of the
regulation. The revisions represent final
action on proposed changes published
for comment in December 1986.
EFFECTIVE DATE: April 1, 1987.
FOR FURTHER INFORMATION: Contact
Sharon Bowman or Heather Hansche,
Staff Attorneys, Division of Consumer
and Community Affairs. Board of
Governors of the Federal Reserve
System, Washington, DC 20551, (202)
452-2412. For the hearing-impaired only,
Telecommunication Device for the Deaf
(TDD), Eamestine Hill or Dorothea
Thompson, (202) 452-3544.
SUPPLEMENTARY INFORMATION: (1)
General. The Electronic Fund Transfer
Act (15 D.S.C. 1693 et seq.) governs any
transfer of funds that is electronically
initiated and that debits or credits a
consumer’s account. This statute is
implemented by the Board’s Regulation
E (12 CFR Part 205). Effective September
24,1981, an official staff commentary
(EFT-2, Supp. II to 12 CFR Part 205) was
published to interpret the regulation.
The commentary is designed to provide
guidance to financial institutions in
applying the regulation to specific
situations. The commentary is updated
periodically to address significant
questions that arise. There have been
four updates so far. The proposed
version of this fifth update was
published for comment on Decembers,
1986 (51 FR 43615); this notice contains
the final version.
(2) R evisions to Commentary. Four of
the questions included in this
document—questions 2-12.6, 3-3.6, 7
11.5, and 9-3.5—are new. Question 2
12.6 addresses systems for paying
government benefits, such as public
assistance, by means of electronic
terminals; it clarifies that since the
benefits are not disbursed from an
account established by or in the control
of the recipient, Regulation E does not
apply. Question 3-3.6 concerns the
regulation’s coverage of dividend or
interest payments on securities; it has
been, modified from the proposed
version to avoid indicating that such
payments are necessarily
"preauthorized” transfers.
Question 7-11.5 deals with the
Regulation D restrictions on payments to
third parties from money market deposit
accounts; it describes the circumstances
under which the institution would be
required by Regulation E to disclose
those restrictions. Question 9-3.5
addresses the practice of including
promotional material on ATM or POS
receipts, and is adopted without change
from the proposed version.
The remaining two questions—
questions 9-36 and 11-11.5—are
revisions of existing commentary
provisions; the new material deals with
the treatment of cash-back and cashonly transactions at merchant point-ofsale terminals. These have been adopted
without change from the proposed
versions.
List of Subjects in 12 CFR Part 205
Banks, banking; Consumer protection;
Electronic fund transfers; Federal
Reserve System; Penalties.
Text o f Revisions.
The revisions to the Official Staff
Commentary on Regulation E (EFT-2,
Supp. II to 12 CFR Part 205) read as
follows:
§205.2 D efinitions a n d ru le s o f
c o n stru ctio n .
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Q 2-12.6: Fund tra n sfer—electro n ic
p a ym en t o f governm ent b enefits. A recipient
of governm ent benefits, such a s public
assistance or food stam ps, receives the
benefits from an autom ated teller m achine or
a staffed electronic terminal. For example,
the recipient presents an identification card
to a clerk, the card is run through an
electronic term inal, the recipient's identity Is
verified by some m eans (such a s a
photograph, personal identification number,
or signature), and the benefits are given in
the form of cash, food stamps, or food items.
The benefits are disbursed from a n account
of the governm ental entity paying the
benefits, not an account established by or in
the control of the consumer. Are these
transactions subject to Regulation E?
A: No, since there is no debit or credit to a
consum er asset account. (See questions 2-4
and 2-12.) (Section 205.2(b) and (g))
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§ 205.3
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E xem ptions.
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Q 3-3.6: P aym ent o f d ivid en d s or
in te re st on securities. A paym ent of interest
or dividends on securities is m ade by
electronic fund transfer into a consum er's
a cc o u n t The paym ent m ay be m ade, for
exam ple, by a discount brokerage firm into
an account a t an affiliated depository
institution or, for government securities, by a
Federal Reserve Bank into the consum er's
account a t a depository institution. Is the
transfer covered by Regulation E?
A: Yes. The securities exem ption does not
apply since there is no purchase or sale of
securities. (Section 205.3(c))
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§ 205.7 initial D isclo su re o f T erm s an d
C o nditions.
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Q 7-11.5: R estrictio n s on certain deposit
accounts. Regulation D im poses restrictions
Federal Register / Vol. 52, No. 64 / Friday, April 3, 1967 / Rules and Regulations
on the num ber of paym ents to third parties
that may be m ade from a money m arket
deposit account (whether m ade by electronic
or nonelectronic means}. If an institution
chooses to implement the restrictions by
refusing to execute transfers that would
exceed the limit, m ust it disclose the
restrictions under Regulation E as lim itations
on the frequency of electronic fund transfers?
A: Yes, lim itations on account activity th at
restrict the consum er’s ability to make
electronic hind transfers m ust be disclosed to
the consum er as part of the Regulation E
disclosures. (Section 205.7(a)(4))
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§205.9 Documentation of transfers.
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Q 9-3.5: R eceipts— inclusion o f
prom otional m aterial. A financial institution
uses receipts on w hich there is prom otional
m aterial (such a s discount coupons for food
item s at restaurants). Is the printing o f such
prom otional m aterial on receipts prohibited
by the regulation?
A: No: The regulation does, however,
m andate that the required receipt inform ation
b e set forth clearly; this m ay be achieved, fo r
exam ple, by separating it from the
prom otional m aterial. In addition, a consum er
m ust n o t be required to surrender th e receipt
(or that portion containing the required
disclosures) in order to take advantage of a
promotion. (Section 205.9(a))
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Q 9-38: R eceip ts/p erio d ic sta tem en ts—
typ e o f tra n sfer. W hat degree of specificity is
required on term inal receipts a n d periodic
statem ents for th8 type of transfer?
A: Common descriptions are sufficient.
There is no prescribed term inology, although
som e exam ples a re contained in the
regulation. On periodic statem ents, it is
enough simply to show the am ount of the
transfer in the debit or the credit column if
other inform ation on the statem ent (such a s a
term inal location or third-party name)
enables the consum er to identify the type o f
transfer. W hen a consum er o btains cash from
a m erchant a t a POS term inal in addition to
purchasing goods, or obtains cash only, it is
not necessary to differentiate 4he transaction
from one involving only the purchase of
goods. (See question 9-27.) (Section
205.9(a)(3) and (b)(l)(iii))
*
*
§ 205.11
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*
P ro c e d u re s fo r reso lv in g e rro rs .
*
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*
Q 11—11.5: PO S d e b it-ca rd transactions.
T he deadlines for investigating errors are
extended for all transfers resulting from POS
debit-card transactions, regardless of
w hether an electronic term inal is involved.
For purposes o f these deadlines, w hat types
of transactions c an b e view ed as POS debitcard transactions?
A: POS debit-card transactions include all
debit card transactions a t m erchants’ paintof-sale term inals, including those for cash
only. (Transactions a t ATMs, how ever, are
not POS transactions even though the ATM
may be in a m erchant location.) POS debitcard transactions generally ta k e p lace a t
m erchant-locations-bat also include mail an d
telephone orders of goods or services
involving a debit card. (Sec ti on 205.11(c)(4))
*
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Board o f G overnors of the Federal Reserve
System. M arch 30,1967.
WilliamW. WUes.
Secretary o f the Board.
[FR Doc. 87-7408 Filed 4-2-87; 8:45 am]
BjL*JNG cooe 62MHM-M
10735
10875
Rules and Regulations
Federal Register
Vol. 52. No. 65
M onday, April 6, 1987
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Re* Z; TIL-11
Truth in Lending; Official Staff
Com mentary Update
Board of Governors of the
Federal Reserve System.
a c t io n : Final official staff
interpretation.
agency:
SUMMARY: The
Board is publishing in
final form changes 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 of the
regulation. The revisions address a
variety of questions that have arisen
about the regulation, and include new
material and changes in existing
material.
As a result of the increased use of
home-equity lines of credit and second
mortgage loans, partly due to the new
limitations on the deductibility of non
business interest expenses under the
revised federal tax laws, the Board has
received a number of inquiries
concerning real estate-secured
extensions of credit These questions are
addressed by several revisions, one of
which clarifies the rules that apply when
a creditor adds a security interest in the
consumer’s principal dwelling to a
transaction that w as previously exempt
from the regulation.
The update indudes a variety of other
revisions including clarification of the
10876
Federal Register / Vol. 52* No. 65 / Monday, April 6, 1987 / Rules and Regulations
exception from the finance charge for
participation or membership fees under
§ 226.4(c)(4), and clarification of the
prohibition against offsetting a
consumer’s credit card indebtedness
with funds from a deposit account held
with a credit card issuer under
§ 226.12(d).
DATES: Effective April 1,1987, but
compliance optional until October 1,
1987.
f o r f u r t h e r in f o r m a t io n : Contact the
following attorneys in the Division of
Consumer and Community Affairs at
(202) 452-3667 or (202) 452-3867:
Open-end—Kathleen Brueger, Heather
Hansche, Susan Kraeger
Closed-end—Sharon Bowman, Leonard
Chanin, Adrienne Hurt, Thomas Noto
For the hearing impaired only.
Telecommunications Device for the Deaf
(TDD), Earnestine Hill or 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).
Effective October 13,1981, an official
staff commentary (TIL-1, Supp. 1 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. The commentary
is updated periodically to address
significant questions that arise. There
have been five general updates so far.
This notice contains the sixth general
update, which was proposed for
comment on December 2,1986 (51 FR
43372). The changes are effective on
April 1,1987. Although creditors are free
to rely on the provisions as of that date
and are protected if they do so, they
need not follow the revisions until
October 1,1987.
(2) Revisions
The following is a brief description of
the revisions to the commentary:
Subpart A —General
Section 228.2—D efinitions and Rules
o f Construction— 2(a) D efinitions—
2(a)(20) “Open-End C redit”. Comment
2(a)(20)-4 is amended to further clarify
that an open-end credit plan may exist
even though the creditor does not
normally impose a finance charge,
provided the creditor has the right to
impose a finance charge from time to
time on the outstanding balance.
Section 226.3—Exem pt
Transactions— 3(b) Credit Over $25,000
Not Secured by Real Property or a
Dwelling—Comment 3(b)-2 is amended
to clarify that an open-end credit plan
which was exempt from the regulation’s
coverage under § 226.3(b) becomes
subject to the regulation when a security
interest is taken in any real property, or
in personal property used or expected to
be used as the consumer’s principal
dwelling. As a result, creditors must give
the consumer an initial disclosure
statement reflecting the current account
terms at the time such security interest
is taken, and comply with the other
provisions of the regulation applicable
to open-end credit. If the security
interest that is taken is in the
consumer’s principal dwelling, the
creditor must also give the consumer the
right to rescind the security interest.
Comment 3(b)-3 is amended to correct
the reference to the $25,000 limitation
and to add a reference to the consumer’s
principal dwelling in the first sentence.
In addition, the caption "Refinanced
obligations” has been changed to
“Closed-end credit—subsequent
changes’’ to more closely parallel the
language used in the caption for the
preceding comment on open^-end credit.
The revisions clarify the rule that
disclosures for previously exempt
closed-end credit transactions are
required only when the existing
obligation is satisfied and replaced by a
new obligation. A cross reference to the
commentary to § 226.23(a)(1), which
discusses the right of rescission when a
security interest in a consumer’s
principal dwelling is added to a
previously exempt transaction, has also
been added to the comment.
Section 226.4—Finance Charge—4(c)
Charges Excluded from the Finance
Charge—Paragraph 4(c)(4). Comment
4(c)(4)-l is amended and a new
comment 4(c)(4)-2 is added to clarify the
types of charges that may be treated as
participation or membership fees, and
thus excluded from the finance charge.
Specifically, comment 4(c)(4)—1 is
amended to make clear that a one-time
charge imposed when an account is
opened, such as a loan origination fee,
may not be treated as a participation
fee. Comment 4(c)(4)-2 is added to make
clear that fees based on either the
degree of account activity or on the
amount of credit available under the
plan (such as a fee based on a
percentage of the credit limit) are not
participation fees and, if imposed, must
be treated as finance charges.
Subpart B—Open-End Credit
Section 226.5— General Disclosure
Requirem ents—5(b) Time of
Disclosures—5(b)(1) Initial disclosures.
Comment 5(b)(l)-l is revised to make
clear that, in general, the initial
disclosure statement must be provided
to the consumer before the consumer
pays any fees or charges under the plan,
including real estate charges of the type
excluded from the finance charge in
§ 226.4(c)(7). However, the comment
would continue to allow imposition of
an application fee (§ 226.4(c)(1)) or
membership fee (§ 226.4(c)(4)) prior to
giving the initial disclosure statement;
any membership fee imposed before the
initial disclosures are given must be
refunded if the consumer rejects the
.
plan.
Section 226.6—Initial Disclosure
Statem ent—6(b) Other Charges—
Comment 6(b)-l is amended by adding
examples of the types of real estate
charges included in § 226.4(c)(7). In
addition, taxes and filing or notary fees
excluded from the finance charge under
§ 226.4(e) are deleted as examples of an
“other charge” in comment 6(b)—
1, and
comment 6(b)-2 is amended to include
them as examples of what is not an
“other charge.” Since taxes and filing or
notary fees excluded from the finance
charge under § 226.4(e) must be itemized
and disclosed, it is unnecessary to
specifically require them to be treated
as "other charges” in order to ensure
that they are disclosed to the consumer.
The creditor has the option of either
itemizing and disclosing these fees
separately under § 226.4(e), or including
the fees as part of the initial disclosure
statement as an “other charge” under
§ 226.6(b). Under either option, the
creditor may disclose the amount of the
fees or, alternatively, an explanation of
how the amount will be determined.
6(c) Security Interests. Comments
6(c)-2 and 6(c)-4 are revised to take into
account the Board’s Credit Practices
Rule, Subpart B of Regulation AA, 12
CFR Part 227, and the credit practices
rules of the Federal Trade Commission
and the Federal Home Loan Bank Board,
16 CFR Part 444 and 12 CFR Part 535,
respectively. These rules declare it an
unfair or deceptive act or practice for
creditors to take or enforce a
nonpurchase money, nonpossessory
security interest in “household goods,”
as that term is defined by the rules.
Some state laws also limit the
availability of security interests in
household goods. Comments 6(c)-2 and
6(c)-4 have been supplemented with
parenthetical statements designed to
alert creditors to the existence of these
restrictions, rather than deleting the
references to “household appliances"
and “household goods” altogether, as
was originally proposed.
Federal Register / Vol. 52, No. 63 / Monday, April 6, 1987 / Rules and Regulations
Section 226.7-—Periodic Statem ent—
7(f) Am ount o f Finance Charge. A new
comment 7(f)-8 is added to clarify that
finance charges assessed at the time an
account is opened must be disclosed on
the periodic statement if they are
financed under the plan.
7(h) O ther Charges. Comment 7(h)—1
is amended to make clear that creditors
may disclose real estate-related charges
excluded from the finance charge under
§ 226.4(c)(7) as a single amount with a
term such a s “closing costs” on the
periodic statem ent if the charges were
itemized and described by the same
term on the initial disclosure. Creditors
may continue, however, to disclose
these charges on the initial disclosure
statement by explaining how the charge
will be determined (see § 226.6(b)).
Section 226.12—Special Credit Card
Provisions—12(d) O ffsets b y Card
Issuer Prohibited—Paragraph 12(d)(2),
Comment 12(d)(2)-l is revised to clarify
thaf the security interest exception to
the prohibition on offsetting a
cardholder’s indebtedness against funds
on deposit with the card issuer does not
include a security interest that is the
functional equivalent of the right of
offset. Therefore, security interests
granted by language routinely included
in credit card agreements are not within
the exception. For the exception to
apply, there must be some affirmative
indication that the consumer is aware
that a security interest is a condition for
an account (or for more favorable terms
on an account) and specifically intends
to grant the security interest. In
addition, to qualify for the exception, a
security interest in the consumer's
deposit account must be obtainable and
enforceable by creditors generally. The
revised comment eliminates the
examples at the end of the previous
comment since they are now
incorporated in the requirements
discussion.
Section 226.15—Right o f Rescission—
15(c) D elay o f Creditor’s Performance.
Comment 15(c)~l is amended to clarify
that a creditor is not prohibited from
disbursing funds during the rescission
period when property subject to the
right to rescind is added as security
under an existing open-end credit plan.
Comment 15(c)-3 is revised to clarify
that the examples .of actions a creditor'
may take during the rescission period
are permissible actions provided they
are not prohibited by state law or other
requirements. In addition, the caption
“Permissible actions" has been changed
to “Actions during the delay period.”
These revisions were prompted by the
fact that some creditors mistakenly
believed that the regulation authorized
the accrual of finance charges during the
rescission period, even when state law
does not permit the practice. The
revisions make it clear that the
regulation neither authorizes nor
prohibits the listed actions.
Subpart G—Closed-End Credit
Section 226.19—Content o f
Disclosures—18(g) Paym ent Schedule—
Paragraph 18(g)(2). Comment 18(g)(2)—
1
is revised to incorporate a discussion of
transactions in which interest and
principal payments occur at different
intervals. The revision clarifies that a
creditor may disclose the two series of
payments separately and use an
abbreviated payment schedule for the
interest payments. The revision also
makes clear that this option is available
for transactions in which interest and
principal payments are scheduled on the
same, as well as on different, dates of
the month.
18(m) Security Interest— Comment
18(m}-2, addressing disclosure of
nonpurchase money security interests, is
revised to reflect the existence of the
Board's Credit Practices Rule, Subpart B
of Regulation AA, 12 CFR Part 227, and
the credit practices rules of the Federal
Trade Commission, 16 CFR Part 444, and
the Federal Home Loan Bank Board, 12
CFR Part 535. These rules declare it an
unfair or deceptive act or practice for
creditors to take or enforce a
nonpossessory, nonpurchase money
security interest in “household goods,”
as that term is defined by the rules.
Some state laws also limit the
availability of security interests in
household goods. Comment 18(m)-2 has
therefore been supplemented with a
parenthetical statement designed to
alert creditors to the existence of these
restrictions.
Rather than deleting the reference to
“household goods” altogether, as was
originally proposed, an additional
example has been provided: “certain
household items.” Some creditors have
expressed reluctance, in light of the
credit practices rules, to use the term
“household goods.” Accordingly, the
additional term has been provided in
comment 18(m)-2 as an alternative
means of describing this type of
property.
Section 226.20—Subsequent
Disclosure Requirem ents—20(a)
Refinancing—Paragraph 20(a)(2). The
discussion in comment 20(a)(2)-l on
what qualifies as a corresponding
change in the payment schedule is
deleted as a result of the addition of
comment 20(a)(2)-2»
Comment 20(a)(2}-2 is added to clarify
what is a corresponding change in the
payment schedule that would not
require new disclosures. The addition
10877
also makes clear that a reduction in the
annual percentage rate accompanied by
an increase in the term of the original
obligation is an event requiring new
disclosures.
Section 226.23—Right t>fRescission—
23(a) Consumer’s Right to Rescind—
Paragraph 23(a)(1). Comment 23(a)(1)—
5
is modified to clarify the circumstances
in which the addition of a security
interest to an existing obligation is
rescindable. The revised comment
makes clear that if a security interest in
the consumer's principal dwelling is
added to a transaction that was
previously exempt from the regulation
(because it was credit over $25,000 not
secured by real property or a principal
dwelling), the consumer has the right to
rescind the addition of that security
interest even if the existing obligation is
not satisfied and replaced by a new
obligation. Finally, the term
“preexisting” has been replaced by
“existing” for consistency of
terminology.
23(c) D elay o f Creditor’s
Performance—Comment 23(c}-3 is
revised to clarify that the examples of
actions a creditor may take during the
rescission period are permissible actions
provided they are not prohibited by
state law or other requirements. In
addition, the caption “Permissible
actions” has been changed to “Actions
during the delay period” to reflect a
more neutral statement of the subject of
the comment. These revisions were
prompted by the fact that some creditors
mistakenly believed that the regulation
authorized the accrual of finance
charges during the rescission period,
even if state law prohibited such a
practice. The revisions make it clear
that the regulation neither authorizes
nor prohibits the listed actions.
23(f) Exem pt Transactions—In
December, the Board adopted an
amendment to Regulation Z to redefine
what constitutes a new advance of
money to a consumer for purposes of the
rescission exemption for refinancings
with the original creditor. Under the
amendment, a new advance of money to
a consumer would no longer include
amounts attributed solely to the costs of
the refinancing. Comment 23(f)-4 has
been changed to incorporate the revised
definition of a new advance of money in
a refinancing with the original creditor
and to further explain what amounts are
included and excluded when
determining what constitutes a new
advance. In a refinancing, if the new
“amount financed” exceeds the unpaid
principal balance, any earned unpaid
finance charges on the existing debt,
and the amounts attributable solely to
10878
Federal Register / Vol. 52, No* 65 / Monday, April 6, 1987 / Rules and Regulations
the costs of the refinancing, the
consumer has the right of rescission as
to the difference. Final comment 23(f)-4
differs from the proposal in that it
explains that in determining whether
there is a new advance in a refinancing,
creditors may rely on the information
stated in the latest Truth in Lending
disclosure given to the consumer. Thus,
for example, if the actual dollar amount
of refinancing costs determined at the
time a loan closes differs from that
reflected in the latest Truth in Lending
disclosure, the creditor may rely on the
amounts contained in the disclosure in
determining whether there is a new
advance in the refinancing. A minor
editorial change has also been made in
the first sentence of this comment to
clarify that a consolidation is a type of
refinancing: no substantive change is
intended.
A p p e n d ix D —M u ltip le -A d v a n c e
C o n stru c tio n L o a n s
Comment Appendix D-5 is added to
explain the way in which “interest
reserves” for multiple-advance
construction loans should be treated
when a creditor uses appendix D to
calculate the annual percentage rate and
disclosures. The final comment provides
that regardless of the amount of the
interest reserve, it is not treated as a
prepaid finance charge. The comment
explains that if the consumer is
permitted to make interest payments as
they become due, the interest reserve
should be disregarded in the disclosures
and calculations under appendix D. The
comment also provides, however, that if
a creditor automatically deducts the
interest payments from the interest
reserve rather than allow the consumer
to make the interest payments as they
become due, the estimated interest must
reflect the fact that interest will accrue
on the interest payments as well as the
other loan proceeds. The comment
explains how to account for that
accrual.
List of Subjects in 12 CFR Part 226
Advertising, Banks, Banking.
Consumer protection, Credit, Federal
Reserve System, Finance, Penalties,
Truth in lending.
Pursuant to authority granted in
section 105 of the Truth in Lending Act
(15 U.S.C. 1604 as amended), the Board
amends the official staff commentary to
Regulation Z (12. CFR Part 226 Supp. I)
as follows:
1. Authority Citation
The authority citation for Part 226
continues to read:
Authority: Sec. 105, Truth in Lending Act,
as am ended by sec. 605, Pub. L 96-221,94
Stat. 170 (15 U.S.C. 1604 e t seq,).
(either in full or in installm ents) within the
time necessary to avoid finance charges.
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PART 226—[AMENDED]
Section 228.3— E xem pt Transactions
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2, Text of Revisions
The commentary (TIL-1, Supplement I
to 12 CFR Part 226) is amended by
revising comments 2(a)(20)-4, 3(b)—
2,
3(b)—
3, and 4(c)(4)—1; by adding
comment 4(c)(4)—2; by revising the first
sentence of comment 5(b)(1)—1: by
revising the third bulleted paragraph
and removing the fourth bulleted
paragraph of comment 6(b)-l; by adding
a new bulleted paragraph at the end of
comment 6(b)-2; by revising comment
6(c)-2; by adding parenthetical material
at the end of comment 6(c)-4; by adding
new comment 7(f)—S; by adding a new
second sentence to comment 7(h)—1; by
revising comment 12(d)(2)—1; by adding
two new sentences at the end of
comment 15(c)-l; by revising the
heading and second sentence of
comment 15(c)-3; by revising comments
18(g) (2)-l, 18(m)-2,20(a)(2)-l: by adding
comment 20(a)(2)-2; by revising
comments 23(a)(l)-5,23(c)-3, and
23(f)—
4; and by adding comment app. D5, to read as follows:
Supplement I—Official Staff
Interpretations
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Subpart A—General
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Section 226.2— D efinitions a n d R ules o f
C onstruction
*
2(a) Definitions
*
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*
*
2(a)(20) "O pen-End C redit"
*
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*
4. F inance charge on an outstanding
balance. The requirem ent that a finance
charge may be com puted and im posed from
time to time on the outstanding balance
m eans that there is no specific am ount
financed for the plan for which the finance
charge, total of paym ents, and paym ent
schedule can be calculated. A plan m ay meet
the definition of open-end credit even though
a finance charge is not norm ally imposed,
provided the creditor h as the right, under the
plan, to impose a finance charge from time to
time on the outstanding balance. For
example, in some plana, such as certain
“china club" plans, a finance charge is not
imposed if the consum er pays all o r a
specified portion of the outstanding balance
within a given time period. Such a plan could
m eet the finance charge criterion, if the
creditor has the right to impose a finance
charge, even though the consum er actually
pays no finance charges during the existence
of the plan because the consum er takes
advantage of the option to pay the balance
3(b) C redit O ver $25,000 N ot Secu red b y R eal
P roperty or a D w elling.
*
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2. O pen-end credit. An open-end credit
plan is exem pt under S 226.3(b) (unless
secured-by real property or personal property
used or expected to be used as the
consum er's principal dwelling) if either of the
following conditions is met
• The creditor m akes a firm commitment to
lend over $25,000 with no requirem ent of
additional credit information for any
advances.
• The initial extension of credit on the line
exceeds $25,000.
If a security interest is taken a t a later time
in any real property, or in personal property
used or expected to be used a s the
consum er’s principal dwelling, the plan
would no longer be exem pt. The creditor
must comply with all of the requirem ents of
the regulation including, for example,
providing the consum er with an initial
disclosure statem ent. If the security interest
being added is in the consum er's principal
dwelling, the creditor m ust also give the
consum er the right to rescind the security
interest. (See the com m entary to § 226.15
concerning the right of rescission.)
3. C losed-end credit—subsequent changes.
A closed-end loan for over $25,000 may later
be rew ritten for $25,000 or less, or a security
interest in real property or in personal
property used or expected to be used as the
consum er’s principal dwelling m ay be added
to an extension of credit for over $25,000.
Such a transaction is consum er credit
requiring disclosures only if the existing
obligation is satisfied and replaced by a new
obligation m ade for consum er purposes
undertaken by. the sam e obligor. (See the
com m entary to § 226.23(a)(1) regarding the
right of rescission when a security interest in
a consum er's principal dwelling is added to a
previously exem pt transaction.)
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S ection 226.4— Finance Charge
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4(c) Charges E xcluded from th e Finance
Charge
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Paragraph 4(c)(4)
1. P articipation fe e s—perio d ic basis. The
participation fees mentioned in $ 226.4(c)(4)
do not necessarily have to be formal
mem bership fees, nor are they limited to
credit card plans. The provision applies to
any credit plan in which paym ent of a fee is a
condition of access to the plan itself, but it
does not apply to fees imposed separately on
individual closed-end transactions. The fee
may be charged on a monthly, annual, or
other periodic basis; a one-time, non
recurring fee im posed at the time a n account
is opened is not a fee that is charged on a
Federal Register / Vol. 52, No. 65 / Monday, April 6, 1987 / Rules and Regulations
periodic basis, and m ay not be treated as a
participation fee.
2. P articipation fe e s—exclusions. Minimum
monthly charges, charges for non-use of a
credit card, and other charges based on either
account activity or the am ount of credit
available under the plan are not excluded
from the finance charge by § 226.4(c)(4). Thus,
for example, a fee that is charged and then
refunded to. the consum er based on the extent
to which the consum er uses the credit
available would be. a finance charge. (See the
comm entary to § 226.4(b)(2).)
♦
*
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*
*
opening of the account that are paid prior to
the issuance of the first periodic statem ent
need not be disclosed on the periodic
statem ent. If, however, these charges are
financed as part of the plan, including
charges that are paid out of the first advance,
the charges m ust.be disclosed as part of the
finance charge on the first periodic statem ent.
However, they need not be factored into the
annual percentage rate. (See footnote 33 in
the regulatton.)
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Subpart B—Open-End Credit
1. Identification. In identifying any “other
charges’' actually im posed during the billing
cycle, the type is adequately described as
“late charge" or “mem bership fee," for
exam ple. Similarly, “closing costs'* or
“settlem ent costs,” foe exam ple, may be used
to describe charges im posed in connection'
with real estate transactions that are
excluded from the finance charge under
§ 226.4(c)(7), if the sam e term (such as
“closing costs") w as used in the initial
disclosures and if the creditor chose to
itemize and individually disclose the costs
included in th a t term. (See comment 6(b)—1 for
exam ples of “other charges*”).
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Section 226.5— G eneral D isclosure
R equirem ents
*
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5(b) Tim e o f D isclosures—5(b)(1) In itia l
D isclosures
1. D isclosure before the fir st transaction.
The rule that the initial disclosure statem ent
must be furnished “before the first
transaction" requires delivery of the initial
disclosure statem ent b efore the consum er
becom es obligated on the plan. For example,
the initial disclosures must be given before
the consum er m akes the first purchase,
receives the first advance, or pays any fees or
charges under the plan other than an
application fee or refundable m em bership fee
(see below). * * *
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Section 226.6—In itia l D isclosure S tatem ent
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•6(b) O ther Charges
7(h) O ther Charges
Section 226.12— S p ecia l C redit C ard
Provisions.
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12(d) O ffsets b y C ard Issu er P rohibited
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Paragraph 12(d)(2)
1. Secu rity in terest—lim ita tio n s. In order to
qualify for the exception stated in
§ 226:12(d)(2), a security interest must be
affirm atively agreed to by the consum er and
m ust be disclosed in the issuer’s initial
disclosures under § 226.6. The security
interest must not be the functional equivalent
of a right of offset; as a result, routinely
including in agreem ents contract language
indicating that consum ers are giving a
security interest in any deposit accounts
m aintained w ith the issuer does not result in
6(c.) S ecu rity In terests
a security interest that falls w ithin the
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exception in § 226.12(d)(2). For a security
2. Identification o f property. Identification interest to qualify for the exception under
of the collateral by type is satisfied by
§ 226.12(d)(2) the following conditions must
stating, for example, “m otor vehicle” or
be met:
“household appliances." (Creditors should be
• The consum er must be aw are that
aw are, however, that the federal credit
granting a security interest is a condition for
practices rules, as well as some state laws,
the credit card account (or for more favorable
prohibit certain security interests in
account terms) and m ust specifically intend
household goods.) The creditor may, at its
to grant a security interest in a deposit
option, provide a m ore specific identification
account. Indicia of the consum er's aw areness
(for exam ple, a model and serial number).
and intent could include, for example:
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—Separate signature o r initials on the
agreem ent indicating that a security
4. A d d itio n a l collateral. * * * (See comment
6(c)—2.)
interest is being given
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—Placem ent of the security agreem ent on a
separate page, or otherw ise separating the
Section 226.7—P eriodic Statem ent
security interest provisions from other
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contract and disclosure provisions
—Reference to a specific am ount of deposited
7(f) A m ount ofF in a n ce Charge
funds or to a specific deposit account
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nu m b er
6. Start-up fees* Points.'loan fees, and
• The security interest must be obtainable
sim ilar finance charges relating-to the
and enforceable by creditors generally. If
1. G eneral; exam ples o f o ther charges.
Under § 226.6(b), significant charges related
to the plan (that a re not finance charges)'
must also be disclosed. For exam pler ' * *
• Charges im posed in connection with real
estate transactions such as title, appraisal,
and credit report fees (See § 226.4(c)(7)) * * *
2. E xclusions. The following are exam ples
of charges that are not "other charges": * * *
* T axes and filing or notary fees excluded
from the finance charge under § 226.4(e).
10879
other creditors could not obtain a security
interest in the consum er's deposit accounts to
the sam e extent as the card issuer, the
security interest is prohibited by
§ 226.12(d)(2).
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Section 226.15—R ight o f R escissio n
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15(c) D elay o f C reditor's P erform ance
1. G eneral rule. Until the rescission period
has expired and the creditor is reasonably
satisfied that the consum er h as not rescinded,
the creditor m ust not, either directly or
through a third party:
• Disburse advances to the consumer.
• Begin performing services for the
consum er.
.
• Deliver m aterials to the consumer,
A creditor may, however, continue to allow
transactions under an existing open-end
credit plan during a rescission period that
results solely from the addition of a security
interest in the consum er’s principal dwelling.
(See comment 15(c)-3 for other actions that
m ay be taken during the delay period.)
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3. A ctio n s during th e d ela y period. Section
226.15(c) does not prevent the creditor from
taking other steps during the delay, short of
beginning actual perform ance. Unless
otherw ise prohibited, such as by state law.
the creditor may, for example:
• Prepare the cash advance check.
• Perfect the security interest.
• Accrue finance charges during the delay
period.
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Subpart C—Closed-End Credit
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Section 226.18— C ontent o f D isclosures
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18(g) P aym ent Schedule
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Paragraph 18(g)(2)
1. A b b revia ted disclosure. The creditor
may disclose an abbreviated paym ent
schedule when the amount of each regularly
scheduled payment (other than the first or
last payment) includes an equal am ount to be
applied on principal and a finance charge
computed by application of a rate to the
decreasing unpaid balance. This option is
also available when m ortgage-guarantee
insurance premiums, paid either monthly or
annually, cause variations in the am ount of
the scheduled paym ents, reflecting the
continual decrease or increase in the
premium due. In addition, in transactions
w here paym ents vary because interest and
principal are paid at different intervals, the
two series of paym ents may be disclosed
separately and the abbreviated paym ent
schedule may be used for the interest
paym ents. For example, in transactions with
fixed quarterly principal paym ents and
monthly interest paym ents based on the
outstanding principal balance, the amount ot
10880
Federal Register / Vol. 52. No., 65 / Monday, April 6, 1987 / Rules and Regulations
th e interest paym ents wiH change quarterly
as principal declines. In such cases the
creditor may treat the interest an d principal
paym ents as two sep arate series o f
paym ents, separately disclosing the number,
amount, and due dates of principal payments*
and. using the abbreviated paym ent schedule,
the number, am ount, and due dates of
interest paym ents. This option m ay be used
when interest and principal are scheduled to
be paid on the sam e date of the month as
well as on different d a te s of the m onth. T he
creditor using this alternative must disclose
the dollar am ount of the highest and low est
paym ents and m ake reference to the
variation in payments:.
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18(m) S ecu rity In terest
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2. N onpurchase m oney transactions. In
nonpurchase m oney transactions, the
property subject to the security interest must
be identified b y item or type. T his disclosure
is satisfied by a general disclosure of the
category of property subject to the security
interest, such as "m otor vehicles,”
“securities,” "certain household items,’* o r
“household goods.” (Creditors should be.
aw are, how ever, that the federal credit
practices rules, a s well a s some s ta te laws,
prohibit certain security interests in'
household goods.) At the creditor's option,
how ever, a m ore precise identification of the
property or goods may b e provided.
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Section 226.20—Subsequent D isclosure
R equirem ents 20(a) R efinancings
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Paragraph 20(a)(2)
1. A nnual percentage rate reduction. A
reduction in the annual percentage rate with
a corresponding change in the paym ent
schedule is not a refinancing. If the annual
percentage rate is subsequently increased
(even though it rem ains below its original
level) and the increase is effected in such a
w ay that the old obligation is satisfied and
replaced, new disclosures m ust then be
m ade.
2. C orresponding change. A corresponding
change in the paym ent schedule to implement
a lower annual percentage ra te would be a
shortening-of the maturity, or a reduction in
the payment am ount or the num ber of
paym ents of a n obligation. The exception in
§ 226.20(a)(2) does not apply if th e m aturity is
lengthened, o r if the paym ent am ount o r
num ber of paym ents is increased beyond th at
rem aining on th e existing transaction.
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Section 22023— R ight o f R escissio n
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23(a) C onsum er's R ight to R escin d
Paragraph 2 3 (a )(lf
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5. A d d itio n o f a se c u rity in te re st U nder
footnote 47, the addition o f a security interest,
in a consum er's principal dw elling to an
existing obligation is rescindable even if the
existing obligation is not satisfied and
replaced by a new obligation, a n d even if the
existing obligatioa w as previously exem pt
(because it w a s credit, over S2&000 not.
secured by real property of a consum er's
principal dwelling). The right of rescission
ap p lies only to the ad d ed security interest,
however, a n d n o t to th e original obligation. In
those situations, only the J 226.23(b) notice
need b e deliv ered not new m aterial
disclosures; the rescission period will begin
to run from the delivery of the notice.
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23(c) D elay o f C reditor's P erform ance
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3. Actions daring the d e la y period. Section
226.23(c) does not prevent the creditor from
taking other steps during the delay, short o f
beginning actual perform ance. Unless
otherw ise prohibited, such a s by sta te law,
the creditor may, for exam ple:
• Prepare the loan check.
• Perfect the security interest.
• Prepare to discount or assign the
contract to a third party.
• Accrue finance charges during the delay
period.
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23(f) E xem pt T ransactions
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4. N ew advances. The exem ption in
§ 226.23(f)(2) applies only to refinancings
(including consolidations) by the original
creditor. If the refinancing involves a new
advance of money, the am ount of the new
a d v a n c e ia rescindable. In determ ining
w hether there is a new advance, a creditor
m ay rely on the am ount financed, refinancing
costs, and other figures sta te d in the latest
T ruth in Lending disclosures provided to the
consum er a n d is not required to use. for
exam ple, m ore precise inform ation that m ay
only becom e available w hen the loan is
closed. For purposes of the right of rescission*
a new advance does not include am ounts
attributed solely to the costs of the
refinancing. T hese am ounts would include
§ 226.4(c)(7) charges (such a s attorneys fees
and title exam ination and insurance fees, if
bona fide a n d reasonable in am ount), a s well
a s insurance prem ium s and o th er charges
that are not finance charges. (Finance
charges o n the new transaction—points, for
exam ple—w ould not be considered in
determ ining w hether there is a new advance
of money in a refinancing since finance
charges are not p art of the am ount financed.)
T o illustrate, if the sum of the outstanding
principal balance plus the earned unpaid
finance charge is $50,000 an d the new am ount
financed is $61,000. then the refinancing
would be exem pt if th e extra $1,000 is
attributed solely to costs financed in
connection w ith the refinancm g that are not
finance charges. Of course, if new advances
of money are made (for exam ple, to pay for
hom e improvem ents) and the consum er
exercises the right of rescission, the
consum er m ust b e placed in the sam e
position a s he o r she w as in prior to entering
into the n ew credit transaction. Thus, all
am ounts of m oney (which w ould include a ll
the costs of the refinancing) already p a id by
the-consumer to the creditor or to a third
party as p art of the refinancing w ould h a v e to
be refunded to the consumer. (See the
comm entary to § 226.23(d)(2) for a discussion
of refunds to consum ers.) A m odel rescission
notice applicable to transactions involving
new advances appears in A ppendix H.
» • » ■ » * #
Appendix D—M ultiple-Advance Construction
Loans
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5. In terest reserves. In a m ultiple-advance
construction loan, a creditor may establish an
"interest reserve" to ensure that interest is
paid as it accrues by designating a portion o f
the loan to be used for paying the interest
that accrues on the loan. An interest reserve
is not treated a s a prepaid finance charge,
w hether the interest reserve is th e sam e a s o r
different from the estim ated interest figure
calculated under Appendix D.
• If a creditor permits a consum er to make
interest paym ents as they become due. the
interest reserve should be disregarded in the
disclosures and calculations under Appendix
D.
• If a creditor requires the establishm ent of
an interest reserve and autom atically deducts
interest paym ents from the reserve am ount
rather than allow the consum er to make
interest paym ents a s they becom e due, the
fact th at interest will accrue on those interest
paym ents a s well a s the other loan proceeds
must be reflected in the calculations and
disclosures. To reflect the effects of such
compounding, a creditor should first calculate
interest on the commitment amount
(exclusive of th e interest reserve)- a n d then
add the figure obtained by assuming that onehalf of that interest is outstanding at the
contract interest rate for the entire
construction period. For exam ple, using th e
exam ple show n under paragraph A, part I of
Appendix O. the estim ated interest w ould b e
$1,117.68 ($1099.75 plus an additional $23.93
calculated by assuming half of $1093.75 is
outstanding a t the contract interest rate for
the entire construction period), an d th e
estim ated annual percentage rate w ould be
21.18%.
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Board o f Governors of the Federal Reserve
System. March 31,1987.
William W. Wiles,
S ecreta ry o f the Board.
[FR Doc. 87-7410 Filed 4-3-87; 8:45 ami
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