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Federal R eserve Bank
OF DALLAS
WILLIAM H. WALLACE
DALLAS, TEXAS 7 5 2 2 2
f i r s t v ic e p r e s i d e n t
April 6, 1988
Circular 88-27
TO:
The Chief Executive Officer of all
member banks and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Regulation B (Equal Credit Opportunity); Regulation E (Electronic
Funds Transfers); and Regulation Z (Truth in Lending)
DETAILS
Attached for your information are the Board of Governors' press
releases announcing changes to the official staff commentary for three of the
Board's consumer credit regulations -- Regulation B, Regulation E and
Regulation Z.
The final revisions to the staff commentary for Regulation B address
issues concerning consideration of age in evaluating creditworthiness,
signature requirements, record retention and collection of monitoring
information.
The revisions to the staff commentary for Regulation E include
clarification of the amendments adopted by the Board in August 1987 concerning
point-of-sale/automated clearinghouse services.
The Regulation Z staff commentary has been amended to include
interpretations of the Board's rule that adjustable rate mortgages contain a
maximum interest rate. The changes to the commentary also provide guidance to
creditors in complying with the amendment to Regulation that was adopted by
the Board in December 1987 to provide more information to consumers about
certain variable rate loans.
ATTACHMENTS
The Board's press releases and text of changes are attached.
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
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MORE INFORMATION
Questions regarding the changes to the commentaries should be
directed to 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,
FEDERA^ESERVEMjjrBS^glease
For immediate release
April 1, 1988
The Federal Reserve Board today published an official staff
commentary for three of its consumer credit protection regulations-Regulation B (Equal Credit Opportunity), Regulation E (Electronic
Fund Transfers) and Regulation Z (Truth in Lending).
The final revisions to the staff commentary for Regulation B
address issues concerning consideration of age in evaluating
creditworthiness, signature requirements, record retention and
collection of monitoring information.
The final revisions to the staff commentary for Regulation E
clarify the amendments adopted by the Board in August 1987 concerning
point-of-sale/automated clearinghouse services.
The revisions deal
with issues such as institutions' responsibilities concerning periodic
statements, card issuance and error resolution.
Revisions to the Regulation Z staff commentary address
disclosure questions raised by the emergence of conversion features in
adjustable-rate mortgages and the imposition of fees that are
considered finance charges at the time a credit card plan is renewed.
Commentary is also inc-luded which interprets the Board's rule
implementing the requirement of the Competitive Equality Banking Act
that adjustable-rate mortgages contain a maximum interest rate.
The Board's notices are attached.
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Attachment
0
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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 revisions to the
official staff commentary to Regulation B (Equal Credit
Opportunity).
The commentary applies and interprets the
requirements of Regulation B and is a substitute for individual
staff interpretations of the regulation.
The revisions address
issues concerning consideration of age in evaluating
creditworthiness, signature requirements, record retention and
collection of monitoring information.
EFFECTIVE DATE:
April 1, 1988.
FOR FURTHER INFORMATION CONTACT:
Kathleen S. Brueger or Leonard
N. Chanin, Staff Attorneys, or Adrienne D. Hurt, Senior Attorney,
Division of Consumer and Community Affairs, at (202) 452-2412 or
452-3667; for the hearing impaired only, contact Earnestine Hill
or Dorothea Thompson, Telecommunication 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:
(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).
On November 20, 1985, an official staff commentary
(EC-1, Supp. I to 12 CFR Part 202) was published to interpret the
regulation (50 FR 48018).
The commentary is designed to provide
guidance to creditors in applying the regulation to specific
transactions.
The commentary is updated periodically to address
significant questions that arise.
The previous update was
published in April 1987 (52 FR 10732).
This notice contains the
second update, which was proposed for comment on December 10,
1987 (52 FR 47589).
The revisions are effective April 1, 1988.
(2) Revisions
The following is a brief description of the revisions
to the commentary:
SECTION 202.6 —
Rules Concerning Evaluation of Applications
6(b) Specific Rules Concerning Use of Information
Paragraph 6(b)(2)
Comment 6(b)(2)-l is amended to clarify that while
section 202.6(b)(2)(iv) permits favoring persons age 62 and older
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3
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both in evaluating creditworthiness and in the credit terms
offered, that paragraph does not permit offering more favorable
credit terms to an age group that includes persons under age 62
(such as persons age 55 and older).
To offer a program favoring
a larger age group, the creditor must rely on the special purpose
credit provisions of section 202.8.
The additional language does
not, of course, affect consideration of age in evaluating
creditworthiness in a credit scoring system, as described in
comment 6(b)(2)-2.
Comment 6(b)(2)-3 is amended to clarify that, in a
judgmental system, age or age-related information about an
applicant may be considered only in connection with other
relevant information about the particular applicant or
transaction.
SECTION 202.7 —
Rules Concerning Extensions of Credit
7(d) Signature of Spouse or Other Person
Paragraph 7(d)(5)
Comment 7(d)(5)-2 is revised in light of United States
v. ITT Consumer Financial Corp.. 816 F.2d 487 (9th Cir. 1987) to
clarify the rules about when a creditor may require additional
signatures on a credit obligation in a community property state.
In the ITT case, the U.S. Court of Appeals for the Ninth Circuit
held that the future earnings of a spouse cannot be characterized
as community property until they are earned.
Therefore, when an
applicant relies on the spouse's future earnings to establish
creditworthiness, a creditor may condition the extension of
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credit on the nonapplicant spouse's signing the credit
obligation.
Whether an applicant is relying on the future earnings
of a nonapplicant spouse is for the creditor to determine.
Because section 202.5(c)(2)(iv) permits a creditor routinely to
request information about a nonapplicant spouse, the mere fact
that the nonapplicant spouse's income is listed on an application
form is insufficient to show that the applicant is relying on the
spouse's income.
In addition to revisions to the first and second
sentence of comment 7(d)(5)-2, a third sentence has been added to
incorporate the holding of ITT and to address questions raised by
creditors. Some creditors have asked whether, given the ITT
ruling, they are required to obtain the signature of the
applicant's spouse whose future earnings are relied on for an
extension of credit.
Creditors also have asked whether they may
take marital status into consideration when future earnings are
relied.on —
that is, whether a creditor may follow the practice
of not requiring the signature of an applicant's spouse if it is
the creditor's practice to require a signature when it is a
person not married to the applicant whose future earnings are
relied on.
They explain that, in the case of a spouse, the
creditor is assuming the spouse's future earnings -- unlike the
future earnings of a nonspouse —
will become community property
once earned, under state property law.
comment addresses both of these points.
The third sentence of the
A reference to section
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202.6(c), which allows the consideration of state property laws,
has also been added.
SECTION 202.12 —
Record Retention
12(b) Preservation of Records
Comment 12(b)-l is revised to clarify the rules for
record retention of documents (for example, notifications of
action taken) in computerized systems.
SECTION 202.13 —
Information for Monitoring Purposes
13(a) Information to Be Requested
Comment 13(a)-5 is revised to clarify the monitoring
information rules regarding open-end lines of credit.
List of Subjects in 12 CFR 202
Banks, Banking, Civil rights, Consumer protection,
Credit, Federal Reserve System, Marital status discrimination,
Minority groups, Penalties, Religious discrimination, Sex
discrimination, Women.
Certain conventions have been used to highlight the
revisions to the commentary.
New language is shown inside
bold-faced arrows and underlined, while language that has been
removed is set off with brackets.
(3) Text of revisions
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:
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1. The authority citation for Part 202 continues to
read:
AUTHORITY: 15 U.S.C. 1691 et seq.
2. The revisions amend the commentary (12 CFR Part 202,
Supp. I) by revising comments 6(b)(2)-l, 6(b)(2)-3, 7(d)(5)-2,
12(b)-l and 13(a)-5 to read as follows:
SUPPLEMENT I - Official Staff Commentary
*
SECTION 202.6 —
*
*
*
*
Rules Concerning Evaluation of Applications
*
*
*
*
*
6(b) Specific Rules Concerning Use of Information
*
*
*
*
*
Paragraph 6(b)(2)
1. Favoring the elderly.
Any system of evaluating credit
worthiness may favor a credit applicant who is age 62 or older.
»A credit program that offers more favorable credit terms to
applicants age 62 or older is also permissible: a program that
offers more favorable credit terms to applicants at an age lower
than 62 is permissible only if it meets the special-purpose
credit requirements of section 202.8.«
*
*
*
*
*
3. Consideration of age in a judgmental system.
In a judgmental
system, defined in section 202.2(t), a creditor may not take age
directly into account in any aspect of the credit transaction.
For example, the creditor may not reject an application or
terminate an account because the applicant is 60 years old.
But
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a creditor that uses a judgmental system may relate the
applicant's age to other information about the applicant that the
creditor considers in evaluating creditworthiness.
°
For example:
A creditor may consider the applicant's occupation
and length of time to retirement to ascertain
whether the applicant's income (including retirement
income) will support the extension of credit to its
maturity.
°
A creditor may consider the adequacy of any security
offered when the term of the credit extension
exceeds the life expectancy of the applicant and the
cost of realizing on the collateral could exceed the
applicant's equity.
(An elderly applicant might not
qualify for a 5 percent down, 30-year mortgage loan
but might qualify with a larger downpayment or a
shorter loan maturity.)
°
A creditor may consider the applicant's age to
assess the significance of the length of the
applicant's employment (a young applicant may have
just entered the job market) or length of time at an
address (an elderly applicant may recently have
retired and moved from a long-term residence).
►As the examples above illustrate, the evaluation must be made in
an individualized, case-bv-case manner: and it is impermissible
for a creditor, in deciding whether to extend credit or in
setting the terms and conditions, to base its decision on age or
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information related exclusively to age.
Age or age-related
information may be considered only in evaluating other ’pertinent
’
elements of creditworthiness” that are drawn from the particular
facts and circumstances concerning the applicant.*
*
SECTION 202.7 —
*
*
*
*
Rules Concerning Extensions of Credit
*
*
*
*
*
7(d) Signature of Spouse or Other Person
*
*
*
*
*
*
*
*
*
*
Paragraph 7(d)(5)
2. Reliance on income of another person —
individual credit. An
applicant who requests individual credit relying on the income of
another person (|such as} ►including* a spouse »in a noncommunitv
property state*) may be required to provide the signature of the
other person to make the income available to pay the debt.
In
community property states, the signature fof a spouse* may be
r
required if the applicant relies on the ►spouse *s* separate
income ►-_* Cof another person, i.e., income] »If the applicant
2
relies on the spouse's future earnings* that as a matter of state
law Cis not} ►cannot be characterized as* community property C.}
►until earned, the creditor may require the spouse's signature,
but need not do so -- even if it is the creditor's practice to
require the signature when an applicant relies on the future
earnings of a person other than a spouse.
on consideration of state property laws.)*
(See section 202.6(c)
-
*
SECTION 202.12 —
*
9
*
-
*
*
*
*
Record Retention
*
*
*
12(b) Preservation of Records
1. Copies. A copy of the original record includes carbon copies,
photocopies, microfilm or microfiche copies, or copies produced
by any other accurate retrieval system, such as documents stored
and reproduced by computer.
»A creditor that uses a computerized
or mechanized system need not keep a written copy of a document
(for example, an adverse action notice) if it can regenerate all
pertinent information in a timely manner for examination or other
purposes.<
*
SECTION 202.13 —
*
*
*
*
Information for Monitoring Purposes
13(a) Information to Be Requested
*
*
5. Transactions not covered.
*
*
*
The information-collection
requirements of ►this* section [202.13(a)] apply to applications
for credit primarily for the purchase or refinancing of a
dwelling that is or will become the applicant's principal
residence.
Therefore, [applications for home-equity lines and
other] applications for credit secured by the applicant's
principal residence but made primarily for a purpose other than
the purchase or refinancing of the principal residence (such as
loans for home improvement and debt consolidation) are not
subject to information-collection requirements [of section
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202.13(a)3 . ►An application for an open-end home equity line of
credit is not subject to this section unless it is readily
apparent to the creditor when the application is taken that the
primary purpose of the line is for the purchase or refinancing of
a principal dwelling.*
Board of Governors of the Federal Reserve System, March
30, 1988.
(signed) William W. Wiles
William W. Wiles
Secretary of the Board
FEDERAL RESERVE SYSTEM
12 CFR Part 205
[Reg. 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 regulation, including
amendments adopted by the Board in August 1987 dealing with
POS/ACH services.
The revisions deal with, for example, the
responsibilities of a service-providing institution concerning
periodic statements, card issuance, and error resolution.
EFFECTIVE DATE:
April. 1, 1988.
FOR FURTHER INFORMATION:
Contact Thomas J. Noto, Staff Attorney,
or John C. Wood, Senior Attorney, Division of Consumer and
Community Affairs, at (202) 452-2412; for the hearing-impaired
only, contact Earnestine Hill or Dorothea Thompson,
Telecommunication 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:
2
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(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).
Effective September 24, 1981, an official staff
commentary (EFT-2, Supp. II to 12 CFR Part 205) was published to
interpret the regulation.
The commentary is designed to provide
guidance to financial institutions in applying the regulation to
specific situations.
The commentary is updated periodically to
address significant questions that arise.
The previous updates
were published on April 6, 1983 (48 FR 14880), October 18, 1984
(49 FR 40794), April 3, 1985 (50 FR 13180), April 21, 1986 (51 FR
13484), and April 3, 1987 (52 FR 10734).
This notice contains
the sixth update, which was proposed for comment on December 10,
1987 (52 FR 47591).
(2)
The revisions are effective April 1, 1988.
Description of revisions.
The following is a bri
description of the revisions to the commentary:
SECTION 205.3 —
Exemptions
Question 3-6
Question 3-6 is revised to make clear that section 913
of the EFT Act does not require an employer to give its employees
the option of receiving their salary by check or cash as an
alternative to direct deposit; an employer also complies with
section 913 by allowing employees to choose the institutions to
receive their direct deposits.
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SECTION 205.14 —
3
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Services Offered by Financial Institutions Not
Holding Consumer's Account
Question 14-4
Question 14-4 is revised to make clear that a service
provider need not furnish a periodic statement if it complies
with the conditions set forth in the August 1987 amendments to
the regulation (52 FR 30904).
Question 14-5
This question is added to clarify that, in a POS/ACH
program, if the service provider does not issue the debit card
that is actually used to initiate transfers, or does not issue a
debit card at all, the service provider must send periodic
statements to consumers.
Question 14-6
This question is also new.
It deals with the
responsibility of a service provider for error resolution.
It
clarifies that the service provider must reimburse the consumer
for any fees or charges incurred as a result of the error,
including those imposed by the account-holding institution.
Question 14-7
This question is added to address an issue concerning
the periodic statement provided by the account-holding
institution.
Specifically, the question makes clear that the
statement need not show, with respect to POS/ACH transactions,
information other than the transaction description set forth in
§ 205.9(b)(1).
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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.
The revisions amend the official staff commentary on
Regulation E (EFT-2, Supp. II to 12 CFR Part 205) by revising
questions 3-6 and 14-4 and by adding questions 14-5, 14-6, and
14-7, and read as follows:
SUPPLEMENT II —
Official Staff Interpretations
* * * * *
SECTION 205.3 —
Exemptions
* * * * *
Q 3-6:
Compulsory use -- salary payments.
Preauthorized
transfers from a financial institution to a consumer's account at
the same institution are exempt from the act and regulation
generally but are subject to the statutory prohibition against
requiring an employee (as a condition of employment) to receive
payroll deposits by electronic means at a particular institution.
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Does this prohibition apply to a financial institution as an
employer?
A:
Yes.
The prohibition applies to all employers, including
financial institutions.
To comply with the law, an employer
could, for example, give its employees a choice of the method of
receiving payment -- [such as having their] ►letting the employee
choose between having* pay deposited at a particular institution,
or receiving payment by check or cash.
►Or. an employer could
mandate payment by electronic means, but allow the employee to
choose the institution to receive direct deposits.*
As in the case of preauthorized loan payments, the
compulsory-use prohibition does not require an employer to offer
alternative means of payment to employees who agreed to
electronic deposits at a particular financial institution before
May 10, 1980.
However, if an employee asks to terminate this
arrangement, the employer should honor the request.
(§205.3(d)(2), §913)
* * * * *
SECTION 205.14 —
Services Offered by Financial Institutions Not
Holding Consumer's Account
* * * * *
Q 14-4: Periodic statement —
service-providing institution.
Does the service-providing institution have to provide to the
consumer a periodic statement showing transfers other than
electronic fund transfers made with the service provider's access
device?
-
A:
No.
6
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►Moreover, if the service provider complies with the
conditions set forth in the regulation, it need not provide anv
periodic statement.< (§205.14(a )(2)►( i )
►0 14-5:
Periodic statement —
issuance of card.
If a service
provider issues its own card but then allows1 the consumer to use
another card (such as a bank-issued debit or credit card) to
initiate transfers through the POS/ACH system, must it send
periodic statements?
A:
Yes.
To qualify for the periodic statement exception, the
service provider must issue the debit card that will actually be
used to initiate transfers.
Similarly, a service provider that
does not issue any debit card remains subject to the requirement
to send periodic statements. (§205.14(a)(2)(i ))*
►0 14-6:
Error resolution —
institution.
responsibility of service-providing
In a POS/ACH transaction, the consumer properly
notifies the service-providing institution of an alleged error.
What is the service provider's responsibility?
A:
The service provider must investigate and resolve the error
as set forth in the regulation.
If an error in fact occurred,
anv fees or charges imposed as a result of the error, either bv
the service provider or by the account-holding institution (for
example, overdraft or dishonor fees) must be reimbursed to the
consumer bv the service provider. (§§ 205.11 and
205.14(a)(3)-(a)(6))«
-
►Q 14-7:
7
-
Content of periodic statement —
institution.
account-holding
For POS/ACH transactions initiated bv the service
provider, is the account-holding institution required to disclose
all the items specified in section 205.9(b) on its periodic
statement?
A:
No.
Its periodic statement need contain only the information
specified in section 205.9(b)(1).
*
*
*
(§205.14(b)(1))<
*
*
Board of Governors of the Federal Reserve System,
March 30, 1988.
(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 changes address, for example,
disclosure questions raised by the emergence of conversion
features in adjustable-rate mortgages, as well as the imposition
of fees that are considered finance charges at the time an
open-end credit account is renewed or continued.
Commentary also
is included which interprets the Board's recent rule implementing
the requirement of the Competitive Equality Banking Act that
adjustable-rate mortgages contain a maximum interest rate.
(The
Board is also publishing in this issue of the Federal Register
official staff interpretations on the recent amendments to
Regulation Z requiring special disclosures for adjustable-rate
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mortgages secured by a consumer's principal dwelling and having a
term greater than one year.)
DATES:
Effective April 1, 1988, but compliance optional until
October 1, 1988.
FOR FURTHER INFORMATION CONTACT:
The following attorneys in the
Division of Consumer and Community Affairs, at (202) 452-3667 or
(202) 452-2412:
Subparts A and B —
Kathleen S. Brueger,
Gerald P. Hurst, John C. Wood
Subpart C -- Michael S. Bylsma, Leonard N. Chanin,
Thomas J. Noto
Subpart D -- Adrienne D. Hurt, Sharon T. Bowman
For the hearing impaired only. Telecommunication Device for the
Deaf (TDD), Earnestine Hill or Dorothea Thompson, at (202)
452-3544, Board of Governors of the Federal Reserve System,
Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
(1) General.
The Truth in Lending
Act (15 U.S.C. 1601 et seq.) governs consumer credit transactions
and is implemented by the Board's Regulation Z (12 CFR Part 226).
Effective October 13, 1981, an official staff commentary (TIL-1,
Supp. 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 six general updates:
the first in
September 1982 (47 FR 41338), the second in April 1983 (48 FR
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14882), the third in April 1984 (49 FR 13482), the fourth in
April 1985 (50 FR 13181), the fifth in April 1986 (51 FR 11422),
and the sixth in April 1987 (52 FR 10875).
There was also a
limited update concerning fees for the use of automated teller
machines, which was adopted in October 1984 (49 FR 40560).
notice contains the seventh general update.
This
Creditors are free
to rely on the revised provisions as of April 1, 1988, although
they need not follow the revisions until October 1, 1988.
(2) Revisions. The following is a brief description of the
revisions to the commentary:
SUBPART A —
GENERAL
SECTION 226.4 —
Finance Charge
4(c) Charges Excluded from the Finance Charge
Paragraph 4(c)(4)
A cross-reference is added to comment 4(c)(4)-2
addressing participation fees.
The cross-reference is to the
commentary to section 226.14(c), concerning computation of the
annual percentage rate on periodic statements.
Comment 14(c)-7,
Which currently discusses the exclusion of fees related to the
opening of the account from the computation of the annual
percentage rate for periodic statements, is being revised to also
exclude certain account renewal fees from the computation of the
annual percentage rate on periodic statements.
SUBPART B —
OPEN-END CREDIT
SECTION 226.6 —
Initial Disclosure Statement
6(a) Finance Charge
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Paragraph 6(a)(2)
Comment 6(a)(2)-7 is revised to include a reference to
section 226.30 and the commentary to that section.
Section
226.30 requires creditors to include a provision setting a
maximum interest rate in their dwelling-secured credit contracts
that provide for changes in the interest rate.
SECTION 226.7 —
Periodic Statement
7(h) Other Charges
Comment 7(h)-l is revised to clarify the treatment of
taxes and filing or notary fees that are excluded from the
finance charge under section 226.4(e).
Even though the section
226.4(e) items are not required to be disclosed as "other
charges" under section 226.6(b), creditors may include such
charges in a disclosure of "other charges" on the initial
disclosures.
Similarly, these charges may be included in the
amount shown as "closing costs" or "settlement costs" on the
periodic statement, if the charges were itemized and disclosed as
part of the closing or settlement costs on the initial disclosure
statement.
SECTION 226.14 —
Determination of Annual Percentage Rate
14(c) Annual Percentage Rate for Periodic Statements
Comment 14(c)-7 discusses the exclusion of finance
charges related to opening an account from inclusion in the
annual percentage rate computation.
This comment is revised to
also exclude fees that are imposed for renewal of an account or
continued participation in an open-end credit plan, provided the
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5
-
fees are not imposed as a result of specific transactions or
specific account activity.
For example, charges
that are imposed only on consumers that do not charge a certain
amount on their credit card annually, or annual fees that are a
percentage of the consumer's credit limit, need not be included
in the computation of the annual percentage rate.
This change
recognizes that such charges, when they are not related to
specific transactions or specific activity, result in the same
problems already identified in this comment with respect to fees
related to the opening of an account.
Including such fees in the
computation of the annual percentage rate would result, in many
cases, in significant distortions of the annual percentage rate
and the delivery of potentially misleading information to
consumers.
SUBPART C ~
CLOSED-END CREDIT
SECTION 226.17 —
General Disclosure Requirements
17(a) Form of Disclosures
Paragraph 17(a)(1)
Comment 17(a)(l)-5 is revised to explain that in
variable-rate transactions subject to section 226.18(f)(1) with
more than one variable-rate feature, more than one hypothetical
example is information that is directly related to the disclosure
required under section 226.18(f)(1)(iv).
SECTION 226.18 —
Content of Disclosures
18(b) Amount Financed
Paragraph 18(b)(3)
-
6
-
Comment 18(b)(3)-l, addressing the treatment of prepaid
finance charges in calculations of the amount financed, is
deleted and a new comment 18(b)(3)-l substituted in its place.
The new comment clarifies and more fully explains the treatment
of prepaid finance charges, which has been the source of
considerable confusion.
Several changes have been made to the
version originally proposed.
First, additional examples have
been added to illustrate a transaction where the creditor
withholds the amount of a finance charge from the amount advanced
to the consumer but does not increase the amount of the note by
the amount of the charge.
The additional examples clarify that
the same rules are applicable in both situations.
Second,
additional material has been included to clarify that while a
finance charge need not, in some circumstances, be subtracted as
a prepaid finance charge, the charge nevertheless remains a
finance charge.
The new comment is not intended to change the existing
rules under section 226.18(b), but merely to clarify when
creditors have an option to treat certain fees as prepaid finance
charges and what the implications of that choice are under
section 226.18(b).
18(c) Itemization of Amount Financed
Paragraph 18(c)(l)(iv)
Comment 18(c)(1)(iv)-l, addressing the itemization of
prepaid finance charges, is supplemented by a new sentence at the
beginning which clarifies that only those finance charges
-
7
-
deducted from the principal loan amount under section
226.18(b)(3) should be itemized as prepaid finance charges under
section 226.18(c)(1)(iv).
The revision is made in conjunction
with the clarification to comment 18(b)(3)-l and is not intended
to change the substance of existing rules.
18(f) Variable Rate
Paragraph 18(f)(1)
Comment 18(f)(l)-2 is added to discuss the disclosure
requirements under this section for variable-rate transactions
containing an option permitting consumers to convert to a fixed
rate.
The conversion option is a variable-rate feature that must
be disclosed.
given.
The comment explains how the disclosures should be
It explains that only those limitations on, and effects
of, an increase that differ from other variable-rate features
need to be stated.
Consistent with the revision being made to
comment 18(f)(1)(iv)-l, described below, it also clarifies that
only one hypothetical example need be disclosed, such as an
example of payment terms resulting from changes in the index.
The comment applies only to variable-rate transactions that are
not secured by a consumer's dwelling, or that are secured by a
principal dwelling but have a term of one year or less.
The
comment number reflects the redesignation of the regulatory
section applicable to such variable-rate transactions from
section 226.18(f) to section 226.18(f)(1).
All other closed-end
variable-rate transactions are subject to sections 226.18(f)(2)
and 226.19(b), rather than section 226.18(f)(1).
-
8
-
Paragraph 18(f) (l)(ii)
Comment 18(f)(l)(ii)-l is revised by adding a
cross-reference to the requirement in new section 226.30 that a
maximum interest rate limitation be included in certain variablerate transactions.
Paragraph 18(f)(l)(iv)
Comment 18(f)(1)(iv)-l is revised to clarify that
section 226.18(f)(1)(iv) requires only one example of the effects
of a rate increase on payment terms.
The comment states that in
transactions with more than one variable-rate feature, only one
hypothetical example need be included in the disclosures.
It
also adds a cross-reference to the commentary to section
226.17(a)(1), which permits inclusion of more than one example as
"directly related" information.
SUBPART D —
MISCELLANEOUS
SECTION 226.28 —
Effect on State Laws
28(a) Inconsistent Disclosure Requirements
Comments 28(a)-13 and -14 are added to reflect the
Board's 1985 and 1988 determinations of the effect of the Truth
in Lending Act on provisions of the consumer credit laws of
Arizona and Indiana, respectively.
The comment on Arizona law
has been revised to indicate that the preempted provision has
since been repealed.
SECTION 226.30 —
Limitations on Rates
On November 9, 1987, the Board published a final rule
amending Regulation Z to incorporate the substance of section
-
9
-
1204 of the Competitive Equality Banking Act (CEBA) into the
regulation (52 FR 43178; technical corrections to original notice
at 52 FR 45611 (1987)).
The rule requires creditors who offer
dwelling-secured loans with an adjustable interest rate to
include a maximum rate in their credit obligations entered into
on or after December 9, 1987.
The following comments are
included in the commentary to section 226.30.
Comments 30-1 through 30-5 explain the scope of the
rule's coverage, including examples of what types of obligations
are covered and not covered.
Generally stated, the rule is that
any post-effective date credit obligation is subject to the
interest rate ceiling requirement if it: (1) is secured by a
dwelling, (2) contractually allows for interest rate increases,
and (3) requires initial Truth in Lending Act (TILA) disclosures.
A credit obligation subject to the TILA may also become subject
to section 226.30 in two other instances: (1) if a security
interest in a dwelling is added to an obligation that allows for
interest rate increases, or (2) a variable rate feature is added
to a dwelling-secured credit obligation.
The scope of the substantive requirement of section
1204 of CEBA is limited to obligations subject to the TILA and
Regulation Z.
Comment 30-6 generally explains that the other
provisions of the regulation relating to TILA disclosures and
their corresponding commentaries apply to section 226.30 where
appropriate (such as definitions and exemptions), unless
otherwise specified in the commentary to section 226.30.
For
-
10
-
example, for purposes of coverage, the refinancing and assumption
rules of section 226.20(a) and (b) apply.
On the other hand, for
purposes of increasing a maximum interest rate originally imposed
under section 226.30 only the refinancing and assumption rules in
comments 11 and 12 to this section apply.
Comments 30-7 through 30-9 explain the requirement to
specify the maximum interest rate in credit contracts, including
how the rate may be stated and that multiple rates may be set.
Comment 30-10 explains that a maximum rate must be
applicable to increases after default.
This comment applies only
in situations in which a post-default agreement is considered
part of the original obligation subject to Regulation Z.
Comments 30-11 and 30-12 explain when the maximum rate
originally set on an obligation may be increased.
Comment 30-13
further explains the relief provided in footnote 50 to section
226.30.
The final commentary provisions differ from the
proposal in that editorial revisions have been made to eliminate
unnecessary language and to provide further clarification.
For
example, a cross reference to the definition of a dwelling has
been added to the first sentence in comment 30-1, while other
cross references have been deleted as unnecessary.
In that
comment's second example of transactions not subject to section
226.30, the word "contractual" before the words "legal
obligation" has been deleted.
There is no intent to modify the
term "legal obligation," as discussed in the commentary to
-
11
-
section 226.17(c)(1), or section 226.5(c), when used in section
226.30.
A fixed rate, closed-end multiple advance transaction
secured by a dwelling, in which each advance is disclosed as a
separate transaction, has been added to that comment as a third
example of transactions not covered by section 226.30.
This
example was contained in the supplemental information to the
final rule, section 226.30, published in November 1987; some
commenters asked that it be included in the commentary.
A substantive revision from the proposal has been made
to comment 30-7.
The requirement that the maximum rate set forth
in the credit contract meet the Regulation Z "clear and
conspicuous" standard has been eliminated as unnecessary.
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 arrows and underlined,
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 on Regulation Z (12 CFR Part 226 Supp. I) as follows:
1. The authority citation for Part 226 continues to
read:
12
-
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 CF
Part 226 Supp. I) by revising comments 4(c)(4)-2, 6(a)(2)-7,
7(h)-l, 14(c)-7, 17(a)(l)-5, 18(b)(3)-l, and 18(c)(1)(iv)-l;
adding comment 18(f)-9; revising comments 18(f)(2)-l and
18(f)(4)-1; and adding comments 28(a)-13, 28(a)-14, and 30-1
through 30-13 to read as follows:
SUBPART A —
GENERAL
*
SECTION 226.4 —
*
*
*
*
*
*
*
Finance Charge
*
*
4(c) Charges Excluded from the Finance Charge
*
*
*
*
*
*
*
*
*
*
Paragraph 4(c)(4)
2.
Participation fees —
exclusions. *
commentary to section 226.4(b)(2).
*
*
(See the
►Also, see comment 14(c)-7
for treatment of certain types of fees excluded in determining
the annual percentage rate for the periodic statement.*)
*
SUBPART B —
*
*
*
*
*
*
*
OPEN-END CREDIT
*
SECTION 226.6 —
*
Initial Disclosure Statement
13
-
-
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
6(a) Finance Charge
Paragraph 6(a)(2)
7. Variable-rate plan -- limitations on increase.
In disclosing
any limitations on rate increases, limitations such as the
maximum increase per year or the maximum increase over the
duration of the plan must be disclosed.
When there are no
limitations, the creditor may, but need not, disclose that fact.
►(A maximum interest rate must be included in dwelling-secured
open-end credit plans under which the interest rate may be
changed.
See section 226.30 and the commentary to that
section.)« *
*
*
*
SECTION 226.7 —
*
*
*
*
Periodic Statement
*
*
*
*
*
7(h) Other Charges
1. Identification.
In identifying any "other charges" actually
imposed during the billing cycle, the type is adequately
described as "late charge" or "membership fee," for example.
Similarly, "closing costs" or "settlement costs," for example,
may be used to describe charges imposed in connection with real
estate transactions that are excluded from the finance charge
under section 226.4(c)(7), if the same term (such as "closing
costs") was used in the initial disclosures and if the creditor
-
14
-
chose to itemize and individually disclose the costs included in
that term.
»Even though the taxes and filing or notary fees
excluded from the finance charge under section 226.4(e) are not
required to be disclosed as "other charges" under section
226.6(b). these charges may be included in the amount shown as
"closing costs" or "settlement costs" on the periodic statement.
if the charges were itemized and disclosed as part of the
"closing costs" or "settlement costs" on the initial disclosure
statement.*
(See comment 6(b)-1 for examples of "other
charges.")
*
SECTION 226.14 —
*
*
*
Determination of Annual Percentage Rate
*
14(c)
*
*
*
*
*
Annual Percentage Rate for Periodic Statements
*
*
*
*
*
7. Charges related to opening ► . renewing, or continuing an *
account.
(c)(3).
Footnote 33 is applicable to section 226.14(c)(2) and
The charges involved here do not relate to a specific
transaction or to ►specific* activity on the account, but relate
solely to the opening ►.renewing, or continuing* of the account.
►For example, an annual fee to renew an open-end credit account
that is a percentage of the credit limit on the account, or that
is charged only to consumers that have not used their credit card
for a certain dollar amount in transactions during the preceding
year, would not be included in the calculation of the annual
percentage rate, even though the fee may not be excluded from the
15
-
-
finance charge under section 226.4(c)(4).
4(c)(4)-2).*
(See comment
Inclusion of these charges in the annual percentage
rate calculation results in significant distortions of the annual
percentage rate and delivery of a possibly misleading disclosure
to consumers.
The rule in footnote 33 applies even if the loan
fee, points, or similar charges are billed on a subsequent
periodic statement or withheld from the proceeds of the first
advance on the account.
*
SUBPART C —
*
*
*
*
CLOSED-END CREDIT
SECTION 226.17 —
General Disclosure Requirements
17(a) Form of Disclosures
Paragraph 17(a)(1)
5.
Directly related. *
*
*
k • More than one hypothetical example under section
226.18(f)(1)(iv) in transactions with more than one
variable-rate feature.
For example, in a
variable-rate transaction with an option permitting
consumers to convert to a fixed-rate transaction, the
disclosures may include an example illustrating the
effects on the payment terms of an increase resulting
from conversion in addition to the example
illustrating an increase resulting from changes in
the index.*
*
SECTION 226.18 —
*
*
*
*
Content of Disclosures
16
-
*
*
-
*
*
*
18(b) Amount Financed
*
*
*
*
*
Paragraph 18(b)(3)
1.
Prepaid finance charges.
^Prepaid finance charges that are
paid separately in cash or bv check should be deducted under
section 226.18(b)(3) in calculating the amount financed.
To
illustrate:
* A consumer applies for a loan of $2.500 with a $40
loan fee.
The face amount of the note is $2.500 and
the consumer pays the loan fee separately bv cash or
check at closing.
The principal loan amount for
purposes of section 226.18(b)(1) is $2.500 and $40
should be deducted under section 226.18(b)(3).
thereby yielding an amount financed of $2.460.
In some instances, as when loan fees are financed by the
creditor, finance charges are incorporated in the face amount of
the note.
Creditors have the option, when the charges are not
add-on or discount charges, of determining a principal loan
amount under section 226.18(b)(1) that either includes or does
not include the amount of the finance charges.
(Thus the
principal loan amount may, but need not, be determined to equal
the face amount of the note.)
When the finance charges are
included in the principal loan amount, they should be deducted as
prepaid finance charges under section 226.18(b)(3).
When the
finance charges are not included in the principal loan amount.
they should not be deducted under section 226.18(b)(3).
The
following examples illustrate the application of section
226.18(b) to this type of transaction.
Each example assumes a
loan request of $2.500 with a loan fee of $40: the creditor
assesses the loan fee by increasing the face amount of the note
to $2.540.
* If the creditor determines
under section 226.18(b)(1)
the principal loan
amount
to be $2.540. it has
included the loan fee in the principal loan amount
and should deduct $40 as a prepaid finance charge
under section 226.18(b)(3). thereby obtaining an
amount financed of $2.500.
* If the creditor determines the principal loan amount
under section 226.18(b)(1) to be $2.500. it has not
included the loan fee in the principal loan amount
and should not deduct any amount under section
226.18(b)(3). thereby obtaining an amount financed of
$2.500.
The same rules apply when the creditor does not increase the face
amount of the note by the amount of the charge but collects the
charge by withholding it from the amount advanced to the
consumer.
To illustrate, the following examples assume a loan
request of $2.500 with a loan fee of $40: the creditor prepares a
note for $2.500 and advances $2.460 to the consumer.
* If the creditor determines the principal loan
amount
-
18
-
under section 226.18(b)(1) to be $2.500. it has
included the loan fee in the principal loan amount
and should deduct $40 as a prepaid finance charge
under section 226.18(b)(3). thereby obtaining an
amount financed of $2.460.
« If the creditor determines the principal loan amount
under section 226.18(b)(1) to be $2.460. it has not
included the loan fee in the principal loan amount
and should not deduct any amount under section
226.18(b)(3), thereby obtaining an amount -financed of
$2.460.
Thus in the examples where the creditor derives the net amount of
credit bv determining a principal loan amount that does not
include the amount of the finance charge, no subtraction is
appropriate.
Creditors should note, however. that although the
charges are not subtracted as prepaid finance charges in those
examples, they are nonetheless finance charges and must be
treated as such.*
*
*
*
*
*
*
★
18(c) Itemization of Amount Financed
*
*
*
Paragraph 18(c)(l)(iv)
1.
Prepaid finance charge.
►Prepaid finance charges that are
deducted under section 226.18(b)(3) must be disclosed under this
section.* *
*
*
*
*
*
*
*
19
-
-
18(f) Variable Rate
*
*
*
*
*
*
*
*
*
*
Paragraph 18(f)(1)
►2.
Conversion feature.
In variable-rate transactions with an
option permitting consumers to convert to a fixed-rate
transaction, the conversion option is a variable-rate feature
that must be disclosed.
In making disclosures under section
226.18(f)(1), creditors should disclose the fact that the rate
may increase upon conversion; identify the index or formula used
to set the fixed rate; and state any limitations on and effects
of an increase resulting from conversion that differ from other
variable-rate features.
Because section 226.18(f)(1)(iv)
requires only one hypothetical example (such as an example of the
effect on payments resulting from changes in the index), a second
hypothetical example need not be given.*
*
*
*
*
*
Paragraph 18(f)(l)(ii)
1.
Limitations.
This includes any maximum imposed on the amount
of an increase in the rate at any time, as well as any maximum on
the total increase over the life of the transaction.
When there
are no limitations, the creditor may, but need not, disclose that
fact.
Limitations do not include legal limits in the nature of
usury or rate ceilings under state or federal statutes orregulations.
►(See section 226.30 for the rule requiring that a
20
-
-
maximum interest rate be included in certain variable-rate
transactions.)*
*
*
*
*
*
Paragraph 18(f)(l)(iv)
1.
Hypothetical example.
The example may, at the creditor's
option appear apart from the other disclosures.
The creditor may
provide either a standard example that illustrates the terms and
conditions of that type of credit offered by that creditor or an
example that directly reflects the terms and conditions of the
particular transaction.
»In transactions with more than one
variable-rate feature, only one hypothetical example need be
provided.
(See the commentary to section 226.17(a)(1) regarding
disclosure of more than one hypothetical example as directly
related information.)*
*
SUBPART D —
*
*
*
*
*
*
*
MISCELLANEOUS
*
SECTION 226.28 —
*
Effect on State Laws
28(a) Inconsistent Disclosure Requirements
*
*
*
*
*
►13. Preemption determination -- Arizona.
Effective October 1.
1986. the Board has determined that the following provision in
the state law of Arizona is preempted by the federal law:
* Section 6-621A.2 -- Use of the term "the total sum of
$
" in certain notices provided to borrowers.
This
term describes the same item that is disclosed under
-
21
-
federal law as the "total of payments.”
Since the
state law requires the use of a different term than
federal law to describe the same item, the
state-required term is preempted.
The notice itself
is not preempted.
(Note:
The state disclosure notice that incorporated the above
preempted term was amended on May 4. 1987. to provide that
disclosures must now be made pursuant to the federal disclosure
provisions.)
14.
Preemption determination —
Indiana.
Effective October 1.
1988. the Board has determined that the following provision in
the state law of Indiana is preempted bv the federal law:
• Section 23-2-5-8 -- Inclusion of the loan broker's
fees and charges in the calculation of. among other
items, the finance charge and annual percentage rate
disclosed to potential borrowers.
This disclosure is
inconsistent with sections 106(a) and 226.4(a) of the
federal statute and regulation, respectively, and is
preempted in those instances where the use of the
same term would disclose a different amount than that
required to be disclosed under federal law.*
*
*
*
*
★
►SECTION 226.30 - Limitation on Rates
1.
Scope of coverage.
The requirement of this section applies
to consumer credit obligations secured bv a dwelling (as dwelling
is defined in section 226.2(a)(19)) in which the annual
-
22
-
percentage rate may increase after consummation (or during the
term of tne plan, in the case of open-end credit) as a result of
an increase in the interest rate component of the finance charge
—
whether those increases are tied to an index or formula or are
within a creditor's discretion.
sales as well as loans.
The section applies to credit
Examples of credit obligations subject
to this section include:
• Dwelling-secured credit obligations that require
variable-rate disclosures under the regulation
because the interest rate may increase during the
term of the obligation.
■ Dwelling-secured open-end credit plans that
are not considered variable-rate obligations for
purposes of disclosure under the regulation but where
the creditor reserves the contractual right to
increase the interest rate -- periodic rate and
corresponding annual percentage rate -- during the
term of the plan.
In contrast, credit obligations in which there is no contractual
right to increase the interest rate during the term of the
obligation are not subject to this section.
Examples include:
* "Shared-equity'* or "shared-appreciation" mortgage
loans that have a fixed rate of interest and a
shared-appreciation feature based on the consumer's
equity in the mortgaged property.
(The appreciation
share is payable in a lump sum at a specified time.)
-
23
-
» Dwelling-secured fixed rate closed-end balloon
payment mortgage loans and dwelling-secured fixed
rate open-end plans with a stated term that the
creditor may, but does not have a legal obligation
to. renew at maturity.
(Contrast with the
renegotiable rate instrument described in comment
17(c )(1)-11.)
* Dwelling-secured fixed rate closed-end multiple
advance transactions in which each advance is
disclosed as a separate transaction.
The requirement of this section does not apply to credit
obligations entered into prior to December 9. 1987.
Consequently, new advances under open-end credit plans existing
prior to December 9. 1987. are not subject to this section.
2.
Refinanced obligations.
On or after December 9. 1987. when a
credit obligation is refinanced, as defined in section 226.20(a).
the new obligation is subject to this section if it is
dwelling-secured and allows for increases in the interest rate.
3.
Assumptions.
On or after December 9. 1987. when a credit
obligation is assumed, as defined in section 226.20(b). the
obligation becomes subject to this section if it is
dwelling-secured and allows for increases in the interest rate.
4.
Modifications of obligations.
The modification of an
obligation, regardless of when the obligation was entered into,
is generally not covered by this section.
For example,
increasing the credit limit on a dwelling-secured, open-end plan
with a variable interest rate entered into before the effective
-
24
-
date of the rule does not make the obligation subject to this
section.
If. however, a security interest in a dwelling is added
on or after December 9. 1987. to a credit obligation that allows
for interest rate increases, the obligation becomes subject to
this section.
Similarly, if a variable interest rate feature is
added to a dwelling-secured credit obligation, the obligation
becomes subject to this section.
5.
Land trusts.
In some states, a land trust is used in
residential real estate transactions.
3(a)-8).)
(See discussion in comment
If a consumer-purpose loan that allows for interest
rate increases is secured bv an assignment of a beneficial
interest in a land trust that holds title to a consumer's
dwelling, that loan is subject to this section.
6.
Relationship to other sections.
Unless otherwise provided
for in the commentary to this section, other provisions of the
regulation such as definitions, exemptions, rules and
interpretations also apply to this section where appropriate.
To
illustrate;
• An adjustable interest rate business-purpose loan is
not subject to this section even if the loan is
secured bv a dwelling because such credit extensions
are not subject to the regulation. (See generally
section 226.3(a).)
* Creditors subject to this section are only those that
fall within the definition of a creditor in section
226.2(a)(17).
-
7. Consumer credit contract.
25
-
Creditors are required to specify a
lifetime maximum interest rate in their credit contracts -- the
instrument that creates personal liability and generally contains
the terms and conditions of the agreement (for example, a
promissory note or home-equity line of credit agreement).
In
some states, the signing of a commitment letter may create a
binding obligation, for
example, constituting "consummation”
defined in section 226.2(a)(13).
as
The maximum interest rate must
be included in the credit contract, but a creditor may include
the rate ceiling in the commitment instrument as well.
8. Manner of stating the maximum interest rate.
interestrate must be stated either as
The maximum
a specific amount or in
anv othermanner 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.
For
example, the following statements would be sufficiently specific:
* The maximum interest rate will not exceed X%.
* The interest rate will never be higher than X
percentage points above the initial rate of Y%.
* The interest rate will not
exceed X%, or X percentage
points above [a rate to be determined at some future
point in timel, whichever is less.
* The maximum
state usury
interestrate will not exceed X%. or
ceiling, whichever is less.
The following statements would not comply with this section:
* The interest rate will never be higher than X
the
-
26
-
percentage points over the prevailing market rate.
* The interest rate will never be higher than X
percentage points above [a rate to be determined at
some future point in time].
» The interest rate will not exceed the state usury
ceiling which is currently X%.
A creditor may state the maximum rate in terms of a maximum
annual percentage rate that may be imposed.
Under an open-end
credit plan, this normally would be the corresponding annual
percentage rate.
(See generally section 226.6(a)(2).)
9. Multiple interest rate ceilings.
Creditors are not prohibited
from setting multiple interest rate ceilings.
For example, on
loans with multiple variable-rate features, creditors may
establish a maximum interest rate for each feature.
To
illustrate, in a variable-rate loan that has an option to convert
to a fixed rate, a creditor may set one maximum interest rate for
the initially imposed index-based variable-rate feature and
another for the conversion option.
Of course, a creditor may
establish one maximum interest rate applicable to all features.
10. Interest rate charged after default.
State law may allow an
interest rate after default higher than the contract rate in
effect at the time of default; however, the interest rate after
default is subject to a maximum interest rate set forth in a
credit obligation that is otherwise subject to this section.
This rule applies only in situations in which a post-default
agreement is still considered part of the original obligation.
-
27
-
11. Increasing the maximum interest rate - general rule.
Generally, a creditor may not increase the maximum interest rate
originally set on a credit obligation subject to this section
unless the consumer and the creditor enter into a new obligation.
Therefore, under an open-end plan, a creditor may not increase
the rate ceiling imposed merely because there is an increase in
the credit limit.
If an open-end plan is closed and another
opened, a new rate ceiling may be imposed.
Furthermore, where an
open-end plan has a fixed maturity and a creditor renews the plan
at maturity, or converts the plan to closed-end credit, without
having a legal obligation to renew or convert, a new maximum
interest rate may be set at that time.
If. under the initial
agreement, the creditor is obligated to renew or convert the
plan, the maximum interest rate originally imposed cannot be
increased upon renewal or conversion (unless, of course, a new
obligation is entered into).
For a closed-end credit
transaction, a new maximum interest rate may be set only if the
transaction is satisfied and replaced by a new obligation.
(The
exceptions in section 226.20(a)(1)-(5) which limit what
transactions are considered refinancings for purposes of
disclosure do not apply with respect to increasing a rate ceiling
that has been imposed: if a transaction is satisfied and
replaced, the rate ceiling may be increased.)
12.
Increasing the maximum interest rate - assumption of an
obligation.
If an obligation subject to this section is assumed
by a new obligor and the original obligor is released from
-
28
-
liability, the maximum interest rate set on the obligation may be
increased as part of the assumption agreement.
(This rule
applies whether or not the transaction constitutes an assumption
as defined in section 226.20(b).)
13. Transition rules.
Under footnote 50. if creditors properly
include the maximum rate in their credit contracts, creditors
need not revise their Truth in Lending disclosure statement forms
to add the disclosures about limitations on rate increases as
part of the variable-rate disclosures, until October 1. 1988.
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.
References
Statute:
Competitive Equality Banking Act of 1987. Pub. L. No
100-86. 101 Stat. 552
Other sections: S§ 226.6. 226.18. and 226.19
Previous regulation:
1987 changes:
None
This section implements section 1204 of the
Competitive Equality Banking Act of 1987. Pub. L. No. 100-86. 101
Stat. 552 which provides that, effective December 9. 1987.
adjustable-rate mortgages must include a limitation on the
interest rate that may apply during the term of the mortgage
loan.
An adjustable-rate mortgage loan is defined in section
1204 as "any loan secured bv a lien on a one-to-four family
dwelling unit, including a condominium unit, cooperative housing
unit, or mobile home, where the loan is made pursuant to an
agreement under which the creditor may, from time to time, adjust
the rate of interest."
The rule in this section incorporates
section 1204 into Regulation Z and limits the scope of section
1204 to dwelling-secured consumer credit subject to the Truth in
Lending Act, in which a creditor has the contractual right to
increase the interest rate during the term of the credit
obligation.*
Board of Governors of the Federal Reserve System, March
30, 1988.
(signed) William W. Wiles
William W. Wiles
Secretary of the Board
•oLgr/
-qSf*.
■
FEDERAL RESERVE press release
For immediate release
April 1, 1988
The Federal Reserve Board today issued 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 variable-rate
mortgage loans secured by the consumer's principal dwelling.
The Board's notice is attached.
-
Attachment
0
-
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Reg. Z; Docket No. R-0545A]
Update to Official Staff Commentary
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Official staff interpretation.
SUMMARY:
The Board is publishing in final form changes to the
official staff commentary to Regulation Z (Truth in Lending).
The commentary provides guidance to creditors in complying with
an amendment to Regulation Z that was adopted by the Board in
December of 1987 (52 FR 48665).
The regulatory amendment
requires creditors to provide more information to consumers about
certain closed-end variable-rate loans than was previously
required under Regulation Z.
The commentary revisions include
new material and technical changes in existing material.
The
Board is also publishing changes to the official staff commentary
on other provisions of Regulation Z elsewhere in this issue of
the Federal Register.
EFFECTIVE DATE:
April 1, 1988, but compliance optional until
October 1, 1988.
FOR FURTHER INFORMATION:
Contact Sharon T. Bowman or Thomas J.
Noto, Staff Attorneys, or Michael S. Bylsma, Senior Attorney,
Division of Consumer and Community Affairs, Board of Governors of
the Federal Reserve System, Washington, D.C., 20551, (202)
452-3667.
For the hearing impaired only. Telecommunication
Device for the Deaf (TDD), contact Earnestine Hill or Dorothea
Thompson at (202) 452-3544.
-
SUPPLEMENTARY INFORMATION:
2
-
(1) Background.
This official staff
interpretation applies and interprets a final amendment to
Regulation Z that is designed to provide more information to
consumers about closed-end variable-rate transactions secured by
a consumer's principal dwelling with a term greater than one
year.
The amendment to the regulation was published on December
24, 1987 (52 FR 48665) with a mandatory compliance date of
October 1, 1988.
Proposed revisions to the commentary were first
published for public comment on November 24, 1986 (51 FR 42248).
Upon adoption of the regulatory amendment, the Board published
the commentary for additional comment on December 24, 1987 (52 FR
48707).
The Board is now adopting the commentary revisions in
final form with compliance optional until October 1, 1988.
The
major revisions to the commentary begin with comment 18(f)(2)-l.
Portions of existing commentary that have undergone only minor
changes have been reprinted to clarify the revisions.
With the
exception of the provisions interpreting the new disclosure
rules, many of the changes reflect either renumbering of existing
paragraphs or shifting of existing general commentary regarding
variable-rate disclosures from the commentary to section
226.18(f) to the commentary to section 226.17(c).
(2)
Explanation of revisions.
description of the revisions to the commentary:
SUBPART C —
CLOSED-END CREDIT
SECTION 226.17 - General Disclosure Requirements
17(a) Form of Disclosures
The following is a bri
-
3
-
Paragraph 17(a)(1)
Comment 17(a)(l)-2 is amended to clarify that the
general
segregation requirement in section 226.17(a)(1) does
not
apply to the disclosures required under new sections 226.19(b)
and 226.20(c).
The information contained in the fifth bulleted
paragraph under comment 17(a)(l)-5, which discusses disclosure of
a variable-rate feature on other documents, has been deleted
since similar information will be required under new paragraph
(f)(2) of section 226.18.
In addition, the ninth bulleted
paragraph under comment 17(a)(l)-5, discussing negative
amortization, has been revised to change the reference from
section 226.18(f)(3) to new section 226.18(f)(1)(iii)
.
17(b) Time of Disclosures
Comment 17(b)-l has been expanded by adding a reference
to thetiming requirements in new section 226.19(b) for
variable-rate transactions secured by the consumer's principal
dwelling with a term greater than one year.
Comment 17(b)-2 has
been amended by adding a reference to the timing rules for
additional disclosures required upon the conversion of open-end
transactions to certain closed-end variable-rate transactions.
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)
The first bulleted paragraph in comment 17(c)(l)-2 has
been revised to clarify that preferred-rate loans are
variable-rate transactions (while retaining the employee's loan
-
4
-
as an example) and to change the reference from section 226.18(f)
to section 226.19(b).
Material generally relating to the basis of disclosures
for variable-rate transactions currently in the commentary to
section 226.18(f) has been moved to the commentary to section
226.17(c)(1) and the material currently in the commentary to
section 226.17(c)(1) has been reordered to accommodate this
change.
Comments 17(c)(l)-8, -9 and -10, discussing graduated
payment mortgages, Morris Plans and number of transactions have
been redesignated, respectively, as comments 17(c)(1)-12, -14 and
-15.
Material currently contained in comments 18(f)-2 and -3,
discussing the basis of disclosures and use of estimates for
variable-rate transactions, has been added as comments 17(c) (l)-8
and -9.
Comment 17(c)(1)-10 incorporates material on discounted
variable-rate transactions currently contained in comment
18(f)-8, and the heading of the comment has been changed to
clarify that it applies to transactions in which the initial rate
is either lower or higher than the fully indexed rate.
In
addition, an error in the figures in the example of a transaction
with a 7 1/2 percent payment cap has been corrected.
Most of the material currently in comment 18(f)-6
relating to the basis of disclosure for certain variable-rate
transactions has been incorporated in comment 17(c)(l)-ll.
Revisions have been made to clarify that preferred-rate
transactions can include transactions other than employee
-
preferred-rate loans.
5
-
For example, variable-rate rules apply
where a preferential rate is offered so long as the consumer
permits loan payments to be debited from a deposit account.
Two
parts of existing comment 18(f)-6 that do not relate to the basis
of disclosure, namely the reference in the second bullet to the
conditions for imposition of a shared-appreciation feature and
the reference to the hypothetical example in the third bullet,
have been deleted in the new comment 17(c)(l)-ll.
The material currently in comment 18(f)-7, discussing
growth-equity mortgages, has been incorporated in new comment
17(c)(lj-13, although detailed discussion of the option of
disclosing by analogy to variable-rate disclosures has been
deleted in favor of a more general reference in the new comment
17(c)(1)-13.
17(d) Multiple Creditors; Multiple Consumers
Comment 17(d)-2 has been amended to clarify that the
disclosures required under section 226.19(b) need only be
provided to the consumer who expresses an interest in a
variable-rate loan program, and not to every consumer who may be
entitled to rescind the transaction.
17(f) Early Disclosures
As a result of the revisions to section 226.19 of the
regulation, the reference in comment 17(f)—3 to section 226.19(b)
has been revised to reference section 226.19(a)(2).
SECTION 226.18 - Content of Disclosures
18(f) Variable Rate
-
6
-
Comment 18(f)-l has been expanded to explain whether
paragraph (f)(1) or (f)(2) of section 226.18 applies to a
particular variable-rate transaction.
Comment 18(f)-l indicates
that variable-rate loans that are for a term greater than one
year and are secured by the consumer's principal dwelling are
subject to the special early disclosure requirements of new
section 226.19(b).
The comment states that "shared-equity" or
"shared-appreciation” mortgages are subject to the disclosure
requirements of section 226.18(f)(1) regardless of the general
coverage of sections 226.18(f)(1) and 226.19(b).
The comment
also explains that, under new footnote 43, creditors may
substitute the new disclosures under section 226.19(b) and
226.18(f)(2) for any closed-end variable-rate transaction.
With minor changes, material relating to the basis of
disclosures for variable-rate transactions has been moved to the
commentary to section 226.17(c)(1).
Consequently, comments
18(f)-2 and -3 and comments 18(f)-5 through -8 have been deleted.
Present comment 18(f)-4 has been redesignated as comment
18(f)(1)-1.
The material currently in comments 18(f)-2 and -3
has been incorporated, respectively, in comments 17(c)(l)-8 and
-9, and the material currently in comments 18(f)-6 and -7 has
been incorporated in comments 17(c)(1)-11 and -13.
The material
currently in comment 18(f)-8, discussing discounted transactions,
has been incorporated in comment 17(c)(1)-10 and the heading has
been changed to clarify that the comment also applies to
transactions where the initial rate is higher than the fully
-
indexed rate.
7
-
The material currently in comment 18(f)-5 has been
incorporated in the commentary to new section 226.19(b).
Some of
the material currently in comment 18(f)-6 has been incorporated
in new comment 19(b)-4 to clarify that the designated
transactions are subject to the general disclosure requirements
of new section 226.19(b).
The material currently in comment
18(f)-6 relating to the basis for disclosures has not been
transferred to new comment 19(b)-4, since such information has
been incorporated in comment 17(c)(l)-ll.
The current headings referring to paragraphs 18(f)(1)
through (4) have been changed to reference paragraphs 18(f)(l)(i)
through (iv) to reflect the fact that current section 226.18(f)
of the regulation has become section 226.18(f)(1).
Comment 18(f)(2)-l has been added to clarify that where
a variable-rate transaction is secured by the consumer's
principal dwelling and has a term greater than one year, the
later disclosures required under section 226.18 must state that
the variable-rate feature exists and refer to the variable-rate
disclosures provided earlier to the consumer under new section
226.19(b).
SECTION 226.19 - Certain Residential Mortgage Transactions
The title of this section of the commentary has been
revised to read ’Certain Residential Mortgage and Variable-Rate
’
Transactions” to reflect the fact that section 226.19 of the
regulation now incorporates disclosure provisions for
-
8
-
variable-rate loans secured by the consumer's principal dwelling
that have a term greater than one year.
19(a) Time of Disclosure
The current heading referring to 19(a) has been
redesignated as 19(a)(1)
Existing comments 19(a)-l through
19(a)-5 therefore have become comments 19(a)(1)—1 through -5.
19(b) Redisclosure Required
The current heading referring to 19(b) has been
redesignated as 19(a)(2).
Existing comments 19(b)-l through
19(b)-4 have therefore become comments 19(a)(2)-l through -4.
Comment 19(b)-l has been added to clarify that the new
requirements of section 226.19(b) apply to variable-rate
transactions secured by the consumer s principal dwelling with a
term greater than one year.
The comment states that
"shared-equity" or "shared-appreciation" mortgages are subject to
the disclosure requirements of sectipn 226.18(f)(1) regardless of
the general coverage of sections 226.18(f)(1) and 226.19(b).
The
comment also explains that the term of a demand loan is to be
determined in accordance with the rules set forth in the
commentary to section 226.17(c)(5).
Comment 19(b)-2 explains the special timing rules under
section 226.19(b) for cases where applications are received
through an agent or broker or by telephone.
The comment also
explains that where open-end accounts convert, pursuant to a
written agreement, to transactions subject to section 226.19(b),
the required disclosures may be given at the time of conversion.
-
9
-
Comment 19(b)-3 incorporates material previously
contained in comment 18(f)-5 to clarify that creditors may
substitute information provided
in accordance with the
variable-rate regulations of other federal agencies for the
disclosures required by section 226.19(b).
The references to
footnote 43 and section 226.18(f) in old comment 18(f)-5 have
been revised to reference footnote 45a and section 226.19(b),
respectively, in the new comment 19(b)-3.
Comment 19(b)-4 incorporates, with changes, some of the
material previously contained in comment 18(f)-6 to clarify that
the designated transactions are
subject to certain orall of
general disclosure requirements
of section 226.19(b).
the
Thelast
sentence in the first bullet under old comment 18(f)-6 referring
to the disclosures that must be given for renegotiable rate
mortgages has been deleted in the new comment 19(b)-4.
The
language in the third bullet under old comment 18(f)-6 has been
revised in the new comment 19(b)-4 to clarify that preferred-rate
loans where the rate can increase upon some occurrence are
variable-rate transactions even where the initial underlying rate
is fixed, and the reference to the hypothetical example in the
last sentence has been deleted.
Paragraph 19(b)(1)
Comment 19(b)(1)-1 clarifies what constitutes a
suitable substitute for the Consumer Handbook on Adjustable Rate
Mortgages.
New comment 19(b)(l)-2 explains that the Consumer
Handbook requirement is not applicable to loan programs where the
-
10
underlying interest rate is fixed.
-
Thus the Consumer Handbook
need not be provided, for example, in certain preferred-rate
transactions or when variable-rate mortgage insurance or required
credit life insurance is offered in connection with an otherwise
fixed-rate transaction.
Paragraph 19(b)(2)
Comment 19(b)(2)-l explains that a creditor must
provide disclosures for each of its variable-rate programs in
which the consumer expresses an interest.
The final comment has
been expanded from the proposal to also indicate that a creditor
need only provide disclosures for programs that are available to
the consumer.
Thus if an application is denied within the
three-day period following receipt through a broker, disclosures
need not be provided under footnote 45b of the regulation.
In
addition, if a program is made available only to certain
customers of an institution, the creditor need not provide
disclosures for that program to other consumers who express a
general interest in the creditor's ARM programs.
The final
comment also indicates that a creditor should provide additional
loan program disclosures in response to subsequent expressions of
interest by the consumer.
Finally, material has been included to
clarify that program disclosures may consist of more than one
page.
Comment 19(b)(2)-2 has been added to clarify what
constitutes a separate loan program that would require separate
-
program disclosures.
11
-
The final comment also clarifies that loans
with a different term constitute distinct programs.
Comment 19(b)(2)-3 has been added to clarify that the
disclosures required under section 226.19(b)(2) need only be made
as applicable.
The final comment has been expanded to clarify
that disclosures relating to payments are only applicable to
payments based on the interest rate, loan balance and loan term.
Comment 19(b)(2)-4 has been added to explain the
circumstances under which a creditor must revise its loan program
disclosures.
Comments to new section 226.19(b)(2)(i) through (xiii)
have been added to clarify the requirements imposed by these
paragraphs and to illustrate how a creditor may comply with the
new provisions.
Additional commentary has been added to explain,
for example, how to select index values to be used in the
historical index table and how to illustrate discounted and
premium rates.
SECTION 226.20 - Subsequent Disclosure Requirements
20(a) Refinancings
Comment 20(a)-3 has been amended to clarify that the
addition of a variable-rate feature to an obligation or an
increase in the rate based on a previously undisclosed
variable-rate feature are events requiring disclosures under new
section 226.19(b) if the variable-rate transaction is secured by
the consumer's principal dwelling and has a term greater than one
-
year.
12
-
The comment explains that, in such cases, disclosures must
be given at the time of the addition or increase.
20(b) Assumptions
Comment 20(b)-6 has been amended to provide that
assumptions of variable-rate transactions secured by the
consumer's principal dwelling with a term greater than one year
may be disclosed solely in accordance with section 226.18(f)(1)
and that disclosures under sections 226.18(f)(2)(ii) and
226.19(b) need not be provided.
20(c) Variable-Rate Adjustments
Comment 20(c)-1 has been added to explain what
subsequent disclosures are required to be made by a creditor or a
subsequent holder in cases where an interest rate adjustment is
made in a variable-rate transaction subject to new section
226.19(b).
Comment 20(c)-2 has been added to clarify that
shared-equity or shared-appreciation mortgages are exempt from
the subsequent disclosure requirements of section 226.20(c).
Comment 20(c)(1)—1 and comment 20(c)(2)-l have been added to
clarify the requirements that current and prior interest rates
and index values be disclosed on adjustment notices.
Comment
20(c)(3)—1 has been added to clarify that section 226.20(c)(3) is
applicable only when interest rate carryover occurs at an
adjustment.
Comment 20(c)(4)-1 has been added to clarify the
disclosure of contractual effects of an adjustment, and comment
20(c)(5)-l has been added to clarify when the disclosure of fully
amortizing payments is required.
-
13
-
APPENDIX H - Closed-End Model Forms and Clauses
Comment app. H-4 has been revised to clarify that the
model clauses set forth in Appendix H-4(A) of the regulation
apply to transactions subject to section 226.18(f)(1).
In
addition, commentary has been provided to interpret the new model
clauses H-4(B) through H-4(D) in Appendix H.
numbered as comments app. H-5 through -7.
These additions are
Commentary describing
new Sample H-14 has been added as comment app. H-18.
Consequently, existing comments app. H-5 through -14 have been
renumbered as comments app. H-8 through -17 and existing comments
app. H-16 through -20 have been renumbered as comments app. H-19
through -23.
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 to the commentary.
New language is shown inside
arrows, while language that has been deleted is set off with
brackets.
Pursuant to authority granted in section 105 of the
Truth in Lending Act (15 U.S.C. 1604 as amended), the Board
amends the official staff commentary to Regulation Z (12 CFR Part
226 Supp. I) as follows:
(1) The authority citation for Part 226 continues to
read:
-
AUTHORITY:
14
-
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)
Text of revisions.
The commentary (12 CFR Part
Supp. I) is amended by revising comment 17(a)(1)—2; removing the
information contained in the fifth bullet under comment
17(a)(1)-5 and changing the reference in the ninth bullet under
this comment from section 226.18(f)(3) to section
226.18(f)(1)(iii); revising comments 17(b)-l and 17(b)-2;
revising the information contained in the first bullet under
comment 17(c) (1) —2; redesignating comment 17(c)(1)-8 as comment
17(c)(1) —12; redesignating comments 17(c)(1)—9 and 17(c)(1)-10 as
comments 17(c)(1)-14 and 17(c)(1)-15, respectively; adding
comments 17(c)(l)-8 through 17(c)(l)-ll and 17(c)(l)-13; revising
comment 17(d)-2; changing the reference in comment 17(f)-3 from
section 226.19(b) to section 226.19(a)(2); revising comment
18(f )-1; removing comments 18(f)-2 and 18(f)-3; removing comments
18(f)-5 through 18(f)-8; adding a heading "Paragraph 18(f )(1)(i )"
under the heading "Paragraph 18(f)(1)" and redesignating comment
18(f)(1)-1 as comment 18(f)(l)(i)-l; redesignating comment
18(f)-4 as comment 18(f)(1)-1; revising the heading "Paragraph
18(f)(2)" to read "Paragraph 18(f )(1)(ii)" and redesignating
comment 18(f)(2)-l as comment 18(f)(l)(ii)-l; revising the
heading "Paragraph 18(f)(3)" to read "Paragraph 18(f )(1)(iii)"
and redesignating comment 18(f)(3)-! as comment 18(f)(1) (i;.i )-l;
15
-
-
revising the heading "Paragraph 18(f)(4)" to read "Paragraph
18(f)(1)(iv)" and redesignating comments 18(f)(4)-1 and
18(f)(4)-2 as comments 18(f)(1)(iv)-l and 18(f)(1)(iv)-2,
respectively; adding a heading to read "Paragraph 18(f)(2)":
adding comment 18(f)(2)-l; revising the title to the commentary
to section 226.19; revising the heading "19(a) Time of
Disclosure" to read "19(a)(1) Time of Disclosure" and
redesignating comments 19(a)-l through 19(a)-5 as comments
19(a)(1)-1 through 19(a)(l)-5, respectively; revising the heading
"19(b) Redisclosure Required" to read "19(a)(2) Redisclosure
Required" and redesignating comments 19(b)-l through 19(b)-4 as
comments 19(a)(2)-l through 19(a)(2)-4, respectively; adding a
heading "19(b) Certain Variable-Rate Transactions"; adding
comments 19(b)-l through 19(b)(2)(xiii)-l; revising comment
20(a)-3; revising comment 20(b)-6; adding a heading to read
"20(c) Variable-Rate Adjustments" and adding comments 20(c)-l,
20(c)-2, 20(c)(1)—1, 20(c)(2)-1, 20(c)(3)-l, 20(c)(4)-l and
20(c)(5)-l; revising the heading and the first sentence of
comment app. H-4; redesignating comments app. H-5 through app.
H-20 as comments app. H-8 through app. H-23, respectively; adding
comments app. H-5 through app. H-7; and revising newly
redesignated comment app. H-18 to read as follows:
SUPPLEMENT I —
OFFICIAL STAFF INTERPRETATION
*
*
*
*
*
SECTION 226.17 - General Disclosure Requirements
17(a) Form of Disclosures
Paragraph 17(a)(1)
16
-
*
2.
*
-
*
*
*
Segregation of disclosures. The disclosures may be grouped
together and segregated from other information in a variety of
ways.
For example, the disclosures may appear on a separate
sheet of paper or may be set off from other information on the
contract or other documents:
• By outlining them in a box
• By bold print dividing lines
• By a different color background
• By a different type style
►(The general segregation requirement described in this
subparagraph does not apply to the disclosures required under
sections 226.19(b) and 226.20(c) although the disclosures must be
clear and conspicuous.)*
*
5.
*
Directly related. *
*
*
*
*
*
[• When a variable-rate feature is disclosed on other
documents
*
*
*]
*
*
*
• A brief reference to negative amortization in
variable-rate transactions.
For example, in the
variable-rate disclosure, the creditor may include a
short statement such as "Unpaid interest will be
added to principal."
(See the commentary to section
[226.18(f)(3)1 ►226.18(f)(1)(iii)*.)
*
*
*
*
*
-
17
-
17(b) Time of Disclosures
1.
Consummation. As a general rule, disclosures must be made
before "consummation" of the transaction.
The disclosures need
not be given by any particular time before consummation, except
in certain mortgage transactions ►and variable-rate transactions
secured by the consumer's principal dwelling with a term greater
than one year* under section 226.19.
(See the commentary to
section 226.2(a)(13) regarding the definition of consummation.)
2.
Converting open-end to closed-end credit.
If an open-end
credit account is converted to a closed-end transaction under a
written agreement with the consumer, the creditor must provide a
set of closed-end credit disclosures before consummation of the
closed-end transaction.
^ S e e the commentary to section
226.19(b) for the timing rules for additional disclosures
required upon the conversion to a variable-rate transaction
secured by a consumer's principal dwelling with a term greater
than one.year.)*
If consummation of the closed-end transaction
occurs at the same time as the consumer enters into the open-end
agreement, the closed-end credit disclosures may be given at the
time of conversion.
If disclosures are delayed until conversion
and the closed-end transaction has a variable-rate feature,
disclosures should be based on the rate in effect at the time of
conversion.
(See the commentary to section 226.5 regarding
conversion of closed-end to open-end credit.)
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)
18
-
*
2.
*
-
*
Modification of obligation.
*
*
*
*
*
• If the creditorf-employer] offers a preferential
femployee] rate, ►such as an employee preferred
rate,* the disclosures should reflect the terms of
the legal obligation.
(See the commentary to section
[226.18(f)] ►226.19(b)* for an example of a
preferred-rate [employee] transaction that is a
variable-rate transaction.)
*
►8.
*
*
*
*
Basis of disclosures in variable-rate transactions.
The
disclosures for a variable-rate transaction must be given for the
full term of the transaction and must be based on the terms in
effect at the time of consummation.
However, in a variable-rate
transaction with either a seller buydown that is reflected in the
credit contract or a consumer buydown, 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 and the rate that is the
basis of the variable-rate feature for the remainder of the term.
(See the commentary to section 226.17(c) for a discussion of
buydown 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).
-
9.
19
-
Use of estimates in variable-rate transactions.
The
variable-rate feature does not, by itself, make the disclosures
estimates.
10.
Discounted and premium variable-rate transactions.
In some
variable-rate transactions, creditors may set an initial interest
rate that is not determined by the index or formula used to make
later interest rate adjustments.
Typically, this initial rate
charged to consumers is lower than the rate would be if it were
calculated using the index or formula.
the initial rate may be higher.
However, in some cases
In a discounted transaction, for
example, a creditor may calculate interest rates according to a
formula using the six-month Treasury bill rate plus a 2 percent
margin.
If the Treasury bill rate at consummation is 10 percent,
the creditor may forgo the 2 percent spread and charge only 10
percent for a limited time, instead of setting an initial rate of
12 percent.
• When creditors use an initial interest rate that is
not calculated using the index or formula for later
rate adjustments, the disclosures should reflect a
composite annual percentage rate based on the initial
rate for as long as it is charged and, for the
remainder of the term, the rate that would have been
applied using the index or formula at the time of
consummation.
The rate at consummation need not be
used if a contract provides for a delay in the
implementation of changes in an index value.
For
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20
-
example, if the contract specifies that rate changes
are based on the index value in effect 45 days before
the change date, creditors may use the index value in
effect not more than 45 days before consummation in
calculating a composite annual percentage rate.
• The effect of the multiple rates must also be
reflected in the calculation and disclosure of the
finance charge, total of payments, and payment
schedule.
• If a loan contains a rate or payment cap that would
prevent the initial rate or payment, at the time of
the first adjustment, from changing to the rate
determined by the index or formula at consummation,
the effect of that rate or payment cap should be
reflected in the disclosures.
• Because these transactions involve irregular payment
amounts, an annual percentage rate tolerance of 1/4
of 1 percent applies, in accordance with section
226.22(a)(3) of the regulation.
• Examples of discounted variable-rate transactions
include --- A 30-year loan for $100,000 with no prepaid
finance charges and rates determined by the Treasury
bill rate plus 2 percent.
Rate and payment
adjustments are made annually.
Although the Treasury
bill rate at the time of consummation is 10 percent,
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21
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the creditor sets the interest rate for one year at 9
percent, instead of 12 percent according to the
formula.
The disclosures should reflect a composite
annual percentage rate of 11.63 percent based on 9
percent for one year and 12 percent for 29 years.
Reflecting those two rate levels, the payment
schedule should show 12 payments of $804.62 and 348
payments of $1,025.31.
The finance charge should be
$266,463.32 and the total of payments $366,463.32.
-- Same loan as above, except with a 2 percent rate
cap on periodic adjustments.
The disclosures should
reflect a composite annual percentage rate of 11.53
percent based on 9 percent for the first year, 11
percent for the second year, and 12 percent for the
remaining 28 years.
Reflecting those three rate
levels, the payment schedule should show 12 payments
of $804.62, 12 payments of $950.09, and 336 payments
of $1,024.34.
The finance charge should be
$265,234.76, and the total of payments $365,234.76.
-- Same loan as above, except with a 7 1/2 percent
cap on payment adjustments.
The disclosures should
reflect a composite annual percentage rate of 11.64
percent, based on 9 percent for one year and 12
percent for 29 years.
Because of the payment cap,
five levels of payments should be reflected.
The
payment schedule should show 12 payments of $804.62,
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22
-
12 payments of $864.97, 12 payments of $929.84, 12
payments of $999.58, and 312 payments of $1,070.04.
The finance charge should be $277,040.60, and the
total of payments $377,040.60.
This paragraph does not apply to variable-rate loans in which the
initial interest rate is set according to the index or formula
used for later adjustments but is not set at the value of the
index or formula at consummation.
For example, if a creditor
commits to an initial rate based on the formula on a date prior
to consummation, but the index has moved during the period
between that time and consummation, a creditor should base its
disclosures on the initial rate.
11.
Other variable-rate transactions.
Examples of variable-rate
transactions include:
• Renegotiable rate mortgage instruments that involve a
series of short-term loans secured by a long-term
obligation, where the lender is obligated to renew
the short-term loans at the consumer's option.
At
the time of renewal, the lender has the option of
increasing the interest rate.
Disclosures must be
given for the longer term of the obligation, with all
disclosures calculated on the basis of the rate in
effect at the time of consummation of the
transaction.
• "Shared-equity" or "shared-appreciation" mortgages
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23
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that have a fixed rate of interest and an
appreciation share based on the consumer's equity in
the mortgaged property.
The appreciation share is
payable in a lump sum at a specified time.
Disclosures must be based on the fixed interest rate.
(As discussed in the commentary to section 226.2,
other types of shared-equity arrangements are not
considered "credit" and are not subject to Regulation
Z.)
• Preferred-rate loans where the terms of the
legal obligation provide that the initial underlying
rate is fixed but will increase upon the occurrence
of some event, such as an employee leaving the employ
of the creditor, and the note reflects the preferred
rate.
The disclosures are to be based on the
preferred rate.
Graduated-payment mortgages and step-rate transactions without a
variable-rate feature are not considered variable-rate
transactions.*
[8.] ►12.* Graduated-payment adjustable-rate mortgages. *
►13.
Growth-equity mortgages.
*
Also referred to as
payment-escalated mortgages, these mortgage plans involve
scheduled payment increases to prematurely amortize the loan.
The initial payment amount is determined as for a long-term loan
with a fixed interest rate.
Payment increases are scheduled
periodically, based on changes in an index.
The larger payments
*
24
-
-
result in accelerated amortization of the loan.
In disclosing
these mortgage plans, creditors may either:
• Estimate the amount of payment increases, based on
the best information reasonably available; or
• Disclose by analogy to the variable-rate
disclosures in section 226.18(f)(1).
(This discussion does not apply to growth-equity mortgages in
which the amount of payment increases can be accurately
determined at the time of disclosure.
For these mortgages, as
for graduated-payment mortgages, disclosures should reflect the
scheduled increases in payments.)*
[9.] ►14.*
Morris Plan transactions. *
(10.J ►IS.*
Number of transactions. *
*
*
*
*
*
*
*
*
*
17(d) Multiple Creditors; Multiple Consumers
*
2.
*
*
*
*
Multiple consumers. When two consumers are joint obligors
with primary liability on an obligation, the disclosures may be
given to either one of them.
If one consumer is merely a surety
or guarantor, the disclosures must be given to the principal
debtor.
In rescindabie transactions, however, separate
disclosures must be given to each consumer who has the right to
rescind under section 2 2 6 .23[ ."}> t although the disclosures
required under section 226.19(b) need only be provided to the
consumer who expresses an interest in a variable-rate loan
program.*
25
-
*
*
-
*
*
*
17(f) Early Disclosures
*
3.
*
*
Content of new disclosures.
*
*
If redisclosure is required, the
creditor has the option of either providing a complete set of new
disclosures or providing disclosures of only the terms that vary
from those originally disclosed.
(See the commentary to section
[226.19(b)] ►226.19(a)(2)*.)
*
*
*
*
*
SECTION 226.18 - Content of Disclosures
*
*
*
*
*
18(f) Variable Rate
1.
Coverage.
The requirements of section'226.18(f) apply to all
transactions in which the terms of the legal obligation allow the
creditor to increase the rate originally disclosed to the
consumer.
It includes not only increases in the interest rate
but also increases in other components, such as the rate of
required credit life insurance.
The provisions, however, do not
apply to increases resulting from delinquency (including late
payment), default, assumption, acceleration or transfer of the
collateral.
►Section*226.18(f)(1) applies to variable-rate
transactions that are not secured by the consumer's principal
dwelling and to those that are secured by the principal dwelling
but have a term of one year or less.
Section 226.18(f)(2)
applies to variable-rate transactions that are secured by the
consumer's principal dwelling and have a term greater than one
26
-
year.
-
Moreover, transactions subject to section 226.18(f)(2) are
subject to the special early disclosure requirements of section
226.19(b).
(However, "shared-equity" or "shared-appreciation"
mortgages are subject to the disclosure requirements of section
226.18(f)(1) and not to the requirements of sections 226.18(f)(2)
and 226.19(b) regardless of the general coverage of those
sections.)
Creditors are permitted under footnote 43 to
substitute in any variable-rate transaction the disclosures
required under section 226.19(b) for those disclosures ordinarily
required under section 226.18(f)(1).
Creditors who provide
variable-rate disclosures under section 226.19(b) must comply
with all of the requirements of that section, including the
timing of disclosures, and must also provide the disclosures
required under section 226.18(f)(2).
Creditors utilizing
footnote 43 may, but need not, also provide disclosures pursuant
to section 226.20(c).
(Substitution of disclosures under section
226.18(f)(1) in transactions subject to section 226.19(b) is not
permitted under the footnote.)*
[2. Basis for disclosures. *
*
[3. Use of estimates. *
*3
*
*]
£4. Terms used in disclosure. *
* *]
~
[5.
Other variable-rate regulations. *
[6.
Examples of variable-rate transactions. *
[7. Growth-equity mortgages.
[8.
*
*
Discounted variable-ratetransactions. *
Paragraph 18(f)(1)
*3
*
*]
* *]
*
*1
27
-
►1.
Terms used in disclosure. *
-
*
**
*
*
►Paragraph 18(f)(l)(i)*
*
*
*
Paragraph [18(f)(2)] »18(f)(1)(ii)*
*
*
*
*
*
Paragraph 118(f)(3)] »18(f)(1)(iii)«
*
*
*
*
*
Paragraph [18(f)(4)] »18(f)(1)(iv)*
*
*
*
*
*
►Paragraph 18(f)(2)
1.
Disclosure required.
In variable-rate transactions that have
a term greater than one year and are secured by the consumer's
principal dwelling, the creditor must give special early
disclosures under section 226.19(b) in addition to the later
disclosures required under section 226.18(f)(2).
The disclosures
under section 226.18(f)(2) must state that the transaction has a
variable-rate feature and that variable-rate disclosures have
been provided earlier.*
*
*
*
*
*
SECTION 226.19 - Certain Residential Mortgage >and Variable-Rate<
Transactions
[19(a) Time of Disclosure]
►19(a)(1) Time of Disclosure*
*
*
*
[19(b) Redisclosure Required]
►19(a)(2) Redisclosure Required*
*
*
28
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*
*
*
-
*
*
►19(b) Certain Variable-Rate Transactions
1.
Coverage.
Section 226.19(b) applies to all closed-end
variable-rate transactions that are secured by the consumer's
principal dwelling and have a term greater than one year.
The
requirements of this section apply not only to transactions
financing the initial acquisition of the consumer's principal
dwelling, but also to any other closed-end variable-rate
transaction secured by the principal dwelling.
Closed-end
variable-rate transactions that are not secured by the principal
dwelling, or are secured by the principal dwelling but have a
term of one year or less, are subject to the disclosure
requirements of section 226.18(f)(1) rather than those of section
226.19(b).
(Furthermore, "shared-equity” or
"shared-appreciation” mortgages are subject to the disclosure
requirements of section 226.18(f)(1) rather than those of section
226.19(b) regardless of the general coverage of those sections.)
For purposes of this section, the term of a variable-rate demand
loan is determined in accordance with the commentary to section
226.17(c)(5).
2.
Timing.
A creditor must give the disclosures required under
this section at the time an application form is provided or
before the consumer pays a non-refundable fee, whichever is
earlier.
In cases where a creditor receives a written
application through an intermediary agent or broker, however,
footnote 45b provides a substitute timing rule requiring the
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29
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creditor to deliver the disclosures or place them in the mail not
later than three business days after the creditor receives the
consumer's written application.
This three-day rule also applies
where the creditor takes an application over the telephone.
If,
however, the consumer merely requests an application over the
telephone, the creditor must include the early disclosures
required under this section with the application that is sent to
the consumer.
In cases where the creditor solicits applications
through the mail, the creditor must also send the disclosures
required under this section if an application form is included
with the solicitation.
In cases where an open-end credit account
will convert to a closed-end transaction subject to this section
under a written agreement with the consumer, disclosures under
this section may be given at the time of conversion.
(See the
commentary to section 226.20(a) for information on the timing
requirements for section 226.19(b)(2) disclosures when a
variable-rate feature is later added to a transaction.)
3.
Other variable-rate regulations.
Transactions in which the
creditor is required to comply with and has complied with the
disclosure requirements of the variable-rate regulations of other
federal agencies are exempt from the requirements of section
226.19(b), by virtue of footnote 45a, and are exempt from the
requirements of section 226.20(c), by virtue of footnote 45c.
Those variable-rate regulations include the regulations issued by
the Federal Home Loan Bank Board and those issued by the
Department of Housing and Urban Development.
The exception in
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30
-
footnotes 45a and 45c is also available to creditors that are
required by state law to comply with the federal variable-rate
regulations noted above and to creditors that are authorized by
title VIII of the Depository Institutions Act of 1982 (12 USC
3801 et seq.) to make loans in accordance with those regulations.
Creditors using this exception should comply with the timing
requirements of those regulations rather than the timing
requirements of Regulation Z in making the variable-rate
disclosures.
4.
Examples of variable-rate transactions.
The following
transactions, if they have a term greater than one year and are
secured by the consumer's principal dwelling, constitute
variable-rate transactions subject to the disclosure requirements
of section 226.19(b).
• Renegotiable rate mortgage instruments that
involve a series of short-term loans secured by a
long-term obligation, where the lender is obligated
to renew the short-term loans at the consumer's
option.
At the time of renewal, the lender has the
option of increasing the interest rate.
• Preferred-rate loans where the terms of the legal
obligation provide that the initial underlying rate
is fixed but will increase upon the occurrence of
some event, such as an employee leaving the employ of
the creditor, and the note reflects the preferred
rate.
The disclosures under section 226.19(b)(1) and
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31
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226.19(b)(2)(v), (viii), (ix), (x) and (xiii) are not
applicable to such loans.
Graduated-payment mortgages and step-rate transactions without a
variable-rate feature are not considered variable-rate
transactions.
Paragraph 19(b)(1)
1.
Substitutes.
Creditors who wish to use publications other
than the Consumer Handbook on Adjustable Rate Mortgages must make
a good faith determination that their brochures are suitable
substitutes to the Consumer Handbook.
A substitute is suitable
if it is, at a minimum, comparable to the Consumer Handbook in
substance and comprehensiveness.
Creditors are permitted to
provide more detailed information than is contained in the
Consumer Handbook.
2.
Applicability. The Consumer Handbook need not be given for
variable-rate transactions subject to this section in which the
underlying interest rate is fixed.
(See comment 19(b)-4 for an
example of a variable-rate transaction where the underlying
interest rate is fixed.)
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.
If a program is made
available only to certain customers of an institution, a creditor
need not provide disclosures for that program to other consumers
-
32
-
who express a general interest in a creditor's ARM programs.
These disclosures must be given at the time an application form
is provided or before the consumer pays a non-refundable fee,
whichever is earlier.
If the consumer subsequently expresses an
interest in other available variable-rate loan programs subject
to section 226.19(b)(2), the creditor must provide disclosures
for such additional programs.
The creditor, of course, is
permitted to give the consumer information about additional
programs subject to section 226.19(b) initially.
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.
2.
Variable-rate loan program defined.
If the identification,
the presence or absence, or the exact value of a loan feature
I
must be disclosed under this section, variable-rate loans that
differ as to such features constitute separate loan programs.
For example, separate loan program disclosures would be required
based on differences in any of the following loan features:
• The index or other formula used to calculate
interest rate adjustments
• The rules relating to changes in the index value,
interest rate, payments, and loan balance
• The presence or absence of, and the amount of,
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33
-
rate or payment caps
• The presence of a demand feature
• The possibility of negative amortization
• The possibility of interest rate carryover
• The frequency of interest rate and payment
adjustments
• The presence of a discount feature
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).
If, however, a representative value may be given
for a loan feature or the feature need not be disclosed under
section 226.19(b)(2), variable-rate loans that differ as to such
features do not constitute separate loan programs.
For example,
separate program disclosures would not be required based on
differences in the following loan features:
• The amount of a discount
• The amount of a margin
3.
As applicable.
The disclosures required by this section need
only be made as applicable.
Any disclosure not relevant to a
particular transaction may be eliminated.
For example, if the
transaction does not contain a demand feature, the disclosure
required under section 226.19(b)(2)(xi) need not be given.
As
used in this section, "payment" refers only to a payment based on
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34
-
the interest rate, loan balance and loan term, and does not refer
to payment of other elements such as mortgage insurance premiums.
4.
Revisions.
A creditor must revise the disclosures required
under this section once a year as soon as reasonably possible
after the new index value becomes available.
Revisions to the
disclosures also are required when the loan program changes.
Paragraph 19(b)(2)(i)
1.
Change in interest rate, payment, or term.
A creditor must
disclose the fact that the terms of the legal obligation permit
the creditor, after consummation of the transaction, to increase
(or decrease) the interest rate, payment, or term of the loan
initially disclosed to the consumer.
For example, the
disclosures for a variable-rate program in which the interest
rate and payment (but not loan term) can change might read, "Your
interest rate and payment can change yearly."
In transactions
where the term of the loan may change due to rate fluctuations,
the creditor must state that fact.
Paragraph 19(b)(2)(ii)
1.
Identification of index or formula.
If a creditor ties
interest rate changes to a particular index, this fact must be
disclosed, along with a source of information about the index.
For example, if a creditor uses the weekly average yield on U.S.
Treasury Securities adjusted to a constant maturity as its index,
the disclosure might read, "Your index is the weekly average
yield on U.S. Treasury Securities adjusted to a constant maturity
of one year published weekly in the Wall Street Journal."
If no
-
35
-
particular index is used, the creditor must briefly describe the
formula used to calculate interest rate changes.
2.
Changes at creditor's discretion.
If interest rate changes
are at the creditor's discretion, this fact must be disclosed.
If an index is internally defined, such as by a creditor's prime
rate, the creditor should either briefly describe that index or
state that interest rate changes are at the creditor's
discretion.
Paragraph 19(b)(2)(iii)
1.
Determination of interest rate and payment.
This provision
requires an explanation of how the creditor will determine the
consumer's interest rate and payment.
In cases where a creditor
bases its interest rate on a specific index and adjusts the index
through the addition of a margin, for example, the disclosure
might read, "Your interest rate is based on the index plus a
margin, and your payment will be based on the interest rate, loan
balance, and remaining loan term."
If applicable, the creditor
should also disclose that the rate and payment will be rounded.
Paragraph 19(b)(2)(iv)
1.
Current margin value and interest rate.
Because the
disclosures can be prepared in advance, the interest rate and
margin may be several months old when the disclosures are
delivered.
A statement, therefore, is required alerting
consumers to the fact that they should inquire about the current
margin value applied to the index and the current interest rate.
-
36
-
For example, the disclosure might state, "Ask us for our current
interest rate and margin."
Paragraph 19(b)(2)(v)
1.
Discounted and premium interest rate.
In some variable-rate
transactions, creditors may set an initial interest rate that is
not determined by the index or formula used to make later
interest rate adjustments.
Typically, this initial rate charged
to consumers is lower than the rate would be if it were
calculated using the index or formula.
the initial rate may be higher.
However, in some cases
If the initial interest rate
will be a discount or a premium rate, creditors must alert the
consumer to this fact.
For example, if a creditor discounted a
consumer's initial rate, the disclosure might state, "Your
initial interest rate is not based on the index used to make
later adjustments."
(See the commentary to section 226.17(c)(1)
for a further discussion of discounted and premium variable-rate
transactions.)
In addition, the disclosure must suggest that
consumers inquire about the amount that the program is currently
discounted.
For example, the disclosure might state, "Ask us for
the amount our adjustable rate mortgages are currently
discounted."
(See the commentary to section 226.19(b)(2)(viii)
for a discussion of how to reflect the discount or premium in the
historical example.)
Paragraph 19(b)(2)(vi)
1.
Frequency.
The frequency of interest rate and payment
adjustments must be disclosed.
If interest rate changes will be
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37
-
imposed more frequently or at different intervals than payment
changes, a creditor must disclose the frequency and timing of
both types of changes.
For example, in a variable-rate
transaction where interest rate changes are made monthly, but
payment changes occur on an annual basis, this fact must be
disclosed.
Paragraph 19(b)(2)(vii)
1.
Rate and payment 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 must be
disclosed.
If separate overall or periodic limitations apply to
interest rate increases resulting from other events, such as the
exercise of a fixed-rate conversion option or leaving the
creditor's employ, those limitations must also be stated.
Limitations do not include legal limits in the nature of usury or
rate ceilings under state or federal statutes or regulations.
(See section 226.30 for the rule requiring that a maximum
interest rate be included in certain variable-rate transactions.)
2.
Negative amortization and interest rate carryover. A
creditor must disclose, where applicable, the possibility of
negative amortization.
For example, the disclosure might state,
"If any of your payments is not sufficient to cover the interest
due, the difference will be added to your loan amount."
In
addition, the creditor must disclose the existence of any
interest rate carryover provisions.
Interest rate carryover
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38
-
exists when a change in the index rate that is not imposed at the
time of an adjustment because, for example, it exceeds an
adjustment limitation, is carried over and incorporated into the
calculation of future rate adjustments.
For example, if the
index rises 3 percentage points during the year and the loan
contains a 2 percentage point cap on annual changes (increases or
decreases) in the interest rate, interest rate carryover exists
if the creditor may impose the additional percentage point the
following year as an addition to the rate derived by using the
index or formula.
In such cases, the creditor must disclose the
fact that changes in the index will be carried over to subsequent
interest rate adjustment dates.
The disclosure might state,
’Changes in the index not passed on as changes in the interest
’
rate will be carried over and applied to subsequent interest rate
adjustments.’
’
3.
Conversion option.
If a loan program permits consumers to
convert their variable-rate loans to fixed-rate loans, the
creditor must disclose that the interest rate may increase if the
consumer converts the loan to a fixed-rate loan.
The creditor
must also disclose the rules relating to the conversion feature,
such as the period during which the loan may be converted, that
fees may be charged at conversion, and how the fixed rate will be
determined.
The creditor should identify any index or other
measure or formula used to determine the fixed rate and state any
margin to be added.
In disclosing the period during which the
loan may be converted and the margin, the creditor may use
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39
-
information applicable to the conversion feature during the six
months preceding preparation of the disclosures and state that
the information is representative of conversion features recently
offered by the creditor.
The information may be used until the
program disclosures are otherwise revised.
Although the rules
relating to the conversion option must be disclosed, the effect
of exercising the option should not be reflected elsewhere in the
disclosures, such as in the historical example or in the
calculation of the initial and maximum interest rate and
payments.
4.
Preferred-rate loans.
Section 226.19(b) applies to
preferred-rate loans, where the rate will increase upon the
occurrence of some event, such as an employee leaving the
creditor's employ, whether or not the underlying rate is fixed or
variable.
In these transactions, the creditor must disclose the
event that would allow the creditor to increase the rate such as
that the rate may increase if the employee leaves the creditor's
employ.
The creditor must also disclose the rules relating to
termination of the preferred rate, such as that fees may be
charged when the rate is changed and how the new rate will be
determined.
Paragraph 19(b)(2)(viii)
1.
Index movement.
This section requires a creditor to provide
an historical example, based on a $10,000 loan amount originating
in 1977, showing how interest rate changes implemented according
to the terms of the loan program would have affected payments and
-
40
-
the loan balance at the end of each year during a 15-year period.
(In all cases, the creditor need only calculate the payments and
loan balance for the term of the loan.
For example, in a five-
year loan, a creditor would show the payments and loan balance
for the five-year term, from 1977 to 1981, with a zero loan
balance reflected for 1981.
For the remaining ten years,
1982-1991, the creditor need only show the remaining index
values, margin and interest rate.)
Pursuant to this section, the
creditor must provide a history of index values for the preceding
15 years.
Initially, the disclosures would give the index values
from 1977 to the present.
Each year thereafter, the revised
program disclosures should include an additional year's index
value until 15 years of values are shown.
If the values for an
index have not been available for 15 years, a creditor need only
go back as far as the values are available in giving a history
and payment example.
need be shown.
In all cases, only one index value per year
Thus, in transactions where interest rate
adjustments are implemented more frequently than once per year, a
creditor may assume that the interest rate and payment resulting
from the index value chosen will stay in effect for the entire
year for purposes of calculating the loan balance as of the end
of the year and for reflecting other loan program terms.
In
cases where interest rate changes are at the creditor's
discretion (see the commentary to section 226.19(b)(2)(ii)), the
creditor must provide a history of the rates imposed for the
preceding 15 years, beginning with the rates in 1977.
In giving
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this history, the creditor need only go back as far as the
creditor's rates can reasonably be determined.
2.
Selection of index values.
The historical example must
reflect the method by which index values are determined under the
program.
If a creditor uses an average of index values or any
other index formula, the history given should reflect those
values.
The creditor should select one date or, when an average
of single values is used as an index, one period and should base
the example on index values measured as of that same date or
period for each year shown in the history.
A date or period at
any time during the year may be selected, but the same date or
period must be used for each year in the historical example.
For
example, a creditor could use values for the first business day
in July or for the first week ending in July for each of the 15
years shown in the example.
3.
Selection of margin.
For purposes of the disclosure required
under section 226.19(b)(2)(viii) a creditor may select a
,
representative margin that has been used during the six months
preceding preparation of the disclosures, and should disclose
that the margin is one that the creditor has used recently.
The
margin selected may be used until a creditor revises the
disclosure form.
4.
Amount of discount or premium.
For purposes of the
disclosure required under section 226.19(b)(2)(viii) a creditor
,
may select a discount or premium (amount and term) that has been
used during the six months preceding preparation of the
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42
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disclosures, and should disclose that the discount or premium is
one that the creditor has used recently.
The discount or premium
should be reflected in the historical example for as long as the
discount or premium is in effect.
A creditor may assume that a
discount that would have been in effect for any part of a year
was in effect for the full year for purposes of reflecting it in
the historical example.
For example, a 3-month discount may be
treated as being in effect for the entire first year of the
example; a 15-month discount may be treated as being in effect
for the first two years of the example.
In illustrating the
effect of the discount or premium, creditors should adjust the
value of the interest rate in the historical example, and should
not adjust the margin or index values.
For example, if during
the six months preceding preparation of the disclosures the fully
indexed rate would have been 10% but the first year's rate under
the program was 8%, the creditor would discount the first
interest rate in the historical example by 2 percentage points.
Paragraph 19(b)(2)(ix)
1.
Calculation of payments.
A creditor is required to include a
statement on the disclosure form that explains how a consumer may
calculate his or her actual monthly payments for a loan amount
other than $10,000.
The example should be based upon the most
recent payment shown in the historical example.
The creditor,
however, is not required to calculate the consumer's payments.
(See the model clauses in Appendix H-4(C).)
Paragraph 19(b)(2)(x)
-
1.
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Initial and maximum interest rate and payment.
The
disclosure form must state the initial and maximum interest rates
and payments for a $10,000 loan originated at the most recent
interest rate (index value plus margin) shown in the historical
example.
In calculating the maximum payments under this
paragraph, a creditor should assume that the interest rate
increases as rapidly as possible under the loan program, and the
maximum payment disclosed should reflect the amortization of the
loan during this period.
Thus, in a loan with 2 percentage point
annual (and 5 percentage point overall) interest rate limitations
or Mcaps," the maximum interest rate would be 5 percentage points
higher than the most recent rate shown in the historical example.
Moreover, the loan would not reach the maximum interest rate
until the fourth year because of the 2 percentage point annual
rate limitations, and the maximum payment disclosed would reflect
the amortization of the loan during this period.
If the loan
program includes a discounted or premium initial interest rate,
the most recent rate shown in the historical example should be
adjusted by the amount of the discount or premium reflected
elsewhere in the disclosure for purposes of the requirements of
this paragraph.
Furthermore, this disclosure should state the
amount by which the most recent rate has been adjusted.
(See the
commentary to section 226.19(b)(2)(viii) regarding disclosure of
the amount of a discount or premium.)
The creditor may use an
interest rate applicable to the program that is more recent than
the latest rate shown in the historical example.
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44
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Paragraph 19(b)(2)(xi)
1.
Demand feature.
If a variable-rate loan subject to section
226.19(b) requirements contains a demand feature, this fact must
be disclosed.
(Pursuant to section 226.18(i), creditors would
also disclose the demand feature in the standard disclosures
given later.)
Paragraph 19(b)(2)(xii)
1.
Adjustment notices.
A creditor must disclose to the consumer
the type of information that will be contained in subsequent
notices of adjustments and when such notices will be provided.
(See the commentary to section 226.20(c) regarding notices of
adjustments.)
For example, the disclosure might state, "You will
be notified at least 25, but no more than 120, days before the
due date of a payment at a new level.
This notice will contain
information about the index and interest rates, payment amount,
and loan balance.”
In transactions where there may be interest
rate adjustments without accompanying payment adjustments in a
year, the disclosure might read, ”You will be notified once each
year during which interest rate adjustments, but no payment
adjustments, have been made to your loan. This notice will
contain information about the index and interest rates, payment
amount, and loan balance.”
Paragraph 19(b)(2)(xiii)
1.
Multiple loan programs. A creditor that offers multiple
variable-rate loan programs is required to have disclosures for
each varic'ble-rate loan program subject to section 226.19(b)(2)
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45
-
Unless disclosures for all of its variable-rate programs are
provided initially, the creditor must inform the consumer that
other closed-end variable-rate programs exist, and that
disclosure forms are available for these additional loan
programs.
For example, the disclosure form might state,
"Information on other adjustable rate mortgage programs is
available upon request."*
SECTION 226.20 - Subsequent Disclosure Requirements
20(a) Refinancings
*
3.
Variable-rate.
*
*
*
*
If a variable-rate feature was properly
disclosed under the regulation, a rate change in accord with
those disclosures is not a refinancing.
For example, a
renegotiable rate mortgage that was disclosed as a variable-rate
transaction is not subject to new disclosure requirements when
the variable-rate feature is invoked.
However, even if it is not
accomplished by the cancellation of the old obligation and
substitution of a new one, a new transaction subject to new
disclosures results if the creditor either:
• Increases the rate based on a variable-rate
feature that was not previously disclosed, or
• Adds a variable-rate feature to the obligation.
►If either of these two events occurs in a transaction secured by
a principal dwelling with a term longer than one year, the
disclosures required under section 226.19(b) also must be given
at that time.*
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*
*
*
*
*
*
*
*
*
*
20(b) Assumptions
6.
Disclosures.
For transactions that are assumptions within
this provision, the creditor must make disclosures based on the
"remaining obligation."
For example:
• The amount financed is the remaining principal
balance plus any arrearages or other accrued charges
from the original transaction.
• If the finance charge is computed from time to time
by application of a percentage rate to an unpaid
balance, in determining the amount of the finance
charge and the annual percentage rate to be
disclosed, the creditor should disregard any prepaid
finance charges paid by the original obligor, but
must include in the finance charge any prepaid
finance charge imposed in connection with the
assumption.
• If the creditor requires the assuming consumer to pay
any charges as a condition of the assumption, those
sums are prepaid finance charges as to that consumer,
unless exempt from the finance charge under section
226.4.
If a transaction involves add-on or discount finance charges, the
creditor may make abbreviated disclosures, as outlined in section
226.20(b)(1) through (5).
►Creditors providing disclosures
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pursuant to this section for assumptions of variable-rate
transactions secured by the consumer's principal dwelling with a
term longer than one year need not provide new disclosures under
sections 226.18(f)(2)(ii) or 226.19(b).
In such transactions, a
creditor may disclose the variable-rate feature solely in
accordance with section 226.18(f)(1).*
*
*
*
*
*
►20(c) Variable-Rate Adjustments
1.
Timing of adjustment notices.
This section requires a
creditor (or a subsequent holder) to provide certain disclosures
in cases where an adjustment to the interest rate is made in a
variable-rate transaction subject to section 226.19(b),.
There
are two timing rules, depending on whether payment changes
accompany interest rate changes.
A creditor is required to
provide at least one notice each year during which interest rate
adjustments have occurred without accompanying payment
adjustments.
For payment adjustments, a creditor must deliver or
place in the mail notices to borrowers at least 25, but not more
than 120, calendar days before a payment at a new level is due.
The timing rules also apply to the notice required to be given in
connection with the adjustment to the rate and payment that
follows conversion of a transaction subject to section 226.19(b)
to a fixed-rate transaction.
(In cases where an open-end account
is converted to a closed-end transaction subject to section
226.19(b), the requirements of this section do not apply until
adjustments are made following conversion.)
-
2.
Exceptions.
48
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Section 226.20(c) does not apply to
"shared-equity" or "shared-appreciation" mortgages.
Paragraph 20(c)(1)
1.
Current and prior interest rates.
The requirements under
this paragraph are satisfied by disclosing the interest rate used
to compute the new adjusted payment amount ("current rate") and
the adjusted interest rate that was disclosed in the last
adjustment notice, as well as all other interest rates applied to
the transaction in the period since the last notice ("prior
rates").
(If there has been no prior adjustment notice, the
prior rates are the interest rate applicable to the transaction
at consummation, as well as all other interest rates applied to
the transaction in the period since consummation.)
If no payment
adjustment has been made in a year, the current rate is the new
adjusted interest rate for the transaction, and the prior rates
are the adjusted interest rate applicable to the loan at the time
of the last adjustment notice, and all other rates applied to the
transaction in the period between the current and last adjustment
notices.
In disclosing all other rates applied to the
transaction during the period between notices, a creditor may
disclose a range of the highest and lowest rates applied during
that period.
Paragraph 20(c)(2)
1.
Current and prior index values.
This section requires
disclosure of the index or formula values used to compute the
current and prior interest rates disclosed in section
-
226.20(c)(1).
49
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The creditor need not disclose the margin used in
computing the rates.
If the prior interest rate was not based on
an index or formula value, the creditor also need not disclose
the value of the index that would otherwise have been used to
compute the prior interest rate.
Paragraph 20(c)(3)
1.
Unapplied index increases.
The requirement that the consumer
receive information about the extent to which the creditor has
foregone any increase in the interest rate is applicable only to
those transactions permitting interest rate carryover.
The
amount of increase that is foregone at an adjustment is the
amount that, subject to rate caps, can be applied to future
adjustments independently to increase, or offset decreases in,
the rate that is determined according to the index or formula.
Paragraph 20(c)(4)
1.
Contractual effects of the adjustment.
The contractual
effects of an interest rate adjustment must be disclosed
including the payment due after the adjustment is made whether or
not the payment has been adjusted.
A contractual effect of a
rate adjustment would include, for example, disclosure of any
change in the term or maturity of the loan if the change resulted
from the rate adjustment.
is required.
A statement of the loan balance also
The balance required to be disclosed is the balance
on which the new adjusted payment is based.
If no payment
adjustment is disclosed in the notice, the balance disclosed
should be the loan balance on which the payment disclosed under
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section 226.20(c)(5) is based, if applicable, or the balance at
the time the disclosure is prepared.
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
pay off the loan balance (including capitalized interest) in the
remaining term of the loan at the adjusted interest rate.
In
such cases, the adjustment notice must state the payment required
to fully amortize the loan over the remainder of the term.
(This
paragraph does not apply if the new payment disclosed in section
226.20(c)(4) is fully amortizing but the final payment will be a
different amount due to rounding.)*
*
*
*
*
*
APPENDIX H - Closed-End Model Forms and Clauses
*
4.
*
*
*
*
Model H-4» (A)*. This model contains the variable rate model
clauses ►applicable to transactions subject to section
226.18(f)(1)* and is intended to give creditors considerable
flexibility in structuring variable rate disclosures to fit
individual plans. *
5.
►Model H-4(B).
*
*
This model clause illustrates the variable-
rate disclosure required under section 226.18(f)(2), which would
alert consumers to the fact that the transaction contains a
variable-rate feature and that disclosures were provided
earlier.*
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6.
»Model H-4(C).
-
This model clause illustrates the
early
disclosures required generally under section 226.19(b).
It
includes information on how the consumer's interest rate is
determined and how it
explains changes
payment.
can
that may
changeovertheterm of the
loan, and
occurintheborrower's monthly
The model clause also contains an example of how to
disclose historical changes in the index or formula values used
to compute interest rates for the preceding 15 years.
In
addition, the model clause illustrates the disclosure of the
initial and maximum interest rates and payments for a loan
originated at the most recent rate shown in the historical
example.*
7.
►Model H-4(D).
This model clause illustrates the adjustment
notice required under section 226.20(c), and provides examples of
payment change notices and annual notices of interest rate
changes.*
£5.) >&.*
Model
H-5.* *
*
[6.] *9.*
Model
H-6.* *
*
[7.] ►lO.* Model H-7. *
*
*
[8.] ►!!.* ModelsH-8 and H-9.
**
Sample forms. *
*
*
[10.] ► 13.*
Sample H-10. *
*
*
CH.] ► 14. *
Sample H-ll. *
*
*
ri2.j ► 15. *
Sample H-12. *
*
*
£13.} ►16.*
Samples H-13 through H
[14.1 ►17.*
Sample H-13. *
C9.] ►12.*
*
*
*
-
[15.] ►IS.*
Sample H-14.
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►This sample disclosure form
illustrates the disclosures under section 226.19(b) for a
variable-rate transaction secured by the consumer's principal
dwelling with a term greater than one year.
The sample form
shows a creditor how to adapt the model clauses in Appendix
H-4(C) to the creditor's own particular variable-rate program.
The sample disclosure form describes the features of a specific
variable-rate mortgage program and alerts the consumer to the
fact that information on the creditor's other closed-end
variable-rate programs is available upon request.
It includes
information on how the interest rate is determined and how it can
change over time, and explains how the monthly payment can change
based on a $10,000 loan amount, payable in 360 monthly
installments, based on historical changes in the values for the
weekly average yield on U.S. Treasury Securities adjusted to a
constant maturity of one year.
Index values are measured as of
the first week ending in July for the years 1977 through 1987.
This reflects the requirement that the index history be based on
values for the same date or period each year beginning with index
values for 1977.
The sample disclosure also illustrates the
requirement under section 226.19(b)(2)(x) that the initial and
the maximum interest rates and payments be shown for a $10,000
loan originated at the most recent rate shown in the historical
example.
In the sample, the loan is assumed to have an initial
interest rate of 9.71% (which was the interest rate in 1987 for
the example shown) and to have 2 percentage point annual (and 5
53
-
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percentage point overall) interest rate limitations or caps.
Thus, the maximum amount that the interest rate could rise under
this program is 5 percentage points higher than the 9.71% initial
rate to 14.71%, and the monthly payment could rise from $85.62 to
a maximum of $123.31.
The loan would not reach the maximum
interest rate until its fourth year because of the 2 percentage
point annual rate limitations, and the maximum payment disclosed
reflects the amortization of the loan during that period.
The
sample form also illustrates how to provide consumers with a
method for calculating their actual monthly payment for a loan
amount other than $10,000.
(17.] ►20.*
HRSA-500-1 9-82. *
*
*
[18.1 ►21. *
HRSA-500-2 9-82. *
*
*
[19.1 ►22.*
HRSA-502-1 9-82. *
*
*
[20.] ►23. *
HRSA-502-2 9-82. *
*
*
A
*
▼
C>
T
i
—1
*
[16. J
Sample H-15. *
*
*
*
*
Board of Governors of the Federal Reserve System, March
30, 1988.
(signed) William W. Wiles
William W. Wiles
Secretary of the Board
@FedFRASER