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Federal R
eserve
Bank
OF DALLAS
W IL L IA M
H. WALLACE
DALLAS, TEXAS 75222
FIRST V IC E PR ES ID EN T
AND C H IE F O PER ATING O FFIC E R
March 15, 1989
C i r c u l a r 89-14
TO:
The Chief Executive O f ficer of a l l
member banks and oth ers concerned in
the Eleventh Federal Reserve D i s t r i c t
SUBJECT
Regulation B-Equal Credit Opportunity, Regulation E-Electronic Funds
Transfer, Regulation Z-Truth in Lending
DETAILS
The Federal Reserve Board has revised i t s o f f i c i a l s t a f f commentary
f o r th r e e of i t s consumer c r e d i t p r o te c tio n r e g u l a t i o n s : Regulation B-Equal
C redit Opportunity, Regulation E-Electronic Fund T ra n s fe r , and
Regulation Z-Truth in Lending.
The r e v isio n s to the s t a f f commentary fo r Regulation E c l a r i f y the
d i s c lo s u r e requirements a p p licab le when consumers p reau th oriz e d i r e c t deposit
of Social S ecu rity and oth er federa l government b e n e f i t s .
Revisions to the Regulation Z s t a f f commentary address d is c lo s u r e
ques tions r a is e d by revers e mortgage products and questions concerning when a
t h i r d party fee may be a finance charge in a c r e d i t t r a n s a c t i o n . Additional
commentary is included which i n t e r p r e t s the Board's uniform r u l e f o r
d i s c lo s u r e s about a d j u s t a b l e - r a t e mortgages.
The r e v i s io n to the Regulation B commentary addresses a recent
preemption determination by the Board regarding New York law.
ATTACHMENTS
The Board's t e x t of changes is attached.
MORE INFORMATION
For more information, please co n tact Jane Anne Schmoker a t (214)
651-6182. For a d dition al copies of t h i s c i r c u l a r , please c o n tact the Public
A f fa i r s Department a t (214) 651-6289.
S incerely yours,
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL RESERVE SYSTEM
12 CFR Part 202
[Reg. B; EC-1]
EQUAL CREDIT OPPORTUNITY
Update to Official Staff Commentary
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Final official staff interpretation.
SUMMARY: The Board is publishing in final form an addition
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
addition addresses a recent Board preemption determination
regarding a provision of New York law.
EFFECTIVE DATE: March 7, 1989.
FOR FURTHER INFORMATION CONTACT: Linda Vespereny, Staff
Attorney, Division of Consumer and Community Affairs, at
(202) 452-2412; for the hearing impaired only, contact
Earnestine Hill or Dorothea Thompson, Telecommunications
Device for the Deaf, at (202) 452-3544, Board of Governors
of the Federal Reserve System, Washington, DC
20551.
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SUPPLEMENTARY INFORMATION:
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(1) General.
The Equal Credit
Opportunity Act (ECOA) (15 U.S.C. 1691 et seq.) makes it unlawful
for creditors to discriminate in any aspect of a credit
transaction on the basis of race, color, religion, national
origin, sex, marital status, age, receipt of public assistance,
or the exercise of rights under the Consumer Credit Protection
Act.
This statute is implemented by the Board's Regulation B (12
CFR Part 202).
The Board also publishes an official staff commentary
(EC-1, Supp. I to 12 CFR Part 202) to interpret the
regulation.
The commentary provides guidance to creditors
in applying the regulation to specific transactions, and is
updated periodically to address significant questions that
arise.
This notice contains the third update, and codifies
a preexemption determination that took effect on November
11, 1988 (53 FR 45756).
(2) Revision:
The following is a brief description of the
revision to the commentary:
SECTION 202.11 —
Relation to State Law
Paragraph 11(a) is added to the commentary in light of the
Board's recent determination that a provision of New York law on
credit discrimination is inconsistent with federal law, and that
it is preempted by the ECOA and Regulation B to the extent of the
inconsistency.
Thus, the state of New York may not prohibit
special-purpose credit programs or related inquiries that are
permissible under federal law.
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(3) Text of revision: Pursuant to authority granted in section
703 of the Equal Credit Opportunity Act (15 U.S.C. 1691b), the
Board amends the official staff commentary to Regulation B (12
CFR 202 Supp. I) as follows:
1.
The authority citation for Part 202 continues to read:
AUTHORITY: 15 U.S.C. 1691 et seq.
2.
The addition amends the commentary (12 CFR Part 202, Supp. I)
by adding comment 11(a) to read as follows:
*
*
*
*
*
SECTION 202.11 -- Relation to State Law
11(a) Inconsistent state laws
1.
Preemption determination--New York.
Effective November 11,
1988, the Board has determined that the followingprovisions in
the state law of New York are preempted
by thefederal
law:
° Article 15. Section 296a(1)(b)--Unlawful discriminatory
practices in relation to credit on the basis of race,
creed, color, national origin, age, sex, marital
status, or disability.
This provision is preempted to
the extent that it bars taking a prohibited basis into
account when establishing eligibility for certain
special-purpose credit programs.
° Article 15, Section 296a(l)(c)— Unlawful discriminatory
practice to make any record or inquiry based on race,
creed, color, national origin, age, sex, marital
status, or disability.
This provision is preempted to
the extent that it bars a creditor from requesting and
considering information regarding the particular
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characteristics (for example, race, national origin, or
sex) required for eligibility for special-purpose
credit programs.
*
*
*
*
*
Board of Governors of the Federal Reserve System,
March 1, 1989.
William W. Wiles
Secretary of the Board
FEDERAL RESERVE SYSTEM
12 CFR Part 205
IReg. E; EFT-2]
ELECTRONIC FUND TRANSFERS
Update to Official Staff Commentary
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 E (Electronic Fund
Transfers).
The commentary applies and interprets the
requirements of Regulation E and is a substitute for individual
staff interpretations of the regulation.
The revisions address
questions that have arisen about the disclosure requirements of
the regulation.
EFFECTIVE DATE:
April 1, 1989.
FOR FURTHER INFORMATION:
Contact Sharon T. Bowman or Thomas J.
Noto, Staff Attorneys, Division of Consumer Affairs, at (202)
452-3667.
For the hearing-impaired only, Earnestine Hill or
Dorothea Thompson, Telecommunications Device for the Deaf, at
(202) 452-3544, Board of Governors of the Federal Reserve System,
Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
(1) General.
The Electronic Fund
Transfer Act (15 U.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).
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The Board has published an official staff commentary
(Supp. II to 12 CFR Part 205) to interpret the regulation.
The
commentary is designed to provide guidance to financial
institutions and others in applying the regulation to specific
situations.
The commentary is updated periodically to address
significant questions that arise.
This notice contains the
seventh update, which was proposed for comment on December 1,
1988.
The revisions are effective April 1, 1989.
(2)
Description of revisions.
Following is a brief
description of the revisions to the commentary:
SECTION 205.7 -- Initial Disclosure of Terms and Conditions
Question 7-1
Question 7-1 addresses the situation where a financial
institution provides EFT disclosures when a consumer opens an
account.
The question is revised to clarify that the regulation
does not impose a time limit by which a consumer must sign up for
an EFT service with a third party in order for the disclosures
originally provided by the account holding institution to satisfy
the regulation's requirements.
Question 7-2
Question 7-2 is revised to clarify that, in cases where a
financial institution does not receive notice that a consumer has
signed up for direct deposit of Social Security or other
government payments (because there has been no prenotification
and because no Form 1199A or other written agreement has been
completed by the consumer and the financial institution), the
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financial institution must provide the necessary disclosures as
soon as possible after the first electronic fund transfer has
been made.
In response to concerns raised by some commenters,
the Board has revised its proposed language to read "as soon as
reasonably possible."
In cases where the financial institution does receive
prior notice of the consumer's enrollment in the direct deposit
program, the financial institution must provide disclosures
before the first EFT occurs.
The institution has the
option,
of
course, of providing disclosures to customers when an
account
is
opened, as described in question 7-1.
List of Subjects in 12 CFR Part 205
Banks, banking; Consumer protection; Electronic fund
transfers; Federal Reserve System; Penalties.
Certain conventions have been used to highlight the
revisions.
New language is shown inside bold-faced arrows and
underlined, while language to be removed is set off with
brackets.
(3)
Text of revisions.
Pursuant to authority granted in
section 904 of the Electronic Fund Transfer Act, 15 U.S.C. 1693b,
the Board amends the official staff commentary to Regulation E
(12 CFR Part 205, Supp. II) as follows:
1.
The authority citation for Part 205 continues to read:
AUTHORITY: Pub. L. 95-630, 92 Stat. 3730 (15 U.S.C. 1693b).
_
2.
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The official staff commentary to Regulation E, Supp.
II to 12 CFR Part 205, is amended by revising questions 7-1 and
7-2 for § 205.7 to read as follows:
SUPPLEMENT II -- Official Staff Interpretations
* * * * *
SECTION 205.7 -- Initial Disclosure of Terms and Conditions
Q 7-1:
Timing of disclosures -- early disclosure.
An
institution is required to give initial disclosures either (1)
when the consumer contracts for an EFT service or (2) before the
first electronic fund transfer to or from the consumer's account.
If an institution provides initial disclosures when a consumer
opens a checking account and the consumer does not sign up for an
EFT service until Cll months later,] »a later time,-* has
the
institution satisfied the disclosure requirements?
A:
Yes, if the EFT contract is between the consumer and a third
party for preauthorized electronic transfers to be initiated by
the third party to or from the consumer's account.
In this case,
the financial institution need not repeat disclosures previously
given unless the terms and conditions required to be disclosed
are different from those that were given.
If, on the other hand, the EFT contract is directly
between the consumer and the financial institution -- for
the
issuance of an access device, or for a telephone bill-payment
plan, for example -- the institution should provide the
disclosures at the time of contracting.
Disclosures given before
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the time of contracting will satisfy the regulation only if.they
occurred in close proximity thereto.
Q 7-2:
(§205.7(a))
Timing of disclosures -- Social Security »and other
government* direct deposits.
a government agency
In the case of ►direct deposits by
Social Security {.direct deposits,J
►payments, for example --•* £the financial institution receives no
prenotification.
Howl ►how* can the »financial* institution
comply with the disclosure requirements ^absent prenotification,
such as in cases where the government agency no longer uses Form
1199A-*?
A:
Before direct deposit of ►payments such as* Social Security
[payments can occur, bothf| »takes place, usually* the consumer
and the institution ►both* must complete a Form 1199»A, and*
[The} ►the* institution can make disclosures at that time.
►However, if a Form 1199A (or a comparable form providing notice
to the institution) is not used and there is no prenotification,
the institution should provide the required disclosures as soon
as reasonably possible after the first direct deposit is
received, unless the institution has previously given the
disclosures (see question 7-1)*.
(§205.7(a))
* * * * *
Board of Governors of the Federal Reserve System, March 1,
1989.
(signed) William W. Wiles
William W. Wiles
Secretary of the Board
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Reg. Z; TIL-1]
TRUTH IN LENDING
Update to Official Staff Commentary
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Official staff interpretation.
SUMMARY:
The Board is publishing revisions 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.
The comments address, for example,
disclosure questions raised by the emergence of reverse mortgage
products, questions concerning the amendments to Regulation Z
affecting disclosures for adjustable-rate mortgages, and
questions concerning when a third party fee may be a finance
charge in a credit transaction.
DATES:
Effective February 28, 1989, but compliance optional
until October 1, 1989.
FOR FURTHER INFORMATION CONTACT:
The following attorneys in the
Division of Consumer and Community Affairs, at (202) 452-3667 or
(202) 452-2412:
Sharon Bowman, Michael Bylsma, Leonard Chanin,
Adrienne Hurt, Thomas Noto, or Linda Vespereny.
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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, D.C. 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. I 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 and
is updated periodically to address significant questions that
arise.
There have been seven general updates and one limited
update so far.
This notice contains the eighth general update.
This update reflects material that was published in two proposed
updates in 1988 -- a special update regarding disclosures for
adjustable-rate mortgages published at 53 FR 38018 (September 29,
1988) and the proposed general update published at 53 FR 48925
(December 5, 1988).
Creditors are free to rely on the revised
commentary as of February 28, 1989, although they need not follow
the revisions until October 1, 1989.
(2) Revisions.
The following is a brief description of the
revisions to the commentary:
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SUBPART A -- GENERAL
SECTION 226.2 -- Definitions and Rules of Construction
2(a) Definitions
2(a)(25) "Security Interest”
In the original proposal, comment 23(b)-3 would have been
revised to clarify that multiple security interests in the same
property need not be disclosed on rescission notices.
The
comment, for example, would have clarified that the disclosure
that an interest is retained, as in form H-9, is adequate in a
refinancing where a new mortgage is filed and a new advance is
made.
Several commenters suggested that the commentary also
provide guidance on the specificity required of the security
interest disclosure under sections 226.6, 226.15, and 226.18.
In
order to clarify that the same principle holds true in other
required disclosures of security interests, the substance of the
proposed comment has been incorporated in new comment 2(a)(25)-6,
instead of in comment 23(b)-3.
SECTION 226.4 -- Finance Charge
4(a) Definition
Comment 4(a)-3 is revised to clarify that charges imposed
on the consumer by someone other than the creditor are finance
charges if the creditor requires the services of the third party.
For example, if a consumer cannot obtain the same credit terms
from the creditor without using a loan broker, a fee imposed by
the broker is a finance charge.
The revised comment does not
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affect existing rules regarding charges which are excluded from
the finance charge.
4(b) Examples of Finance Charges
Paragraphs 4(b)(7) and (8)
Comment 4(b)(7) and (8)-2 is revised to clarify that
insurance "written in connection with a credit transaction" does
not include insurance written during an open-end credit plan if
the insurance is written because of the consumer's default or
because the consumer requests voluntary insurance after the
opening of the plan.
If insurance written during the term of the
open-end plan is required by the creditor not as a result of the
consumer's default, however, the insurance is written in
connection with the plan.
The final comment, which differs from
the proposed comment, will provide identical rules for insurance
written after consummation of a closed-end transaction and
insurance written during the life of an open-end plan.
SUBPART C -- CLOSED-END CREDIT
SECTION 226.17 —
General Disclosure Requirements
17(a) Form of Disclosures
Paragraph 17(a)(1)
Comment 17(a)(1)-5 is revised to provide that creditors
with variable-rate transactions subject to section 226.18(f)(2)
may also provide the information set forth in section
226.18(f)(1) as information directly related to the required
disclosures.
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17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)
Comment 17(c)(1)—8 is revised to clarify the basis of
disclosures for variable-rate transactions with no initial
discounted or premium rate.
The comment explains that creditors
should base their disclosures only on the initial rate and not on
any potential rate increases.
The comment also has been
reorganized for clarity, but is not different in substance from
the proposal.
Comments 17(c)(1)-14 and 17(c)(1)-15 are renumbered as
17(c)(1)-15 and 17(c)(1)-16, respectively.
New comment
17(c)(1)-14 is added to clarify how lenders should provide
disclosures for reverse mortgages.
These mortgages, also known
as reverse annuity or home equity conversion mortgages, typically
involve the disbursement of monthly or other periodic advances to
the consumer for a fixed period or until the occurrence of an
event such as the sale of the house by the consumer or the
consumer's death.
Repayment of the loan may be required at the
end of the disbursement period or at a later time; both accrued
interest and principal generally are payable in one payment.
Some reverse "term" mortgages have a fixed term for the
disbursement of funds to the consumer, but provide that the loan
does not have to be repaid until a later time, such as when the
consumer dies.
The comment provides that the creditor should
assume repayment will occur at the time disbursements are
scheduled to end (or during a period following the date of the
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final disbursement which is not longer than the regular interval
between disbursements).
For example, in a transaction with
monthly disbursements scheduled for ten years, the creditor may
assume that repayment will be made in the 120th or 121st month.
The new comment also provides guidance on how creditors
should make disclosures when both the period for disbursements
and the date for repayment are determined solely by reference to
future events, including the consumer's death.
In such cases,
the creditor may assume that disbursements will end upon the
consumer's death (by using actuarial tables, for example).
Alternatively, the creditor may assume that disbursements end
upon the occurrence of the event that the creditor estimates will
be most likely to occur first.
If terms will be determined by
reference to future events which do not include the consumer's
death, the creditor must base the disclosures on the event
estimated to be most likely to occur first.
The creditor must
assume repayment will occur at the same time the disbursements
end (or during a period following the final disbursement which is
not longer than the regular interval between disbursements).
The comment also provides that, in making disclosures,
creditors would assume that all disbursements and accrued
interest must be paid by the consumer.
Thus, if a reverse
mortgage has a "nonrecourse" provision providing that the
consumer is not obligated for an amount greater than the value of
the house, the comment explains that the disclosures must assume
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that the full amount disbursed will be repaid, although the
creditor is permitted to explain that the consumer's contract may
limit the amount that must be repaid.
Finally, the comment addresses the disclosure of
shared-appreciation features associated with reverse mortgages.
The commentary provides that the appreciation feature should be
disclosed in accordance with either section 226.18(f)(1) or
section 226.19(b), as appropriate.
SECTION 226.18 -- Content of Disclosures
18(f) Variable Rate
Paragraph 18(f)(2)
Comment 18(f)(2)-l is revised by adding a cross-reference
to the commentary to section 226.17(a)(1) regarding the
disclosure of additional variable-rate information as directly
related information.
SECTION 226.19 -- Certain Residential Mortgage Transactions
19(b) Certain Variable-Rate Transactions
Comment 19(b)-l is revised to clarify the disclosure of
variable-rate construction loans that may be permanently
financed.
Under the current rules in section 226.17(c)(6), a
creditor may disclose the construction and permanent financing
arrangements, under section 226.18, as a single combined
transaction or as separate transactions.
Under revised comment
19(b)-l, a creditor is permitted to apply a similar analysis in
determining the applicability of the variable-rate disclosure
requirements of section 226.19(b).
Thus, the creditor may treat
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the construction phase as a separate transaction and, if the term
is one year or less, disclosures under section 226.19(b) are not
required for the construction phase.
The comment also makes
clear that a creditor may treat the construction and permanent
phases as separate and distinct transactions for purposes of
determining coverage under section 226.19(b), yet still provide a
single section 226.18 disclosure in accordance with the rules in
section 226.17(c)(6).
If the construction and permanent phases
are treated as a single combined transaction with a term greater
than one year, disclosures under section 226.18(f)(2) would be
required.
As provided in comment 17(a)(l)-5, however, the
creditor may describe the variable-rate features of the combined
transaction pursuant to section 226.18(f)(1).
Comment 19(b)-l also is revised to address the disclosure
requirements in assumptions of variable-rate transactions secured
by the consumer's principal dwelling with a term longer than one
year.
The comment explains that disclosures need not be provided
under sections 226.18(f)(2)(ii) or 226.19(b).
References to
applicable sections and to particular parties are deleted as
unnecessary and in order to make the comment more concise.
Paragraph 19(b)(2)
Comment 19(b)(2)-l is revised to omit references to the
form of disclosures for ARM programs.
New comment 19(b)(2)-3 has
been added to describe the manner in which creditors may make the
disclosures for each ARM program they offer.
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Comment 19(b)(2)-l also is revised to clarify the timing
requirements for disclosures provided in response to a subsequent
expression of interest by the consumer.
been made to the original proposal.
Editorial changes have
The final comment makes
clear that if a consumer expresses an interest in a different
program, or if the consumer and creditor decide on a program
different than that set forth in the disclosures that were first
provided, disclosures for the new program must be provided as
soon as reasonably possible.
In addressing the proposed revision to comment 19(b)(2)-l,
several commenters also requested clarification of the timing
requirements in situations, such as private banking arrangements,
where loan terms that are not generally offered to the public are
individually negotiated with a consumer.
Commenters indicated
that in these instances, creditors do not know the loan program
terms in advance and therefore cannot prepare program disclosures
until after they conclude their negotiations with the consumer.
They also expressed concern that "customized" program disclosures
might be needed to disclose each individually negotiated program.
Accordingly, an additional sentence has been added to comment
19(b)(2)-l to make clear that, in such cases, creditors may
provide appropriate program disclosures as soon as reasonably
possible after the terms have been decided upon, but in no event
later than the time a non-refundable fee is paid.
Furthermore,
with the flexibility provided in this commentary concerning
disclosure of variations in loan maturities, rate caps and
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frequencies of adjustments, the potential that "customized"
disclosures will need to be developed for each private banking
customer is significantly limited.
Comment 19(b)(2)-2 has been revised to clarify that the
term to maturity of an ARM loan does not constitute a program
variation.
This revision corresponds to the guidance provided in
new comments 19(b)(2)(viii)-5 and 19(b)(2)(x)-2 on the terms to
maturity which may be used in calculating and disclosing the
historical example and the initial and maximum rates and
payments.
Comments 19(b)(2)-3 and -4 have been renumbered as
comments 19(b)(2)-4 and -5, respectively.
Based upon public
comment and to permit greater flexibility for compliance with the
requirements, new comment 19(b)(2)-3 has been added to describe
the form for disclosures required under section 226.19(b)(2).
The comment incorporates material previously contained in comment
19(b)(2)-l and includes new material which explains that a
creditor may use either a separate disclosure form to describe
each ARM program it offers or a disclosure form which describes
more than one available ARM program.
The comment explains that
the multiple program form must disclose if any program features
are available only in conjunction with certain other features.
Finally, the new comment explains that multiple terms to maturity
or multiple payment amortizations may be illustrated in any
program disclosure form whether the form describes separate or
multiple programs.
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Paragraph 19(b)(2)(iii)
Comment 19(b)(2)(iii)-1 differs from the proposal in two
respects.
The use of the term "balloon payment" has been
replaced by a more specific reference to the type of transactions
subject to the disclosure provisions.
The comment is revised to
clarify that, in transactions where paying the periodic payments
will not fully amortize the loan at the end of the loan term and
where the final payment will equal the periodic payment plus the
remaining unpaid balance, the creditor must disclose that such a
payment will be required.
The creditor, however, need not
reflect any irregular final payment in the historical example or
in the disclosure of the initial and maximum rates and payments.
(The exception for all irregular final payments is an expansion
of the proposed comment, and would include final payments that
differ in amount due to the effect of rate changes.)
Paragraph 19(b)(2)(v)
Comment 19(b)(2)(v)-1 is revised to clarify that consumer
buydowns and third-party buydowns reflected in the consumer's
credit obligation should be disclosed in accordance with the
rules for discounted variable-rate transactions.
The revised
comment also makes clear that no additional disclosures relating
to the buydown need be provided on the program disclosure.
Paragraph 19(b)(2)(vi)
Comment 19(b)(2)(vi)-l is revised to address the
disclosures for transactions in which the interval between
consummation or closing and the initial adjustment is not known
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-- 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 is revised to address the
disclosures for transactions in which the overall limitations on
rate increases (and decreases) vary -- for example, based on the
loan features the consumer chooses or upon fluctuations in the
pricing of the loan.
The final comment extends the alternative
disclosure rule to periodic limitations in addition to overall
rate limitations.
In such cases, the comment explains that the
creditor may disclose the range of the lowest and highest
periodic and overall rate limitations that may be applicable to
the creditor's ARM transactions, and must include a statement
that the consumer ask about the rate limitations that are
currently applicable.
Paragraph 19(b)(2)(viii)
Comment 19(b)(2)(viii)-l is revised to clarify that, in
transactions that end before the last year in the historical
example, the example must illustrate all significant loan program
terms such as rate limitations that would have affected the
interest rate for the remaining years shown in the example.
Comment 19(b)(2)(viii)-5 is added to describe the terms to
maturity or payment amortizations which may be used as a basis
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for the disclosures in ARM transactions.
Based upon public
comment and further consideration, the proposed comment has been
revised.
Under the final comment, creditors will be permitted to
base the disclosures required under section 226.19(b)(2)(viii)
and (x) for ARM loans within certain ranges upon only three
maturities -- five, fifteen and thirty years.
Thus, a creditor
who offers ARM loans for any term over one year would be
permitted to make the disclosures required under these sections
based on five-, fifteen- and thirty-year terms, and need not
illustrate every other maturity that is offered.
The comment
also permits creditors to use five-, fifteen- and thirty-year
term assumptions for disclosing payments based on amortizations
different than the actual loan term.
(Disclosures based on
fifteen- and thirty-year maturities should provide payments that
fairly approximate the payments for long-term ARMs.
Disclosures
based on a five-year maturity should provide payments that fairly
approximate the payments for most short-term ARMs.
Finally, the
comment explains that the creditor would be required to state the
term (or amortization) used in making the disclosures when using
the three terms specified in the comment.)
Comment 19(b)(2)(viii)-6 is added to explain that a
creditor following the alternative rule for disclosing periodic
and overall rate limitations described in revised comment
19(b)(2)(vii)-l must base the historical example upon the highest
rate limitation disclosed under section 226.19(b)(2)(vii).
In
-
14
-
addition, such creditors must state the periodic or overall
limitation used in the historical example.
Comment 19(b)(2)(viii)-7 also is added to explain the
assumptions that can be made by a creditor following the
alternative rule for disclosing the frequency of rate and payment
adjustments 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 19(b)(2)(ix)
Comment 19(b)(2)(ix)-1 states that a creditor should base
the example of how a consumer may calculate their actual payments
on the latest payment shown in the historical example.
The
comment is revised to clarify that, in transactions where the
latest payment shown in the historical example is not for the
latest year of index values shown, a creditor may include
additional examples that are based on the initial or maximum
payments disclosed under section 226.19(b)(2)(x).
This revision
differs from the proposal in that it provides that creditors may
provide the extra examples in addition to, but not as
alternatives for, the example based on the last payment shown in
the historical table.
Paragraph 19(b)(2)(x)
Comment 19(b)(2)(x)-2 is added to allow creditors to base
their calculations of the initial and maximum rates and payments
upon the terms to maturity stated in new comment
-
19(b)(2)(viii)-5.
15
-
The comment explains that the term used for
making disclosures under section 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 is added to describe how a creditor
following the alternative rule for disclosing periodic and
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
must base the disclosure of the maximum rate and payment upon the
highest periodic and overall rate limitation disclosed under
section 226.19(b)(2)(vii).
The creditor would be further
required to state the periodic and overall rate limitations used
in calculating the maximum rate and payment.
Comment 19(b)(2)(x)-4 also is 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 comment explains that the creditor
must assume that the first adjustment occurs at the earliest time
disclosed under section 226.19(b)(2)(v i ).
SECTION 226.20 -- Subsequent Disclosure Requirements
20(b) Assumptions
The proposed amendment to comment 20(b)-6 to add a cross
reference to section 226.19(b) is deleted as unnecessary.
-
16
-
20(c) Variable-Rate Adjustments
Paragraph 20(c)(4)
Comment 20(c)(4)-l differs from the proposal in that it
replaces the term "balloon payment" with a more specific
reference to the type of transactions covered by the disclosure
provisions.
The comment is revised to clarify that the
provisions of this paragraph apply to transactions in which
paying the periodic payments will not fully amortize the
outstanding balance at the end of the loan term and where the
final payment will equal the periodic payment plus the remaining
unpaid balance.
The comment explains that the creditor should
disclose any change in such a payment that results from an
interest rate adjustment.
Paragraph 20(c)(5)
Comment 20(c)(5)—1 is revised to clarify that the
provisions of this paragraph apply only when negative
amortization occurs in a transaction, and not merely because a
payment is a non-amortizing or partially amortizing payment.
SECTION 226.24 -- Advertising
24(b) Advertisement of Rate of Finance Charge
Although not reprinted in this notice, comment 24(b)-5 is
revised to change the references to comment 18(f)-8 to be comment
17(c)(1)-10.
No substantive change is intended.
-
17
-
SUBPART D -- MISCELLANEOUS
SECTION 226.25 -- Record Retention
25(a) General Rule
Comment 25(a)-3 is added to address the record retention
requirements for variable-rate transactions that are subject to
the disclosure requirements of section 226.19(b).
The comment
explains that maintaining written procedures for compliance with
the disclosure provisions as well as retaining a sample
disclosure form for each loan program will be adequate evidence
of compliance.
The comment also states that creditors may rely
on the methods for reconstructing the required disclosures
provided for under comment 25 (a)-2.
SECTION 226.30 -- Limitation on Rates
Comment 30-8 is revised to clarify that this paragraph
applies to the manner of stating the maximum interest rate in the
credit contract only.
This paragraph does not govern how
interest rate ceilings should be stated in Truth in Lending
disclosures.
The disclosures are governed by provisions found
elsewhere in the regulation and commentary.
Comment 30-13, concerning footnote 50, is revised to
clarify the requirements of the regulation after October 1, 1988.
For purposes of section 226.30, the rate must be stated in the
credit contract as prescribed in comment 30-8.
The disclosure
requirements for limitations on rate increases are described
elsewhere in the regulation and commentary.
-
18
-
APPENDIX D -- Multiple-Advance Construction Loans
Although not reprinted in this notice, the first sentence
of comment app. D-2 is revised to delete the word "most" and to
change the reference to section 226.18(f)(4) to be section
226.18(f)(1)(iv).
No substantive change is intended by either
revision.
List of Subjects in 12 CFR Part 226
Advertising, Banks, Banking, Consumer protection, Credit,
Federal Reserve System, Finance, Penalties, Rate limitations,
Truth in Lending.
Certain conventions have been used to highlight the
revisions.
New language is shown inside bold-faced arrows, while
language that has been deleted is set off with brackets.
(3) Text of revisions.
Pursuant to authority granted in section
105 of the Truth in Lending Act (15 U.S.C. 1604 as amended) and
section 1204 of the Competitive Equality Banking Act, Pub. L.
100-86, 101 Stat. 552, the Board amends the official staff
commentary to Regulation Z (12 CFR Part 226 Supp. I) as follows:
1.
The authority citation for Part 226 continues to read:
AUTHORITY:
Sec. 105, Truth in Lending Act, as amended by
sec. 605, Pub. L. 96-221, 94 Stat. 170 (15 U.S.C. 1604 et seq.);
sec. 1204(c), Competitive Equality Banking Act, Pub. L. 100-86,
101 Stat. 552.
2.
The revisions amend the commentary (TIL-1, 12 CFR Part
226 Supp.I) by adding comment 2(a)(25)-6; adding a sentence and a
bullet at the end of comment 4(a)-3; revising the heading and
-
19
-
text of comment 4(b)(7) and (8)-2; adding a bullet at the end of
comment 17(a)(l)-5; adding two sentences after the first
sentence, and revising the second and third sentences and the
parenthetical material in comment 17(c)(l)-8; redesignating
comments 17(c)(1)-14 and -15 to be comments 17(c)(1)-15 and -16,
respectively; adding comment 17(c)(1)-14; adding parenthetical
material at the end of comment 18(f)(2)-l; adding three sentences
at the end of comment 19(b)-l; revising the first, third and
fourth sentences, adding a sentence after the third sentence, and
removing the last three sentences of comment 19(b)(2)-l; revising
the second, third, and fifth sentences of comment 19(b)(2)-2
redesignating comments 19(b)(2)-3 and -4 to be comments
19(b)(2)-4 and -5, respectively; adding comment 19(b)(2)-3;
adding three sentences after the second sentence in comment
19(b)(2)(iii)-1; adding a new sentence before the parenthetical
material at the end of comment 19(b)(2)(v)-l; adding four
sentences and parenthetical material at the end of comment
19(b)(2)(vi)-l; adding five sentences and parenthetical material
at the end of comment 19(b)(2)(vii)-1; revising the third
sentence in the parenthetical material after the first sentence
in comment 19(b)(2)(viii)-1; adding comments 19(b)(2)-5, -6 and
-7; adding a sentence after the second sentence in comment
19(b)(2)(ix)-l; adding comments 19(b)(2)(x)-2, -3 and -4; adding
a sentence after the second sentence in comment 20(c)(4)-1;
revising comment 20(c)(5)-l; changing the references to "comment
18(f)-8" in the first sentence and in the first bullet of comment
20
-
-
24(b)-5 to be "comment 17(c)(1)-10"; adding comment 25(a)-3;
revising the first sentence of comment 30-8; revising the last
sentence in comment 30-13; removing the word "most" and changing
the reference to "section 226.18(f)(4)" in comment app. D-2 to be
"section 226.18(f)(1)(iv)" to read as follows:
*
*
*
*
*
*
*
*
*
*
SUBPART A -- GENERAL
SECTION 226.2 -- Definitions and Rules of Construction
2(a) Definitions
*
*
*
*
*
*
*
*
2(a)(25) "Security Interest"
*
*
►6. Specificity of disclosure.
A creditor need not separately
disclose multiple security interests that it may hold in the same
collateral.
The creditor need only disclose that the transaction
is secured by the collateral, even when security interests from
prior transactions remain of record and a new security interest
is taken in connection with the transaction.■*
*
*
*
*
*
*
*
SECTION 226.4 -- Finance Charge
4(a) Definition
*
3.
*
Charges by third parties.
*
*
*
*
►In contrast, charges imposed on the consumer by someone other
21
-
-
than the creditor are finance charges (unless otherwise excluded)
if the creditor requires the services of the third party.
For
example:
•
A fee charged by a loan broker if the consumer cannot
obtain the same credit terms from the creditor without using
a broker .<
*
*
*
*
*
4(b) Examples of Finance Charges
*
*
*
*
*
*
*
*
Paragraphs 4(b)(7) and (8)
*
2.
*
Insurance written rafter consummation.3 ►in connection with a
transaction.*
[In closed-end credit transactions, insurance]
► Insurance-* sold after consummation ►in closed-end credit
transactions or after the opening of a plan in open-end credit
transactions* is not "written in connection with" the credit
transaction if the insurance is written because of the consumer's
default (for example, by failing to obtain or maintain required
property insurance) or because the consumer requests insurance
after consummation ►or the opening of a plan* (although credit
sale disclosures may be required for the insurance ►sold after
consummation* if it is financed).
*
*
*
*
*
22
-
-
SUBPART C -- CLOSED-END CREDIT
SECTION 226.17 -- General Disclosure Requirements
17(a) Form of Disclosures
Paragraph 17(a)(1)
*
5.
*
Directly related.
*
*
*
*
*
*
The disclosures set forth under section 226.18(f)(1) for
variable-rate transactions subject to section 226.18(f)(2).*
*
*
*
*
*
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)
*
8.
*
*
*
*
Basis of disclosures in variable-rate transactions. *
*
*
►Creditors should base the disclosures only on the initial rate
and should not assume that this rate will increase.
For example,
in a loan with an initial rate of 10 percent and a 5 percentage
points rate cap, creditors should base the disclosures on the
initial rate and should not assume that this rate will increase 5
percentage points.*
However, in a variable-rate transaction with
[either] a seller buydown that is reflected in the credit
contract [or] ►,* a consumer buydown, ►or a discounted or premium
rate,* disclosures should not be based solely on the initial
terms.
In those transactions, the disclosed annual percentage
rate should be a composite rate based on the [lower rate for the
buydown period] ►rate in effect during the initial period* and
the rate that is the basis of the variable-rate feature for the
-
remainder of the term.
23
-
(See the commentary to section 226.17(c)
for a discussion of buydown ►.discounted, and premium*
transactions and the commentary to section 226.19(a)(2) for a
discussion of the redisclosure in certain residential mortgage
transactions with a variable-rate feature).
*
►14. Reverse mortgages.
*
*
*
*
Reverse mortgages, also known as reverse
annuity or home equity conversion mortgages, typically involve
the disbursement of monthly advances to the consumer for a fixed
period or until the occurrence of an event such as the consumer's
death.
Repayment of the loan (generally a single payment of
principal and accrued interest) may be required to be made at the
end of the disbursements or, for example, upon the death of the
consumer.
In disclosing these transactions, creditors must apply
the following rules, as applicable:
•
If the reverse mortgage has a specified period for
disbursements but repayment is due only upon the occurrence
of a future event such as the death of the consumer, the
creditor must assume that disbursements will be made until
they are scheduled to end.
The creditor must assume
repayment will occur when disbursements end (or within a
period following the final disbursement which is not longer
than the regular interval between disbursements).
This
assumption should be used even though repayment may occur
before or after the disbursements are scheduled to end.
In
such cases, the creditor may include a statement such as "The
-
24
-
disclosures assume that you will repay the loan at the time
our payments to you end.
As provided in your agreement, your
repayment may be required at a different time."
If the reverse mortgage has neither a specified period for
disbursements nor a specified repayment date and these terms
will be determined solely by reference to future events
including the consumer's death, the creditor may assume that
the disbursements will end upon the consumer's death
(estimated by using actuarial tables, for example) and that
repayment will be required at the same time (or within a
period following the date of the final disbursement which is
not longer than the regular interval for disbursements).
Alternatively, the creditor may base the disclosures upon
another future event it estimates will be most likely to
occur first.
(If terms will be determined by reference to
future events which do not include the consumer's death, the
creditor must base the disclosures upon the occurence of the
event estimated to be most likely to occur first.)
In making the disclosures, the creditor must assume that all
disbursements and accrued interest will be paid by the
consumer.
For example, if the note has a nonrecourse
provision providing that the consumer is not obligated for an
amount greater than the value of the house, the creditor must
nonetheless assume that the full amount to be disbursed will
be repaid.
In this case, however, the creditor may include a
statement such as "The disclosures assume full repayment of
25
-
-
the amount advanced plus accrued interest, although the
amount you may be required to pay is limited by your
agreement."
Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared
between the consumer and the creditor.
Such loans are
considered variable-rate mortgages, as described in comment
17(c)(l)-ll, and the appreciation feature must be disclosed
in accordance with section 226.18(f)(1).
If the reverse
mortgage has a variable interest rate, is written for a term
greater than one year, and is secured by the consumer's
principal dwelling, the shared appreciation feature must be
described under section 226.19 (b) (2 )(vii ).■«
*
*
*
*
*
SECTION 226.18 -- Content of Disclosures
*
*
*
*
*
*
*
*
*
*
18(f) Variable Rate
Paragraph 18(f)(2)
1.
Disclosure required.
*
*
* ►(See the commentary to
section 226.17(a)(1) regarding the disclosure of certain directly
related information in addition to the variable-rate disclosures
required under section 226.18(f)(2).)*
*
*
*
*
*
26
-
-
SECTION 226.19 -- Certain Residential Mortgage Transactions
*
*
*
*
*
19(b) Certain Variable-Rate Transactions
1.
Coverage.
*
*
*
determining whether a
construction loan that may be permanently financed by the same
creditor is covered under this section, the creditor may treat
the construction and the permanent phases as separate
transactions with distinct terms to maturity or as a single
combined transaction.
For purposes of the disclosures required
under section 226.18, the creditor may nevertheless treat the two
phases either as separate transactions or as a single combined
transaction in accordance with section 226.17(c)(6).
Finally, in
any assumption of a variable-rate transaction secured by the
consumer's principal dwelling with a term greater than one year,
disclosures need not be provided under sections 226.18(f)(2)(ii)
or 226.19(b).*
*
*
*
*
*
Paragraph 19(b)(2)
1.
Disclosure for each variable-rate program.
A creditor must
provide disclosures to the consumer that fully [and separately)
describe each of the creditor's variable-rate loan programs in
which the consumer expresses an interest. *
*
*
[These
disclosures] ►Disclosures* must be given at the time an
application form is provided or before the consumer pays a
nonrefundable fee, whichever is earlier.
H f program disclosures
cannot be provided because a consumer expresses an interest in
-
27
-
individually negotiating loan terms that are not generally
offered, disclosures reflecting those terms may be provided as
soon as reasonably possible after the terms have been decided
upon, but not later than the time a non-refundable fee is paid.-*
If [the] ►a-* consumer ►who has received program disclosures-*
subsequently expresses an interest in other available
variable-rate programs subject to section 226.19(b)(2), ►or the
creditor and consumer decide on a program for which the consumer
has not received disclosures,-* the creditor must provide
► appropriate-* disclosures [for such additional programs] ►as soon
as reasonably possible-*. *
*
* [An individual program
disclosure may consist of more than one page.
For example, a
creditor may attach a separate page containing the historical
payment example for the particular program.
In addition, these
disclosures may be inserted or printed in the Consumer Handbook
(or a suitable substitute) as long as they are identified as the
creditor's loan-program disclosures .3
2.
Variable-rate loan program defined.
*
*
*
For example,
separate loan [-program disclosures would be required] ►programs
would exist-* based on differences in any of the following loan
features: *
*
*
In addition, if a loan feature [such as the
term of the loan] must be taken into account in preparing the
disclosures required by section 226.19(b)(2)(viii) and (x),
variable-rate loans that differ as to that feature constitute
separate programs [and require separate loan-program disclosures]
under section 226.19(b)(2). *
*
*
For example, separate
28
-
-
[program disclosures would not be required] ►programs would not
exist* based on differences in the following loan features: * * *
►3. Form of program disclosures.
A creditor may provide separate
program disclosure forms for each ARM program it offers or a
single disclosure form that describes multiple programs.
disclosure form may consist of more than one page.
A
For example,
a creditor may attach a separate page containing the historical
payment example for a particular program.
A disclosure form
describing more than one program need not repeat information
applicable to each program that is described.
For example, a
form describing multiple programs may disclose the information
applicable to all of the programs in one place with the various
program features (such as options permitting conversion to a
fixed rate) disclosed separately.
The form, however, must state
if any program feature that is described is available only in
conjunction with certain other program features.
Both the
separate and multiple program disclosures may illustrate more
than one loan maturity or payment amortization -- for example, by
including multiple payment and loan balance columns in the
historical payment example.
Disclosures may be inserted or
printed in the Consumer Handbook (or a suitable substitute) as
long as they are identified as the creditor's loan program
disclosures.•«
*
*
*
*
*
29
-
-
Paragraph 19(b)(2)(iii)
1.
Determination of interest rate and payment.
*
*
*
►In
transactions where paying the periodic payments will not fully
amortize the outstanding balance at the end of the loan term and
where the final payment will equal the periodic payment plus the
remaining unpaid balance, the creditor must disclose this fact.
For example, the disclosure might read, "Your periodic payments
will not fully amortize your loan and you will be required to
make a single payment of the periodic payment plus the remaining
unpaid balance at the end of the loan term."
The creditor,
however, need not reflect any irregular final payment in the
historical example or in the disclosure of the initial and
maximum rates and payments.*
*
*
*
*
*
*
*
*
Paragraph 19(b) (2)(v)
1.
Discounted and premium interest rate.
*
*
*
►In a transaction with a consumer buydown or with a third-party
buydown that will be incorporated in the legal obligation, the
creditor should disclose the program as a discounted
variable-rate transaction, but need not disclose additional
information regarding the buydown in its program disclosures.*
*
*
*
Paragraph 19(b)(2)(vi)
1.
Frequency.
*
*
*
►in certain ARM transactions, the
interval between loan closing and the initial adjustment is not
known and may be different from the regular interval for
-
adjustments.
30
-
In such cases, the creditor may disclose the
initial adjustment period as a range of the minimum and maximum
amount of time from consummation or closing.
creditor might state:
For example, the
"The first adjustment to your interest
rate and payment will occur no sooner than 6 months and no later
than 18 months after closing.
Subsequent adjustments may occur
once each year after the first adjustment."
(See comments
19(b)(2)(viii)-7 and 19(b)(2)(x)-4 for guidance on other
disclosures when this alternative disclosure rule is used.)*
Paragraph 19(b)(2)(vii)
1.
Rate and payment caps.
*
*
*
►The creditor need not
disclose each periodic or overall rate limitation that is
currently available.
As an alternative, the creditor may
disclose the range of the lowest and highest periodic and overall
rate limitations that may be applicable to the creditor's ARM
transactions.
For example, the creditor might state:
"The
limitation on increases to your interest rate at each adjustment
will be set at an amount in the following range:
percentage points at each adjustment.
between 1 and 2
The limitation on
increases to your interest rate over the term of the loan will be
set at an amount in the following range:
between 4 and 7
percentage points above the initial interest rate."
A creditor
using this alternative rule must include a statement in its
program disclosures suggesting that the consumer ask about the
overall rate limitations currently offered for the creditor's ARM
programs.
(See comments 19(b)(2)(viii)-6 and 19(b)(2)(x)-3 for
31
-
-
an explanation of the additional requirements for a creditor
using this alternative rule for disclosure of periodic and
overall rate limitations.)*
*
*
*
Paragraph 19(b)(2)(viii)
1.
Index movement.
* * *
For the remaining ten years,
1982-1991, the creditor need only show the remaining index
values, margin and interest rate£.] ►and must continue to reflect
all significant loan program terms such as rate limitations
affecting them.*) *
*
*
►5.
Term of the loan.
*
*
*
*
*
In calculating the payments and loan
balances in the historical example, a creditor need not base the
disclosures on each term to maturity or payment amortization that
it offers.
Instead, disclosures for ARMs may be based upon terms
to maturity or payment amortizations of 5, 15 and 30 years, as
follows:
ARMs with terms or amortizations from over 1 year to 10
years may be based on a 5-year term or amortization; ARMs with
terms or amortizations from over 10 years to 20 years may be
based on a 15-year term or amortization; and ARMs with terms or
amortizations over 20 years may be based on a 30-year term or
amortization.
Thus, disclosures for ARMs offered with any term
from over 1 year to 40 years may be based solely on terms of 5,
15 and 30 years.
Of course, a creditor may always base the
disclosures on the actual terms or amortizations offered.
If the
creditor bases the disclosures on 5-, 15- or 30-year terms or
-
32
-
payment amortizations as provided above, the term or payment
amortization used in making the disclosure must be stated.
6.
Rate caps.
A creditor using the alternative rule described
in comment 19(b)(2)(vii)-l for disclosure of rate limitations
must base the historical example upon the highest periodic and
overall rate limitations disclosed under section 226.19(b)(2)(vii).
In addition, the creditor must state the limitations used in the
historical example.
(See comment 19(b)(2)(x)-3 for an
explanation of the use of the highest rate limitation in other
disclosures.)
7.
Frequency of adjustments.
In certain transactions, creditors
may use the alternative rule described in comment 19(b)(2)(vi)-l
for disclosure of the frequency of rate and payment adjustments.
In such cases, the creditor may assume for purposes of the
historical example that the first adjustment occurred at the end
of the first full year in which the adjustment could occur.
For
example, in an ARM in which the first adjustment may occur
between 6 and 18 months after closing and annually thereafter,
the creditor may assume that the first adjustment occurred at the
end of the first year in the historical example.
(See comment
19(b)(2)(x)-4 for an explanation of how to compute the maximum
interest rate and payment when the initial adjustment period is
not known.)*
Paragraph 19(b)(2)(ix)
1.
Calculation of payments.
* * * ►However, in transactions in
which the latest payment shown in the historical example is not
33
-
-
for the latest year of index values shown (such as in a five-year
loan), a creditor may provide additional examples based on the
initial and maximum payments disclosed under section
226.19(b)(x).* * * *
Paragraph 19(b)(2)(x)
*
►2.
Term of the loan.
*
*
*
*
In calculating the initial and maximum
payments, the creditor need not base the disclosures on each term
to maturity or payment amortization offered under the program.
Instead, the creditor may follow the rules set out in comment
19(b)(2)(viii)-5.
In calculating the initial and maximum
payment, the terms to maturity or payment amortizations selected
for the purpose of making disclosures under section
226.19(b)(2)(viii) must be used.
In addition, creditors must
state the term or payment amortization used in making the
disclosures under this section.
3.
Rate caps.
A creditor using the alternative rule for
disclosure of interest rate limitations described in comment
19(b)(2)(vii)-1 must calculate the maximum interest rate and
payment based upon the highest periodic and overall rate
limitations disclosed under section 226.19(b)(2)(vii).
In
addition, the creditor must state the rate limitations used in
calculating the maximum interest rate and payment.
(See comment
19(b)(2)(viii)-6 for an explanation of the use of the highest
rate limitation in other disclosures.)
34
-
4.
Frequency of adjustments.
-
In certain transactions, a
creditor may use the alternative rule for disclosure of the
frequency of rate and payment adjustments described in comment
19(b)(2)(vi)-l.
In such cases, the creditor must base the
calculations of the initial and maximum rates and payments upon
the earliest possible first adjustment disclosed under section
226.19(b)(2)(vi).
(See comment 19(b)(2)(viii)-7 for an
explanation of how to disclose the historical example when the
initial adjustment period is not known.)*
*
*
*
*
*
SECTION 226.20 -- Subsequent Disclosure Requirements
*
*
*
*
*
20(c) Variable-Rate Adjustments
*
*
*
*
*
Paragraph 20(c)(4)
1.
Contractual effects of the adjustment.
*
*
*
► in
transactions where paying the periodic payments will not fully
amortize the outstanding balance at the end of the loan term and
where the final payment will equal the periodic payment plus the
remaining unpaid balance, the amount of the adjusted payment must
be disclosed if such payment has changed as a result of the rate
adjustment.* *
*
*
Paragraph 20(c)(5)
1.
Fully-amortizing payment.
[A disclosure is required if the
payment disclosed in section 226.20(c)(4) is not sufficient to
35
-
-
pay off the loan balance (including capitalized interest) in the
remaining term of the loan at the adjusted interest rate.
such cases, the}
In
►This paragraph requires a disclosure only when
negative amortization occurs as a result of the adjustment.
A
disclosure is not required simply because a loan calls for
non-amortizing or partially amortizing payments.
For example, in
a transaction with a five-year term and payments based on a
longer amortization schedule, and where the final payment will
equal the periodic payment plus the remaining unpaid balance, the
creditor would not have to disclose the payment necessary to
fully amortize the loan in the remainder of the five-year term.
A disclosure is required, however, if the payment disclosed under
section 226.20(c)(4) is not sufficient to prevent negative
amortization in the loan.
The* adjustment notice must state the
payment required to [fully amortize the loan over the remainder
of the term}
►prevent negative amortization*.
(This paragraph
does not apply if the [new] payment disclosed in section
226.20(c)(4) is [fully amortizing] ►sufficient to prevent
negative amortization in the loan* but the final payment will be
a different amount due to rounding.)
*
*
*
*
*
36
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SUBPART D -- MISCELLANEOUS
SECTION 226.25 -- Record Retention
25(a) General Rule
*
*
*
*
►3. Certain variable-rate transactions.
*
In variable-rate
transactions that are subject to the disclosure requirements of
section 226.19(b), written procedures for compliance with those
requirements as well as a sample disclosure form for each loan
program represent adequate evidence of compliance.
(See comment
25(a)-2 pertaining to permissible methods of retaining the
required disclosures .)+
*
*
*
*
*
SECTION 226.30 -- Limitation on Rates
*
8.
*
*
*
*
Manner of stating the maximum interest rate.
The maximum
interest rate must be stated ►in the credit contract* either as a
specific amount or in any other manner that would allow the
consumer to easily ascertain, at the time of entering into the
obligation, what the rate ceiling will be over the term of the
obligation.
*
*
*
*
13.
Transition rules.
*
*
*
*
*
*
* On or after that date,
creditors must have the maximum rate set forth in their credit
contracts and, where applicable, as part of their truth in
lending disclosures
[.1
►in the manner prescribed in the
applicable sections of the regulation .*
-
37
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Board of Governors of the Federal Reserve System, February 28,
1989.
(signed) William W. Wiles
William W. Wiles
Secretary of the Board
@FedFRASER