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R eserv e Bank




C ir c u la r No. 78-77
J u n e 8, 1978

Minor I r r e g u l a r i t i e s —Maximum I r r e g u l a r Period Limits

T h e Board of G o v e rn o rs of th e F e d e ra l R e s e rv e System p r o p o s e d for
comment an am en dm en t to an in te rp r e ta tio n of Regulation Z, " T r u t h in L e n d in g ,"
th a t would facilitate th e computation of the a n n u a l p e r c e n ta g e r a t e for g r a d u a t e d
paym ent m o rtg a g e s .
T h e Board r e q u e s t e d comment by J u n e 26.
G ra d u a te d pa y m e n t m o r t g a g e s , a n d o t h e r real e s ta te m o r t g a g e s , may
involve one p ay m en t p e rio d th a t is d iff e r e n t (lo n g e r o r s h o r te r ) from o t h e r s . T h e
p r o p o s e d am en d m en t would a p p ly to all m o rtg a g e s with a minor v a ria tio n in a p a y ­
ment p e rio d a nd th a t h a v e a m a tu rity of 15 y e a r s o r m o re , with monthly p a y m e n ts.
G ra d u ated pa y m e n t m o rtg a g e s h a v e b e e n d e v e lo p e d b y the Federal
Housing A d m in istratio n to a s s i s t y o u n g p e o p le , a n d o t h e r s , to b u y hom es. U nd er
them, m ortgage p a y m e n ts i n c r e a s e a n n u a lly d u r i n g th e f i r s t five o r ten y e a r s of
th e m o rtg a g e . T h e p r o p o s e d am en d m en t (to In te rp r e ta tio n 226.503 of Regulation Z)
would simplify th e u s e of a nnual p e r c e n t a g e ra te com putation ta b le s p r e p a r e d by
FHA for u s e w h en homes a r e b o u g h t on its g r a d u a t e d p aym en t m o rtg ag e p la n .
P r in te d on th e r e v e r s e of th is c i r c u l a r is the te x t of the B o a r d 's o r d e r
as it a p p e a r e d in th e F e d e r a l R e g i s t e r . All comm ents sh o u ld be d ir e c te d to the
S e c r e t a r y , Board of G o v e rn o rs of th e Federal R e s e r v e S y ste m , W ashington, D.C.
20551. All material su b m itte d sho u ld inc lu d e Docket No. R-0164.
S in c e r e ly y o u r s ,
R obert H . Boykin
F irs t Vice President

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

E x tra c t From
VOL. 43, NO. 106
T h u r s d a y , J u n e 1, 1978
p p . 23726 - 23727
6210 -01 ]
[ 1 2 CFR P a r t 2 2 6 ]

[R e g . Z: D o c k e t N o . R -0 1 6 4 ]
R e v is e d I n te r p r e ta tio n s

A G ENCY: Board of Governors of the
Federal Reserve System.
ACTION: Proposed revised interpreta­
S U M M A R Y : This proposed revised in­
terpretation would expand the current
"minor irregularities” provisions of
Regulation Z which permit certain i ­
regular payment amounts and pay­
ment periods to be considered regular
for purposes of calculating the annual
percentage rate on consumer credit
transactions. It provides that in most
real property transactions with a term
of 15 years or more, an irregular f r t
period of up to 62 days may be treated
as though i were a regular period.
The proposed rule i intended to sim­
plify computation of the annual per­
centage rate in long-term real proper­
ty transactions involving unequal pay­
ments, including graduated payment
DATE: Comments must be received on
or before June 26,1978.
ADDRESS: Secretary, Board of Gov­
ernors of the Federal Reserve System,
Washington, D.C. 20551.
Glenn E. Loney, Section Chief, Divi­
sion of Consumer Affairs, Board of
Governors of the Federal Reserve
System, Washington, D.C. 20551,
(1) In an effort to 'simplify computa­
tion of annual percentage rates in
graduated payment mortgages, such as
those made under the H U D / F H A Sec­
tion 245 Experimental Financing Pro­
gram, the Board i proposing to revise
Interpretation § 226.503. That inter­
pretation currently allows f r t pay­
ment periods of up to 50 days to be
treated as i they were regular for pur­
poses of the annual percentage rate
calculation, only in transactions longer
than 1 year which are otherwise pay­
able in equal monthly instalments.
Since graduated payment mortgages,
by their very nature, involve unequal

instalments, creditors offering them
cannot now take advantage of the
minor irregularities provision.
The Board believes this requirement
that the obligation be otherwise pay­
able in equal instalments may appro­
priately be relaxed in the case of most
long-term real property transactions,
even i the instalments are unequal.
Moreover, i believes that in such
transactions allowing a first period of
up to 62 days to be considered regular
will have only a minor effect on the
annual percentage rate. It therefore
proposes to allow such a longer period
to be treated as regular.
There are two limitations on the
type of real property transaction that
qualifies for t i ,special rule regarding
irregularities. The transaction must be
for a term of at least 15 years, and i
must be otherwise payable in monthly
instalments. These limitations are in­
cluded to insure that use of this provi­
sion will not result in major deviations
from the true annual percentage rate.
The Board i permitted by g 107 of
the Truth in Lending Act (15 U.S.C.
1606) to allow variances in the annual
percentage rate.
The Board would like to receive any
comments the public might have on
this proposal. In particular, the Board
believes comments on the following
issues would be helpful.
1 Are the restrictions placed on the
use of this amendment appropriate?
Are any additional restrictions neces­
sary? Should any of the proposed re­
strictions be made less severe, more
s r c , or eliminated? For example, the
amendment applies only to real prop­
erty transactions whose terms are 15
years or more. Could that minimum
eligible term be increased, decreased,
or eliminated, without seriously dis­
torting the annual percentage rate?
2 To assure less distortion in the
rate calculation, would i be advisable
or necessary to limit this amendment
to apply to those mortgage credit
plans that require the customer to pay
interest for the irregular portion of
the f r t payment period?
3 Does this adjustment achieve the
desired result as stated above?
(2) To aid in the consideration of
this matter by the Board, interested
persons are invited to submit relevant
data, views, comments, or arguments.
Any such material should be submit­
ted in writing to the Secretary, Board
of Governors of the Federal Reserve
System. Washington, D.C. 20551, to be
received not later than June 26, 1978,
and should include the docket number
R-0164. The material submitted will
be zpade available for inspection and
copying upon request, except as pro­
vided in § 261.6(a) of the Board’ Rules
Regarding Availability of Information
(12 C F R 261.6(a)).
(3> Pursuant to the authority grant­
ed in 15 U.S.C. 1064 (1968), the Board
proposes to revise Regulation Z, 12
C F R Part 226.503 by adding the fol­

lowing at the end thereof:
fi 226.604 Minor irregularities—maximum
irregular period limits.

Notwithstanding the above or the
language in § 226.5(d) that limits the
minor irregularities provisions to
transactions that are "otherwise pay­
able in equal instalments scheduled at
equal intervals,” the following rule
may be applied to real property trans­
An i i i l payment period of 62 days
or less may be trated as though i were
regular i:
(1) The term of the obligation (the
date from which the finance charge
begins to accrue to the date of the
final payr. ent) i at least 15 wears. and
(2) The obligation i otherwise pay­
able in monthly instalments.
By order of the Board of Governors,
May 19,1978.
G r i f f i t h L. G a r w o o d ,
D e p u t y S e c r e t a r y o f th e B o a r d .
[ P R D o c. 78-15144 P ile d 5 -3 1 -7 8 ; 8:45 a m ]

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