The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Federal R eserve Bank
OF DALLAS
ROBERT
D. M c T E E R , J R .
P R E S ID E N T
A N D C H IE F E X E C U T I V E O F F I C E R
September 4, 1992
DALLAS, TEXAS 7 5 2 2 2
Notice 92-75
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Final Rule Regarding Home Equity
Disclosures that Affect Regulation Z
(Truth in Lending)
DETAILS
The Federal Reserve Board has announced the adoption of a final rule
regarding home equity disclosures that affect Regulation Z (Truth in Lending).
The final rule resolves a conflict between the home equity rules and
laws dealing with loans to executive officers. This rule is effective
immediately, but compliance is optional until October 1, 1993.
While the Board requested public comment on rules that set forth the
way creditors disclose discounted initial rates and certain payment examples
for home equity lines, no changes were adopted to these rules.
ATTACHMENT
Attached is a copy of the Board’s notice as it appears on pages
34676-81, Vol. 57, No. 152, of the Federal Register dated August 6, 1992.
MORE INFORMATION
For more information, please contact Eugene Coy at (214) 922-7480.
For additional copies of this Bank’s notice, please contact the Public Affairs
Department at (214) 922-5254.
Sincerely yours,
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastare (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
34676
Federal Register / Vol. 57, No. 152 / Thursday, August 6, 1992 / Rules and Regulations
required by federal law; and not
changing the rules in Regulation Z that
set forth the way creditors disclose
discounted initial rates and certain
payment examples for home equity
lines. The rules in question relate to the
Home Equity Loan Consumer Protection
Act of 1988, which requires creditors to
provide consumers with information for
open-end credit plans secured by the
consumer’s dwelling, and places certain
substantive limitations on the way in
which those lines may be structured.
With regard to the amendment,
depository institutions that currently
include such a provision in their
executive officer’s contracts will not be
affected by this amendment. The
approach adopted by the Board for
disclosure of the discounted initial rate
and certain payment examples has been
examined by the U.S. Court of Appeals
for the District of Columbia Circuit in
recent litigation, and remanded to the
Board for further consideration. After
such reconsideration and analysis of the
comment letters, the Board has decided
to retain the existing rules.
EFFECTIVE DATE: July 29,1992, but
compliance optional until October 1.
1993.
FOR FURTHER INFORMATION CONTACT:
Truth In Lending; Home Equity
Leonard Chanin, Senior Attorney,
Division of Consumer and Community
Affairs, at (202) 452-3667 or (202) 4522412; for the hearing impaired only,
contact Dorothea Thompson,
Telecommunications Device for the
Deaf, at (202) 452-3544, Board of
Governors of the Federal Reserve
System, Washington, DC 20551.
Disclosure Rules
SUPPLEMENTARY INFORMATION:
AGENCY: Board of Governors of the
(1) Background
FEDERAL RESERVE SYSTEM
12 CFR Part 226
fRegulation Z; Docket No. R-0743]
Federal Reserve System.
ACTION: F in a l rule.
SUMMARY: The Board is amending
Regulation Z (Truth in Lending) to
provide that depository institutions may
retain the right to demand payment of a
home equity line of credit extended to
their own executive officers when
! For purposes of this regulation the proposed
IEEE 279 became "in effect" on August 30,1968, and
She revised issue IEEE 279—1971 became “in effect"
on June 3,1971. Copies may be obtained from the
Institute of Electrical and Electronics Engineers,
United Engineering Center, 345 East 47th St.. New
York. NY 10017. Copies are available for Inspection
at the Commission's Technical Library, Phillips
Building, 7920 Norfolk Avenue, Bethesda, Maryland.
8 Where an application for a construction permit
is submitted in four parts pursuant to the provisions
of | 2.101(a-l) and Subpart F of Part 2 of this
chapter, “the formal docket date of the application
for a construction permit" for purposes of this
section is the date of docketing of the information
required by § 2.101(a-l), (2), or (3), whichever is
later.
The Home Equity Loan Consumer
Protection Act was enacted in
November 1988. On January 23,1989, the
Board published for comment a
proposed rule to implement the statute
(54 FR 3063) and on June 9,1989,
adopted a final rule (54 FR 24670). .
Compliance with the regulation was
mandatory as of November 7,1989.
On November 1,1989, Consumers
Union filed suit against the Board
challenging certain aspects of the
regulation.1 The U.S. District Court for
1 Among other issues, Consumer Union
challenged the provision in the regulation permitting
creditors to suspend advances of credit during any
period the rate cap is reached. Consumers Union
also challenged the part of the regulation permitting
creditors to give disclosures about any “repayment”
period—that is, when advances are no longer made
and the consumer is paying off the amount
borrowed—at the time the repayment period begins,
rather than at the time of application. In March 1990
Continued
Federal Register / Vol. 57, No. 152 / Thursday, August 6, 1992 / Rules and Regulations
the District of Columbia issued a
decision in favor of the Board on several
aspects of the lawsuit in May 1990.
Consumers Union v. Federal Reserve
Board (738 F. Supp. 337). Consumers
Union appealed that decision to the U.S.
Court of Appeals for the District of
Columbia Circuit In July 1991. the Court
of Appeals issued its opinion, deciding
in favor of the Board on four of the
issues presented on appeal, and
remanding to the Board for further
consideration two other issues.
Consumers Union v. Federal Reserve
Board (938 F.2d 266). The two issues
deal with how creditors disclose a
“teaser” or initial discounted rate, and
the payment examples that must be
provided in the preapplication
disclosures. On December 30,1991, the
Board published a proposed rule seeking
comment on whether the regulation
should be amended (56 FR 67233). The
Board also requested comment on a
third issue, unrelated to the litigation,
concerning the conflict between section
22 of the Federal Reserve Act. which
regulates member bank loans to
executive officers, and the substantive
rales contained in the home equity
statute.
The Board received 84 comments on
the proposal. Based on a review of the
comments and further analysis the
Board is revising the regulation relating
to credit extended to executive officers,
but is leaving unchanged the provisions
dealing with discounted rates and the
payment examples.
Section 105(d) of the Truth in Lending
Act provides that amendments to
Regulation Z shall have an effective
date of October 1, and must be
promulgated at least six months before
that date. Thus, in the present case the
Board believes an October 1,1993
effective date is required by the statute.
(2) Amendments to Regulation Z
(i) Teaser rate provision. The home
equity statute provides that creditors
must state any initial “teaser" or
discounted rate in the preapplication
disclosures. Specifically, the statute
states |Ijf an initial annual percentage
rate is offered which is not based on an
index—
(<! A statement of such rate and the
period of time such initial rate will be in
effect.
In the final regulations implementing
the statute, the Board did not require
the Board published a proposed rule to amend <he
regulation relating to the rate cap and delayed
timing issues. {55 FR 10465, March 21.1980) In
September 1990 the Board adopted a final rule {55
FR 38310. September IS, 1990) (correction notice at
55 FR 39538, September 27,1990) on these two
issues.
that the exact amount of the discounted
rate be stated. Instead, creditors were
required to disclose the fact that the
initial rate is discounted, state the
period of time the rate will be in effect,
and alert consumers to “ask about” the
current discounted rate. In its briefs to
the District Court and the Court of
Appeals, the Board stated that the
regulation diverged from the statutory
language in reliance on the Board's
“exception”' authority.
The Truth in Lending Act grants the
Board broad authority in implementing
the statute. Section 105 of the act
provides that implementing regulations
may contain such classifications,
differentiations, or other provisions, and
may provide for such adjustments and
exceptions for any class of transactions,
as in the judgment o f the Board are
necessary or proper to effectuate the
purposes of [the Truth in Lending Act],
to prevent circumvention or evasion
thereof, or to facilitate compliance
therewith. (Emphasis added.)
The Court of Appeals noted that the
issue of the Board’s exception authority
had been raised for the first time during
the course of the litigation, and had not
been passed upon in the first instance
by the Board itself. The Court thus
remanded this portion of the regulation
to the Board, to allow it to identify the
scope of its exception authority under
the Truth in Lending Act, to decide how
broad the “class of transactions” can be
that is exempted, and to decide whether
an exception was necessary or
appropriate in the case of the teaser rate
provision.
In December 1991, the Board solicited
comment on the teaser rate disclosure
and whether the regulation should be
amended to require disclosure of the
exact teaser rate in the early
disclosures. The Board also requested
comment on whether an exception is
necessary or appropriate in the case of
the discounted initial rate disclosure.
The Board asked commenters to explain
why stating the amount of time any
discount is in effect (which is required
by the regulation) does not raise the
same problems as requiring the amount
of the discount to be stated. The Board
also solicited comment on whether the
use of ranges to state the discount
would be desirable.
Of the sixty-seven commenters who
discussed the discount issue, fifty-seven
stated the Board should not change the
rules dealing with initial discounted
rates. A number of commenters stated
that if creditors were required to state
the exact amount of the discount in the
early disclosures they might discontinue
offering such a feature, due to the need
34677
to frequently update forms. Several
commenters stated that reprinting
disclosures every time a discount
changed would impose significant costs,
substantially increase the potential for
errors in printing and distributing new
forms, and raise additional liability
risks.
Several commenters noted that in a
rapidly changing rate environment
creditors would have to update the
preprinted forms on a frequent basis,
imposing significant printing,
administrative, and distribution costs
that would be passed on to consumers.
Commenters stated that these increased
costs greatly outweighed any benefits
consumers might derive from receiving
the specific discount. Commenters also
noted practical problems that would
arise if the exact amount of the discount
had to be stated. Commenters stated
that it could take months to prepare the
preprinted disclosures and, if the
discount had to be preprinted, the
institution might want to change the
discount by the time the new forms were
ready for distribution.
Ten commenters stated that the Board
should change its rule, and require
creditors to state the exact amount of
the discount in the preapplication
disclosures. In general, these
commenters felt consumers needed to
know the precise amount of the discount
at this early stage to be able to
accurately compare accounts. These
commenters stated that without this
figure consumers could not determine
which of two (or more) plans offers the
better deal.
Based on a review of the comment
letters and further analysis the Board is
retaining the current rule in the
regulation dealing with initial
discounted rates. The Board believes the
current approach provides the
information that is most useful to
consumers about discounted rates (that
is, the fact that the initial rate is
discounted, the temporary nature of the
discount, and a reminder to ask for
current rates). The Board believes this
approach fulfills Congress’ intent to
ensure that applicants know the most
important features of home equity lines,
and is an appropriate case for making
an adjustment to the statutory provision.
The Board believes that requiring
creditors to state the exact amount of
any initial discounted rate in the
preapplication disclosures could cause
consumers to suffer adverse
consequences.
The Board believes if creditors were
required to state the exact amount of the
discount, many creditors might eliminate
this feature from their plans, thus
34678
Federal Register / Vol. 57, No. 152 / Thursday, A ugust 6, 1992 / Rules and Regulations
reducing choices (particularly lower-cost
alternatives) available to consumers.
For those that continued to offer
discounted plans, the Board believes the
costs incurred in complying (which
would ultimately be paid by the
consumer) would vastly exceed the
benefits consumers derive from the
disclosure.
The Board notes that the regulation
requires creditors to inform consumers
that the rate is temporary and the length
of time it is in effect with the early
preprinted disclosures. In addition,
creditors must disclose to consumers the
exact amount of any discounted initial
rate with other information given prior
to consummation, under § 226.6 of the
regulation. Finally, lenders have an
incentive to let the consumer know the
amount of the discount since the
purpose of a discounted rate program is
to encourage consumers to open a home
equity line.
As mentioned earlier, the Board asked
commenters to explain why stating the
amount of the discount raised a problem
when creditors must state the time a
discount is in effect. Several
commenters stated that providing the
time a discount is in effect was not a
problem since programs are typically
offered for a standard period of time,
such as six months or one year.
Commenters distinguished this
requirement from stating the exact
discount since the latter figure could and
often did change frequently.
The Board also solicited comment on
whether consumers would benefit by
having the discount stated as a range.
Commenters stated that providing a
range for a discount might be more
workable for creditors than stating the
exact amount of the discount, but would
be of little benefit to the consumer, since
the consumer would have to contact the
creditor anyway to find out the exact
amount of the discount. The Board
believes this approach would provide
limited value to consumers, and is not
adopting it.
(ii) Payment examples issue.The
statute requires three types of payment
examples to be provided for home
equity plans: (1) An example showing
the minimum periodic payment and
amount of time needed to repay the line,
based on a $10,000 balance and a recent
annual percentage rate (the "minimum
payment" example); (2) a statement of
the minimum periodic payment based on
a $10,000 balance when the maximum
annual percentage rate is in effect (the
“worst case” example); and (3) an
historical table, based on a $10,000
extension of credit, showing how annual
percentage rates and payments would
have been affected by index value
changes over the most recent 15 year
period (the "historical example”). The
statute provides that the worst case
example and the historical example
must be stated for “each repayment
option” under the plan.
In implementing the statute, the Board
chose to allow creditors to provide
representative examples of the various
payment options offered, rather than
requiring separate examples for each
payment option. (See comments
5b(d)(5)(iii)—(2), 5b(d)(12)(x)-l, and
5b(d)(12)(xi}-7 of the Official Staff
Commentary.) Under this rule, no matter
how many payment options were
offered, creditors would never have to
disclose more than three minimum
payment examples, three worst case
examples, and three historical
examples. In its briefs to the District
Court and Court of Appeals the Board
noted that requiring a worst case
example and historical example for
every payment option offered would
result in "information overload" and
would likely lead lenders to reduce the
options offered to consumers. The briefs
argued that the Board adopted its rule
pursuant to its exception authority.
Again, the Court of Appeals remanded
this issue to the Board because the issue
of the Board’s exception authority under
the Truth in Lending Act had not been
developed in the rulemaking record, but
was raised only in litigation.
In its December 1991 proposal, the
Board solicited comment on whether the
payment example rule should be revised
to require an example for each payment
option. Sixty-four commenters
addressed this issue. Sixty of them
stated that Board should not amend the
regulation to require payment examples
for all payment options offered. Four
commenters stated that the Board
should require such examples and
argued that consumers needed such
information to make informed decisions
about home equity plans.
Based on a review of comment letters
and further analysis, the Board is
retaining the payment example rules as
written. The Board believes the
approach adopted provides consumers
with the information needed to compare
accounts. The use of representative
examples, when coupled with a
complete description of the minimum
payment requirements and other
disclosures, provides consumers with
the most useful information.
The Board believes if creditors were
required to provide a 15-year historical
example and “worst case" example for
every payment option offered, many
creditors would eliminate choices of
payment plans provided to consumers.
A number of commenters stated that
they would reduce options available if
they had to provide a 15-year historical
example, minimum payment example
and worst case example for every
option, due to the expense, risk of error,
and potential liability involved in
providing such information. For
example, one commenter stated it
permits consumers to make payments of
interest and a fixed amount of
principal—with the consumer deciding
how much principal to pay. If this
creditor had to provide three payment
examples for each option given to the
consumer, this could require hundreds of
examples.
For those creditors that choose to
provide numerous payment choices, the
Board believes providing three examples
for each option would produce an
overwhelming amount of information.
Several commenters pointed out this
fact. The Board believes in such cases
consumers may be overwhelmed with
the sheer amount of information, and
not read the disclosures, or not read the
most important pieces of information,
such as the index used to make rate
adjustments. Such a result would be
antithetical to the Congress’ purpose in
enacting the law. Therefore, the Board
believes this is an appropriate case for
the exercise of its authority to make an
exception to the statutory requirements.
The Board recognizes that examples,
by their nature, cannot capture precisely
what a particular consumer’s payments
under a particular plan will be. The
examples are based on an assumed
$10,000 extension of credit. Obviously, if
a consumer’s line of credit is greater
than that, the payment examples will
not reflect his or her actual payments,
regardless of how many examples are
provided. Examples are illustrative, and
providing a huge number of examples
will not necessarily assist consumers in
choosing a plan.
The Board also notes that the
regulation requires creditors to
narratively describe every payment
option given to consumers, and this
ensures that consumers have a full
description of the choices offered. This
information describing the payment
provisions is given a second time to
consumers before they open the plan.
(See § 226.6(e)(2).)
(iii) Use o f Exception Authority. As
mentioned earlier, section 105 of the
Truth in Lending Act grants the Board
broad authority in implementing the
statute. The Supreme Court has
recognized this broad delegation of
authority to the Board. The Court has
stated: “(b]ecause of their complexity
and variety * * * credit transactions
defy exhaustive regulation by a single
Federal Register / Vol. 57, No. 152 / Thursday, August 8, 1992 / Rules an d Regulations
statute. Congress therefore delegated
expansive authority to the Federal
Reserve Board to elaborate and expand
the legal framework governing
commerce in credit.”2
The Board is using its “exception
authority" to address three
circumstances: disclosure of information
about an initial discounted rate,
disclosure of a historical example for
payment options, and disclosure of the
“worst case” example for payment
options. The Board believes these
exceptions are necessary and proper to
accomplish the purposes of the act and
facilitate compliance and fall within the
limits on its authority to make
exceptions.
The Board believes th at while its
authority to make exceptions is broad,
the authority does have limits. The
Board does not take the view that it is
permitted to radically undermine the
Congress' purpose in enacting key
elements of a statutory scheme, even if
the Board strongly disagreed with the
wisdom of the Congress’ decision. The
Board does believe it is authorized to
fashion rules that are faithful to the
essential purposes of the law and that
take account of the needs and capacity
of both consumers and creditors.
The home equity statute and
implementing regulation require
creditors to provide a significant amount
of information to consumers about the
home equity line offered by the creditor.
Depending on the type of features of a
specific creditor’s plan (such as multiple
payment options and variable rate
provisions] over 50 facts may be
required to be disclosed to consumers
(in addition to a 15-year historical
example which shows index values,
annual percentage rates and payments).
The Board believes that use of its
exception authority is warranted in die
case of the discount issue for several
reasons- First, if the exact discount were
required to be disclosed, the Board
believes many creditors would stop
offering discounted plans. Due to the
critical compliance problems—the
inability to provide updated rate
information with the preprinted
disclosures to respond to market and
competitive conditions—a result of such
a requirement would likely be fewer
choices to consumers and, in particular,
the loss to consumers of lower rate
8 Ford Motor Credit Co. v. MilhoUin, 444 U.S. 535.
538^00 (1960^ The Court also noted that: “Itjhe
concept of'roeaningfal disclosure' that animates
TiLA ' * ' cannot fee applied in the abstract.
MeaoingM disclosure does not mean mote
disclosure. Esther, it describes a balance between
competing consideration of complete disclosure
“ * * and the Tieed to avoid * * ’ ^information
overload).' "Id- at 538 (emphasis in original}.
34679
The Board believes use of its
exception authority is warranted in the
case of the 15-year historical example
and worst case example for several
reasons. First, the Board believes that if
creditors were required to provide these
examples for every payment option
offered, the result would be that many
lenders would reduce the payment
choices provided to consumers. Due to
the complexity and costs in complying,
and the increased risk of error and
liability, many creditors would eliminate
choices currently offered to consumers.
Second, the Board believes providing a
multitude of examples would likely
obscure important information, such as
the index used for the plan, and for
those creditors that choose to continue
offering multiple payment options,
consumers might not read the
voluminous disclosures or might miss
the most important terms of the plan.
The Board believes providing multiple
payment examples, beyond those
already required by the regulation,
would overload the consumer with
information.® Third, the Board believes
the costs of complying with such a rule
would be tremendous and greatly
exceed any consumer benefits. This is
especially true since the examples are
not intended to demonstrate the exact
payment that will be made by the
consumer under the plan, but rather to
provide a general sense of the impact of
rate changes on the minimum payments.
(iv) Home equity lines and executive
offices. The home equity statute
provides that a creditor may not
terminate and demand payment of a line
of credit except in three specified
circumstances: Fraud, failure of the
consumer to make payments, and action
by the consumer that impairs the
security for the plan. The regulation
implementing this provision provides
that a creditor may not include in its
contract a provision permitting it to
3 While disclosures must be accura te whan
terminate and accelerate the balance
provided, creditors are not required to guarantee
due
except for these situations. (See
any tern s for the plan, as is reflected by the
§ 22S.5b(f}(2) and the accompanying
disclosure in § 226.5b(d)(23!i3 concerning terms
subject to change.
Official Staff Commentary.)
* In this case, consumers would likely have to call
Section 22(g) of the Federal Reserve
fee institution to ensure that the rate is still
Act establishes rules relating to loans to
available. Alternatively, an institution could be
executive officers by member banks.
required to guarantee the rate and include a date
The law provides that a member bank
identifying how long it is available. Since
discmmted rates are a function of competitive and
may extend credit to its own executive
other factors, however, it might be very difficult for
officers provided “it is on condition that
an institution to accurately predict Jiow long a rate
will be made available to the public. This could lead it shall become due and payable on
institutions to commit to only a short time period, in demand of the bank” any time the
order to retain the option of offering a less favorable person is indebted to any other bank in
alternatives. The Board believes some
creditors would eliminate this option
from their plans due to the increased
risk of error and liability. Second,
consumers might be misled if they rely
on a discounted rate that turned out to
be effective for only a short time after
the disclosures were provided.3 If an
exact figure were given, a consumer
would receive information that is
accurate when provided, but the
discount could change if the consumer
did not apply for the plan soon after
receiving the disclosures.4
Third, the Board believes the key
information the consumer needs is not
the initial rate, but the fact that it is only
temporary. Placing too much emphasis
on the initial rate could diminish the fact
that such a rate cannot be relied on for
the long term. Finally, costs of
complying with such a rule would be
significant. Forms might have to be
frequently changed at great expense to
creditors. For those that continued to
offer such plans the Board believes the
costs of complying with such rules
would greatly exceed any consumer
benefits.
With regard to the rule dealing with
payment examples, the Board is making
an adjustment for two categories of
payment options.5 For that class of
transactions that permit payment of a
fixed percentage or fixed fraction of the
outstanding balance, the Board is not
requiring a 15-year historical example
and .worst case example for every
possible payment choice within that
category, but just one representative
example. Similarly, for that class of
transactions that permit payment of. for
example, a specified dollar amount plus
accrued finance charges, the Board is
not requiring a 15-year historical
example and worst case example for
every possible payment choice within
that category.
discount in Sight of competitive or market
conditions. Consumers would derive little benefit
from having a discounted rate disclosed if they
ultimately had to call institutions to verify the
current rate anyway.
5 The Board is not exempting that class of
payment plans that permit payment of only accrued
finance cterges {“ interest-only” transactions}.
“ it is worth noting that the information required
by Regulation Z Is in addition to information a
creditor includes in its contract with the consumer,
the deed accompanying the transaction, any stats
law-mandated disclosures, and other federal
disclosures.
34680
Federal Register / Vol. 57, No. 152 / Thursday, August 6, 1992 / Rules and Regulations
an amount in excess of that prescribed
by the appropriate federal banking
agency. Shortly after the Board
considered the current proposal (but
prior to publication in the Federal
Register), the Federal Deposit Insurance
Corporation Improvement Act (FDICIA)
of 1991 was enacted. Section 306 of
FDICIA provides that the provisions in
section 22(g) of the Federal Reserve Act
apply to savings associations and
nonmember insured banks. Thus,
member banks, savings associations and
nonmember insured banks that extend
credit to their executive officers must
retain the ability to call the loan in the
circumstances set out in section 22(g) of
the Federal Reserve Act.7
Regulation O (12 CFR part 215), which
implements the Federal Reserve Act,
provides that a member bank making
loans to any of its executive officers
shall retain the right to call the loan any
time the officer is indebted to any other
bank in excess of 2.5% of the member
bank's capital and unimpaired surplus
or $25,000 (whichever is higher), but in
all cases any amount over $100,000.®
The statute and implementing regulation
are intended to limit the risks of insider
lending and to implement important
safety and soundness policies.
If the home equity statute and section
22(g) of the Federal Reserve Act (and
section 306 of FDICIA) were given full
effect, they could be read as effectively
prohibiting home equity lines by
member banks, savings associations and
insured nonmember banks to their
executive officers. The home equity
statute prohibits calling a loan except in
the circumstances specifically set forth
in the statute. Section 22(g) of the
Federal Reserve Act (and section 306 of
FDICIA) prohibits member banks,
savings associations and insured
nonmember banks from making loans to
executive officers unless the institutions
retain the ability to demand payment of
the loan in certain circumstances. The
home equity statute does not recognize
the condition as a permissible reason to
call a line of credit. Thus, if both laws
were given full effect, member banks
’ On March 4,1992, the Federal Deposit Insurance
Corporation amended its rules to provide that, with
certain exceptions, the rules in Regulation O apply
to insured nonmember banks (57 FR 7647). On April
9,1992, the Office of Thrift Supervision proposed a
rule to implement the provision in FDICIA dealing
with loans to executive officers of savings
associations (57 FR 12232).
• Subsequent to publication of the proposal to
amend Regulation Z, the Board proposed to amend
Regulation O to implement amendments to FDICIA.
On May 28,1992, the Board published a fmal rule
amending Regulation O. (57 FR 22417.) Among other
changes, a technical revision was made to
S 215.5(d)(4) to clarify that member banks must “in
writing" provide for the ability to call a loan to an
executive officer.
and savings associations could not offer
home equity lines to their executive
officers.
The Board requested comment on
whether the home equity regulation
should be amended to permit banks to
include a call feature in their contracts
for home equity lines for executive
officers, and exercise that feature as
provided in section 22 of the Federal
Reserve Act and implementing
Regulation O. Based on a review of the
comment letters and further analysis,
the Board is modifying the regulation to
permit depository institutions to include
a demand provision in home equity lines
to executive officers, as provided in the
Federal Reserve Act and FDICIA. The
Board believes that the Congress, in
enacting the home equity statute, did not
intend to override the provisions in the
Federal Reserve Act dealing with
demand provisions in loans made to
executive officers. This idea is
buttressed by the fact that the Congress
recently enacted FDICIA which
extended the important safety and
soundness policies contained in section
22(g) of the Federal Reserve Act to
savings associations and insured
nonmember banks. There is no
suggestion in the legislative history of
the home equity statute that the
Congress intended to repeal section
22(g) of the Federal Reserve Act and
prohibit banks from offering home
equity lines to their executive officers.
Indeed, enactment of section 306 of the
FDICIA supports the idea that the
Congress intended for this provision to
continue in full force in spite of
enactment of the home equity statute.
A number of persons commented on
whether the home equity provisions
should override the policies contained in
section 22(g) of the Federal Reserve Act.
All commenters but one believed the
policies in the Federal Reserve Act,
dealing with safety and soundness,
should take precedence over the home
equity protections. Those commenters
stated that they favored a narrow
exception to the home equity rules for
executive officers, and that an exception
was necessary and appropriate to
effectuate the policies of the Federal
Reserve Act. The one commenter
opposing the Board’s action stated that
this was an inappropriate action to be
taken by the Board, and that the
Congress itself should make this
determination.
The Board is modifying the home
equity rules to provide that member
banks, savings institutions and insured
nonmember banks can include a
provisions in their credit contracts with
executive officers granting the right to
call a home equity line of credit to the
extent required by section 22 of the
Federal Reserve Act and section 306 of
FDICIA. The final regulation permits, as
did the proposal, all depository
institutions, and not solely member
banks, to use the exception regarding a
demand feature. While current federal
law (in the Federal Reserve Act and
FDICIA) is limited to member banks,
savings associations and insured
nonmember banks, the Board has used
the broader category of depository
institutions for ease of reference, and in
the event any other federal law or
regulation is enacted that requires other
institutions to retain the ability to call
credit extended to executive officers.
The home equity rules will ensure that
the same rules apply equally to all
depository institutions.
The creation of an exception to the
home equity rules accommodates the
express terms of section 22(g) of the
Federal Reserve Act and section 306 of
FDICIA. This approach gives effect to
the policies contained in the Federal
Reserve Act, and at the same time
creates a very limited exception to the
home equity statute. The Board also
believes its exception authority under
the Truth in Lending Act is consistent
with this modification of the home
equity rules to permit depository
institutions to include a demand feature
in lines of credit made to executive
officers. Without this modification, the
Board believes some institutions may
not make lines available to their
executive officers. By clarifying that
institutions may make such lines
available to their executive officers, the
Board believes it is ensuring some
consumers access to such credit, which
may not have been offered previously to
them.
The regulation reflects the fact that
institutions that wish to offer home
equity lines to their executive officers
must include such a provision in their
home equity agreements with those
officers. The Board has added specific
language to the regulation to expressly
require this condition in the credit
contract.® Of course, an institution may
only have a demand feature as broad as
that required by the Federal Reserve
Act, FDICIA and their implementing
regulations in its home equity lines with
executive officers. A broader demand
• While Regulation O requires that this provision
must be "in writing," in order to implement
provisions in the Home Equity Loan Consumer
Protection Act that prohibit “unilateral" changes to
a home equity plan, the Board believes that
institutions must include such a provision in the
home equity agreement entered into by the
executive officer.
.
Federal Register / Vol. 57 No. 152 / Thursday, August 6. 1992 / Rules and Regulations
provision is prohibited under Regulation
Z.
The Board solicited comment on
whether a specific disclosure should be
provided to executive officers if the
home equity rales were interpreted to
permit inclusion of this demand
provision. The Board requested
comment on whether a contractual
provision setting forth this provision
would provide adequate information if
the provision is not also specifically
disclosed in the preapplication
disclosures. After reviewing the
comment letters and for the reasons set
forth below, the Board is requiring only
that this provision be in the home equity
contract rather than requiring it to be
separately disclosed with the
preapplication disclosures.
The vast majority of commenters
opposed requiring a separate disclosure
referencing this call provision.
Commenters stated that including this
provision in the contract with the
executive officer was sufficient to notify
the person -of the right of the institution.
Commenters also noted that executive
officers are already likely to be aware of
the limitations contained in Regulation
O. The Board believes inclusion of this
provision in the contract will notify
executive officers of this condition.
Commenters stated that including
such a notice on disclosure forms given
to all consumers would be very
confusing to consumers, since the
provision would be inapplicable to the
vast majority of consumers. Many
commenters also stated that having a
separate disclosure form solely for
executive officers, or requiring the use of
an insert or attachment highlighting this
feature would be unnecessary, and
would increase the likelihood of error
(in distributing the wrong form).
The Board also will be permissive on
whether this condition is separately
disclosed under § 226.6(e)(1) of the
regulation. (Section 226.6(e) generally
requires creditors to provide again to
consumers many of the preapplication
disclosures at the time the account is
opened.) The Board believes that the
inclusion of this feature in the home
equity agreement provides sufficient
notice to executive officers of this
feature. In addition, since these later
disclosures are generally combined with
contractual provisions, the Board
believes that requiring a specific
disclosure of such a feature, in most
cases, would not provide the borrower
with any additional information.
Furthermore, requiring a disclosure
under § 226.6(e), but not requiring a
disclosure under § 226.5b(d)(4), would
likely create a more complicated rule
and could increase compliance
problems, with little, if any, additional
benefit provided to the executive officer.
Commenters requested that the Board
address how this call feature relates to
the closed-end disclosure rules.
Specifically, commenters asked whether
a demand disclosure is required under
| | 228.18(i) and 226.19(b)(2)(xi), if a
closed-end loan to an executive officer
contains a call provision. The Board
believes that when an institution has a
narrow demand feature in its closed-end
credit agreement to the extend required
by section 22(g) of the Federal Reserve
Act and 306 of FDICIA, institutions
should be permitted to provide or not to
provide demand disclosures. For
consistency and to minimize compliance
burdens, the Board believes it is
important to treat these features
similarly under the disclosure rules for
open-end and closed-end credit. Of
course, if an institution has a demand
feature in its closed-end agreement that
is broader than that required by the
Federal Reserve Act and FDICIA, such a
feature would have to be disclosed
under § 226.18(i) and, in the case of
variable-rate mortgages, § 226.19(b).
The Board expects to propose
technical conforming amendments to the
official staff commentary in the fall,
under the normal schedule for
commentary revisions, reflecting these
positions concerning §§ 226.5b(d)(4),
226.6(e)(1), 22G.18(i), and 226.19(b)(2)(xi).
(3) Economic Impact Statement
The change to the regulation is likely
to have an insignificant impact on
creditors' costs, including those of small
entities.
(4) Text of Revisions
Pursuant to authority granted in
section 105 of the Truth in Lending Act
(15 U.S.C. 1604 as amended), the Board
is amending Regulation Z, 12 CFR part
226, by modifying § § 226.5b(f)(2)(ii) and
226.5b(f)(2)(iii) and by adding
§ 226.5b(f)(2)(iv).
List of Subjects in 12 CFR Part 226
Advertising, Federal Reserve System.
Reporting and recordkeeping
requirements. Truth in lending.
For the reasons set out in the
preamble, 12 CFR part 226 is amended
as follows:
PART 226—[AMENDED]
1. The authority citation for part 226
continues to read as follows:
Authority: Truth in Lending Act, 15 U.S.C.
1604 and 1637(c)(5); sec. 1204(c), Competitive
Equality Banking Act, 12 U.S.C. 3806.
34681
Subpart B—Open-End Credit
2.12 CFR 226.5b is amended by
revising paragraphs (f)(2)(ii) and
(f)[2)(iii), and by adding paragraph
(f)(2)(iv) to read as follows:
§ 226.5b
plans.
*
*
R equirem ents lor hom e equity
*
*
*
(ii) The consumer fails to meet the
repayment terms of the agreement for
any outstanding balance:
(iii) Any action or inaction by the
consumer adversely affects the
creditor’s security for the plan, or any
right of the creditor in such security; or
(iv) Federal law dealing with credit
extended by a depository institution to
its executive officers specifically
requires that as a condition of the plan
the credit shall become due and payable
on demand, provided that the creditor
includes such a provision in the initial
agreement.
♦
*
*
' *
*
By order of the Board of Governors of the
Federal Reserve System, July 30,1992.
William W, Wiles,
Secretary of the Board.
(FR Doc. 92-18468 Filed 8-5-82; 8:45 am]
BILLMG CODE 8210-01-W
@FedFRASER