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Federal Reserve Bank
OF DALLAS
W IL L 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 C H IE F O PER ATING O FFICER
October 19, 1988
Circular 88-70
TO:
The Chief Executive Officer of all
member banks and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Proposed amendment to the Official Staff Commentary to Regulation Z,
Truth in Lending
DETAILS
The Board of Governors of the Federal Reserve System has requested
comments on proposed changes to the official staff commentary to Regulation Z.
The proposed revisions offer guidance on compliance with the amended
adjustable-rate mortgage (ARM) disclosure provisions with which creditors were
required to comply as of October 1, 1988. The proposal is especially
pertinent to lenders whose loan programs have features that change frequently
or have minor variations and would limit the possibility that numerous
disclosure forms would be required to reflect the program variations.
Those who wish to comment on the Board's proposal should do so by
addressing comments to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, Washington, D.C. 20551. Comments should be received
by December 1, 1988.
ATTACHMENTS
The Board's press release and text of changes are attached.
MORE INFORMATION
For further information regarding the proposed amendments, please
contact Dean A. Pankonien at (214) 651-6228. For additional copies of this
circular, please contact the Public Affairs Department at (214) 651-6289.
Sincerely yours,
For addition al copies of any c ircu la r p lease c ontact the Public A ffairs D ep artm en t at (214) 6 5 1 -6 2 8 9 . Banks and others are
encouraged to use the follow ing incom ing W A T S numbers in c ontacting this Bank (800) 4 4 2 -7 1 4 0 (intrastate) and (800)
5 2 7 -9 2 0 0 (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 release
mm
September 28, 1988
The Federal Reserve Board today issued proposed
revisions to its official staff commentary to Regulation Z,
Truth in Lending, that interprets an amendment, issued
December 22, 1987, requiring creditors to provide consumers
with more information regarding closed-end adjustable-rate
mortgage loans (ARMs) secured by the consumer's principal
dwelling.
The Board is publishing proposed interpretations
on a limited number of issues affecting ARMs disclosures in
advance of its regular update to the Regulation Z
commentary.
Additional interpretations, addressing the ARM
disclosure rule and other provisions of Regulation Z, are
expected to be proposed in November.
The Board's notice is attached.
-0-
Attachment
38018
Federal Register / Vol. 53, No. 189 / Thursday, September 29, 1988 / Proposed Rules
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[R*g. Z; D ocket No. R -0645]
Proposed Update to Official Staff
Commentary
a g e n c y : Board of Governors of the
Federal Reserve System.
a c t i o n : Proposed official staff
interpretation.
s u m m a ry : The Board is publishing for
comment proposed changes to the
official staff commentary to Regulation
Z (Truth in Lending). The commentary
applies and interprets the requirements
of Regulation Z an d is a substitute for
individual staff interpretations of the
regulation. The proposed revisions offer
additional guidance under the amended
adjustable-rate mortgage (ARM)
disclosure provisions of Regulation Z
with which lenders are required to
comply on O ctober 1,1988. This notice
addresses a limited number of issues
affecting transactions where certain
program features change frequently or
have minor variations The proposed
revisions describe the permissible
disclosures for such transactions, and
will limit the possibility that numerous
disclosure forms would be required to
reflect the program variations.
Additional guidance on other issues
arising under the ARM disclosure rule
and under other provisions of
' Regulation Z will be issued in the
regular update to the commentary
expected to be published in November.
d a t e : Comments must be received on or
before December 1,1988.
ADDRESSES: Comments should refer to
Docket No. R-0645 and be sent to Mr.
William W. Wiles, Secretary, Board of
Governors of the Federal Reserve
System, Washington, DC 20551. They
may be delivered to Room B-2222 of the
Eccles Building between 8:45 am and
5:15 pm weekdays or delivered to the
(2) Explanation of Revisions
guard station in the Eccles Building
Courtyard on 20th Street NW. (between
Constitution Avenue and C Street NW.),
any time. All comments received at the
above address will be available for
inspection and copying by any member
of the public in the Freedom of
Information Office, Room B-1122 of the
Eccles Building between 9:00 am and
5:00 pm weekdays.
Section 226.19 Certain R esiden tial
M ortgage Transactions 19(b) Certain
Variable-Rate Transactions
FOR FURTHER INFORMATION CONTACT:
Paragraph 19(b)(2)
Michael S. Bylsma, Senior Attorney, or
Sharon T. Bowman or Thomas J. Noto,
Staff Attorneys, Division of Consumer
and Community Affairs, Board of
Governors of the Federal Reserve
System, Washington, DC 20551, (202)
452-3667. For the hearing impaired only,
Telecommunications Device for the Deaf
(TDD), Eam estine Hill or Dorothea
Thompson at (202) 452-3544.
Comment 19(b)(2)—1 would be
amended to clarify that the disclosure
form for an ARM program in which the
only feature that varies is the term to
maturity may include the applicable
disclosures affected by each term. For
example, disclosures for an ARM
program which is offered for terms of
both 15 and 30 years may contain the
disclosures affected by both the 15- and
30-year terms in a single program
disclosure form. Furthermore, the
comment would be revised to state that
certain options that are program
features may be disclosed in a single
program disclosure form.
SUPPLEMENTARY INFORMATION:
(1) Background
This proposed official interpretation
addresses four significant issues arising
under the revised disclosure rules for
adjustable-rate mortgages (ARMs) in
Regulation Z. The new ARM disclosure
rules were adopted in final form
effective December 28,1987 (52 FR
48665, December 24,1987). Compliance
with the new rules is m andatory on
October 1,1988, but has been optional
since the effective date. Since the
adoption of the n e w disclosure rules,
questions have arisen concerning the
impact of compliance with certain
provisions of the rules. The narrow
application of certain disclosure
provisions—especially those relating to
variations in ARM programs—may
cause difficulties in transactions where
program features change frequently or
result in numerous forms reflecting
minor program variations. This notice
addresses certain disclosures involving
program variations under the ARM
disclosure rule, such as rate limitations,
terms to maturity, frequency of
adjustments, and multiple options. With
the revisions, minor program variations
should not result in multiple disclosure
forms, and fluctuations in certain
program features should not result in
frequent changes to those forms. In light
of the importance of these issues to
certain creditors, the Board is publishing
the proposed interpretations in advance
of the regular update to the Regulation Z
commentary. Additional proposed
revisions to the Regulation Z
commentary, addressing both the ARM
disclosure rule and other provisions, are
expected to be published in a
subsequent notice in November.
The following is a brief description of
the proposed revisions to the
commentary:
Subpart C—Closed-End Credit
Paragraph 19(b)(2)(vi)
Comment 19(b)(2)(vi)-l would be
revised to address the disclosures for
transactions in which the interval
betw een consummation or closing and
the initial adjustment is not known—for
example, when ARM loans are grouped
together for sale to a secondary
mortgage market purchaser. In such
cases, the comment explains that
lenders may disclose the timing for the
first adjustment as a range of the
minimum and maximum length of time
from consummation or closing until the
first adjustment.
Paragraph 19(b)(2)(vii)
Comment 19(b)(2)(vii)-l would be
revised to address the disclosures for
transactions in which the overall
limitation on rate increases (and
decreases) varies depending on the loan
features the consumer chooses, or upon
fluctuations in the pricing of the loan. In
such cases, the comment explains that
the creditor may disclose the range of
the-lowest and highest rate limitations
that may be applicable to the creditor's
ARM transactions, and must include a
statem ent that the consumer ask about
the rate limitations that are currently
applicable.
Paragraph 19(b)(2)(viii)
Comment 19(b)(2)(viii)-5 would be
added to allow the creditor to base
disclosures for ARM transactions upon
terms to maturity within certain ranges
specified in the new comment. The
Federal Register / Vol. 53, No. 189 / Thursday, September 29, 1988 / Proposed Rules
Board requests comment about whether
it should require disclosures to be based
upon specified terms within those
ranges, or w hether it should adopt the
proposed comment allowing creditors to
b ase disclosures upon any term offered
within the ranges. The comment also
explains that the creditor would be
required to state the term used in
making the disclosures.
Comment 19(b)(2)(viii)-6 would be
added to explain that a creditor
following the alternative rule for
disclosing overall rate limitations
described in revised comment
19(b)(2)(vii)-l must base the historical
example upon the highest rate limitation
disclosed in § 226.19(b)(2)(vii). In
addition, such creditors must state the
overall limitation used in the historical
example.
Comment 19(b)(2J(viii)-7 also would
be added to explain the assumptions
that can be made by a creditor following
the alternative rule for disclosing the
frequency of rate and payment
adjustm ents described in revised
comment 19(b)(2)(vi)-l. The comment
explains that, in disclosing the historical
example, the creditor may assume that
the first adjustment occurred at the end
of the first year in which the adjustment
could occur.
Paragraph 1 9 (b )(2 )(x )
Comment 19(b)(2)(x)-2 would be
added to allow creditors to base their
calculations of the initial and maximum
rates and payments upon the ranges for
terms to maturity stated in new
comment 19(b)(2)(viii)-5. The comment
explains that the term the creditor
selects for making disclosures under
§ 226.19(b)(2)(viii) also must be used in
disclosing the initial and maximum
interest rates and payments.
Comment 19(b)(2)(x)-3 would be
added to describe how a creditor
following the alternative rule for
disclosing overall rate limitations
described in revised comment
19(b)(2)(vii)^l would calculate the
maximum interest rate and payment. In
such cases, the comment explains that
the creditor m ust base the disclosure of
the maximum rate and payment upon
the highest overall rate limitation
disclosed under § 226.19(b)(2)(vii}. The
creditor would be further required to
state the overall rate limitation used in
calculating the maximum rate and
payment.
Comment 19{b)(2](x)—4 also would be
added to explain how to calculate the
initial and maximum rates and
payments if a creditor follows the
alternative rule for disclosing the timing
of the-first rate and payment adjustment
described in revised comment
19(b)(2)(vi)-l- The com m ent explains
that the creditor must assume that the
first adjustment occurs at the earliest
time disclosed under § 226.19(bj(2)(vi).
List of Subjects in 12 CFR Part 226
Advertising, Banks, Banking,
Consumer protection. Credit, Federal
Reserve.System, Finance, Penalties,
Rate limitations. Truth in lending.
To highlight the proposed revisions to
the commentary, new language is shown
inside arrows. Pursuant to authority
granted in section 105 of the Truth in
Lending Act (15 U.S.C. 1604 as
amended), the Board proposes to amend
the official staff commentary to
Regulation Z (12 CFR Part 226, Supp. I)
as follows:
38019
different m aturities should be reflected in the
program disclosures.) In addition, the creditor
is permitted to include the disclosures for the
following options in a single program
disclosure if the features are available for the
ARM being described: options permitting
conversion to a fixed interest rate and options
permitting preferred rates for certain
consumers. The creditor must sta te that these
options are available a n d should not reflect
them -elsew here in the disclosures, such a s in
the historical exam ple or in th e calculation of
the initial and maxim um interest rates and
paym en ts.-* * * *
*
*
*
*
*
Paragraph 19(b)(2)(vi)
Supplement I—Official Staff
Interpretation
*
*
*
*
*
1. F requency. The frequency of interest rate
and paym ent adjustm ents must be disclosed.
If interest rate changes will be imposed more
frequently or at different intervals than
paym ent changes, a creditor must disclose
the frequency a n d timing of both types of
changes. For example, in a variable-rate
transactio n w here interest rale changes are
made monthly, but paym ent changes occur on
a n annual basis, this fact m ust be disclosed.
► In certain ARM transactions, the interval
b e tw ee n loan closing an d the initial
adjustm ent is not know n a n d may be
different from the regular interval for
adjustm ents, in such cases, the creditor may
disclose the initial adjustm ent period as a
range of the minimum an d maximum amount
of time from consum mation or closing. For
exam ple, the creditor might state: "The first
adjustm ent to your interest rate and payment
may occur no sooner than 6 m onths an d no
later than 18 m onths after closing.
Subsequent adjustm ents m ay occur once
each y e ar after the first adjustm ent." (See
comments 19(b)(2)(viii)-7 and 19(b)(2)|x)-4
for guidance on other disclosures w hen this
alternative disclosure rule is used.)-*
S u bp art C—C losed-E nd C redit
Paragraph 19(b)(2)(vii)
PART 226-^{AMENDEDl
1. The authority citation for Part 226
continues to read as follow s
Authority: Sec. 105, Truth, iir Lending Act,
a s am ended by sec. 605, Pub. L 96-221,94
S ta t 170 (15 U.S.C. 1604 e t seq.)\ sec. 1204(c),
Competitive Equality Banking A c t Pub. L.
100-86,101 Stat. 552.
2. Text o f revisions. The commentary
(12 CFR Part 226 Supp. I) is am ended by
revising comments 19(b)(2)—1,
19(b)(2)(vi)-^l, and 19(b)(2)(vii)—1; and
adding comments 19(b)(2)(viii)—5
through -7 and 19(b)(2)(x}-2 through -4.
*
.*
*
*.
*
S e ctio n 226.19 C brtem R e sid e n tia l
M ortgage T ransactions.
*
*
*
#
•
*
19(b) C ertain V ariab ie-R a te T ra n saction s
*
*
*
*
*
Paragraph 19(b)(2)
1. D isclo su re fo r each va riab le-ra te
program . A creditor m ust provide disclosures
to the consum er that fully a n d separately
describe each of the creditor's v ariable-rate
loan programs in which the consum er
e x p resses a n interest. * * * An individual
program disclosure m ay consist of more than
one page. For exam ple, a creditor m ay a ttach
a se p a ra te pagd containing the historical
paym ent exam ple for the particular program.
► A creditor offering an ARM with different
term s to m aturity for p ay m ents b ased on
different am ortizations) may make all of the
applicable disclosures affected by the term of
the loan in a single ARM program disclosure.
(See com m ents 19(b)(2)(viii)-5 and
19(b|(2)(x)-2 for an explanation of how
1. R a te a n d p a y m e n t caps. The creditor
must disclose limits on changes (increases or
decreases) in the interest rate or payment. If
an initial discount is not taken into account in
applying.overall or periodic rate limitations,
that fact m ust be disclosed. If se p a rate
overall or periodic limitations apply to
interest rate increases resulting from other
events, such a s the exercise of a fixed-rate
conversion option or leaving the creditor's
employ, those limitations must also be stated.
► In certain ARM transactions, a creditor
m ay offer a range of overall lim itations on
interest rate changes depending upon a
variety of factors such as the program
features the consum er chooses, the type of
residential property involved, o r the amount
of the loan or the d ow npaym ent. In other
ARM transactions, the overall limitations on
rate changes offered by creditors may vary
within a certain range depending upon
factors such as fluctuations in initial interest
rates and in margins. In such transactions,
the creditor need not disclose each overall
rate limitation that is currently available.
Instead, the creditor may disclose the range
of the lowest a n d highest overall rate
33020
Federal Register / Vol. 53, No. 189 / Thursday, September 29, 1988 / Proposed Rules
lim itations that may be applicable to the
creditor's ARM transactions. For exam ple,
the creditor might state: "The lim itation on
increases, to your interest rate over the term
of the loan w ill be set at an amount in the
follow ing range: betw een 4 and 7 percentage
points above the initial interest rate.” A
creditor using this alternative rule m ust
include a statem ent in its program disclosures
suggesting that the consumer ask about the
overall rate lim itations currently offered for
the creditor’s ARM programs. (See comments
19(b)(Z)(viii}-fl a n d I9(b)(2)(x)-3 for an
explanation o f the additional requirements
for a creditor using this alternative rule for
disclosure of overall rate lim itations.) ■ *
Limitations do not include legal lim its in the
nature o f usury or rate ceilings under state or
federal statu tes or regulations. (See $ 228.30
for the rule requiring that a maximum interest
rate be included in certain variable-rate
transactions.)
Paragraph 19(b)(2)(via)
*
*
•#
*
. #
► S . Term o f th e loan. In calculating the
paym ents and loan balances disclosed in the
historical exam ple, a creditor m ay assum e
that an ARM that w ould have been
outstanding during any portion of a year
would have been outstanding for the full
year, in addition, a creditor need not base the
disclosu res on each term to maturity that it
offers. Instead,-disclosures for ARMs w ith
terms to maturity w ithin the follow ing ranges
m ay be based on any single term (in full
years) that is offered within the applicable
range: Over 1 year to S years; over S years to
10 years; over W years to 15 years; over 15
years to 20 years; over 20 years to 25 years;
over 25 years to 30 years; over 30 years to 35
years; and over 35 years to 40 years. For
exam ple, disclosures for ARMs offered with
terms from 15 to 30 years m ay be based on
terms such a s 15, 20, 25, and 30 years, or any
other 4 terms within th e appropriate ranges
stated ab o ve. In addition, th e creditorm uet
state the term-used in making the disclosures.
6. O vera ll ra te cap« In certain
transaction* a creditor m ay use th e
alternative rule described in comment
19(b)(2)(vii)-l for disclosure o f overall rate
lim itations. In such ca ses, the historical
exam ple-must be based upon the highest
overall rate lim itation d isd o se d under
$ 22BJ9(b)(2)(vw). In addition, th e creditor
must sta te the overall lim itation n sed in the
historical exam ple. (See comment 19fb)(2)(xf~
3 far an explanation of the use o f the highest
rate limitation in other disclosures.)
7. F requency o f adju stm en ts. In certain
transactions, creditors may u se the
alternative rule described in comment
19(b)(2)(vi)-l for disclosure of the frequency
of rate and payment adjustments. In such
ca ses, the creditor m ay assum e for purposes
of the historical exam ple that the fir st
adjustment occurred at the en d o f th e first full
year in which the adjustment could occur. For
exam ple, in an ARM in which the first
adjustment m ay occur betw een fr a n d lfl
months after closing and-annostly thereafter,
the creditor may assum e that the first
adjustment occurred at the end of the
historical exam ple. (See comment 19(b)(2)(x)-
4 for an explanation of how to com pute the
maximum interest rate and paym ent when
the initial adjustm ent period is not known.)-*
Paragraph 19(b)(2f(x)
► 2 . Term o f th e loan. In calculating the
initial and maximum payments; (he creditor
need not b a s e the disclosures on each term to
maturity offered under the program. Instead,
the creditor m ay follow the rules set out in
comment 19(bK2)(viii)-5. In calculating the
initial and maximum paym ent, the terms to
maturity selected for the purpose o f making
disclosures under i 228.10(b.)(2}(viii) must be
u s e d In addition, creditors must state the
term used in making the disclosures under
this section.
3. O vera ll ra te ca p s. In certain
transactions, a creditor m ay use the
alternative rule for disclosure o f overall
interest rate lim itations described in
comment 19(b)(2l)(vii)-l. In such cases, the
maximum interest rate and paym ent m ust b e
b a se d upon the highest overall rate limitation
disclosed under $ 228.19(b)(2J(vii). In
addition, thexreditor m ust state the overall
rate limitation used in calculating the
maximum interest rate and paym en t (S ee
comment 19(b)(2)(viii}-6 for an explanation of
the u se of the highest rate lim itation in other
disclosures.)
4. F requency o f adju stm en ts. In certain
transactions, a creditor m ay use the
altem ative rtilft for disclosure o f the
frequency o f rate a n d paym ent adjustments
described in-com m ent I9(b}(2j(vi)-1. In such
cases, the creditor m ast base the calculations
of the initial and maximum rates and
paym ents upon the earliest possible first
adjustm ents disclosed under
5 226.19(b)(2)(vi). (See comm ent 19(b)(2)(vlii)—
7 for a n explanation of how to disclose the
h istoricalexam ple w hen the initial
adjustm ent period is not k n o w n j^ By order o f the Board otG ov em ors o f the
Federal Reserve System , Septem ber 2 6 ,198&.
W illiam W . W iles.
S e c re ta ry o f th e Board.
[FR Doc. 88-22397 Filed 9-28-88; 8:45 am]
BILLMO COOE S210-M-M
@FedFRASER