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F ederal r es er v e Bank of D allas DALLAS, TEXAS 75222 C irc u la r No. 78-138 October 3, 1978 REGULATION Z— PROPOSED OFFICIAL STAFF INTERPRETATION Computation of Annual Percentage Rates For H U D /FH A Section 245 Graduated Payment Mortgages TO ALL MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE D IS T R IC T: T h e Board of Governors of the Federal Reserve System has published for comment a proposed official staff interpretation approving the use of certain tables and accompanying instructions prep a re d by the U. S. Department of Housing and Urban Development. These tables a re intended for use in computing the annual percentage rate on graduated payment mortgages under the H U D /F H A Section 245 Experimental Financing Program . A copy of the proposed interpretation is p rin te d on the reverse of this c ir c u la r . How ever, we have not attached copies of the tables themselves. These tables may be found in the Feder al Register , Volume 43, No. 182— Tuesday, September 19, 1978, pages 41995 through 42015. If you a re unable to locate a F e d eral Register , copies of the tables are available through our Consumer A ffairs unit. Comments on the proposed interpretation should be addressed to the S e c re ta ry , Board of Governors of the Federal Reserve System, Washington, D. C. 20551. Comments must be received on or before October 19, 1978, and should in clude reference to FC-0154. Any questions on the above interp retation may be directed to our Con sumer A ffairs unit at E x t. 6171. S incerely yo u rs , Robert H. Boykin First Vice President Banks and others are encouraged to use the fo llow ing incoming WATS numbers in contacting this Bank: 1-800-492-4403 (intrastate) and 1-800-527-4970 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) E xtract From Fed er al Register VO L. 43, NO. 182 T u e s d a y , September 19, 1978 p. 41993 [ 6210-01 ] FEDERAL RESERVE SYSTEM [1 2 CFR P o rt 2 2 6 ] [Reg. Z; PC-01543 COMPUTATION O F ANNUAL PERCENTAGE RATES FOR H U D /FH A SECTION 2 4 5 GRADU ATED PAYMENT MORTGAGES P r o p o s e d O fficia l S ta ff In te r p r e ta tio n AGENCY: Board of Governors of th e Federal Reserve System. ACTION: Proposed official staff in ter pretation. SUMMARY: T h e Board is publishing for com m ent a proposed official staff in terpretation approving th e use of certain tables and accompanying instructions prepared by th e U.S. D e p a rtm en t of Housing and U rban D e velopm ent to be used to com pute th e ann u al percentage rate on graduated paym ent m ortgages under th e H U D / FHA section 245 Experim ental Financ ing Program. T he proposed in terp reta tion is intended to assist in com puta tion of th e annual percentage ra te in such mortgages. DATE: Comments m ust be received on or before October 19,1978. ADDRESS: Comments including refer ence to FC-0154 to Secretary, Board of Governors of th e Federal Reserve System, W ashington, D.C. 20551. FO R FU RTH ER INFORM ATION CONTACT: G lenn E. Loney, Section Chief, Divi sion of Consumer Affairs, Board of Governors of th e Federal Reserve System, W ashington, D.C. 20551, 202-452-3867. SUPPLEMENTARY INFORMATION: (1) In order to assist in th e com puta tion of annu al percentage rates in graduated paym ent mortgages made under th e HU D /FH A section 245 E x perim ental Financing Program , th e Board sta ff proposes to approve use of tables and accompanying instructions prepared by th e Actuarial Division of th e U.S. D epartm ent of Housing and U rban Development. T he Board staff has reviewed th e tables and instructions prepared by HUD and has determ ined th a t they yield accurate annual percentage rates. T he staff would appreciate any comments th e public m ight have on th is m atter, particularly regarding w h ether th e instructions and tables, which are attached to th e proposed of ficial sta ff interpretation, are clear, understandable, and easy to use. (2) To aid in th e consideration of th is m atter, interested persons are in vited to subm it relevant data, com m ents or argum ents. All such m ateri als should be subm itted in writing to Secretary, Board of Governors of th e Federal Reserve System, W ashington, D.C. 20551, and should be received n ot la te r th a n O ctober 19, 1978. Such in form ation will be made available for inspection and copying upon request, except as provided in § 261.6(a) of th e Board’s Rules Regarding Availability of Inform ation (12 CFR 261.6(a)). (3) P u rsu an t to th e a u th o rity grant ed in 15 U.S.C. 1640(f), th e Board staff proposes to issue th e following official staff interpretation: M r. C hester C. F o ster, Acting Director, Actuarial Division, De partment of Housing and Urban Devel opment, , Washington, D.C. D ea r M r . F o s t e r : This letter is in re sponse to our recent correspondence and conversations concerning proper computa tion of the annual percentage rate for grad uated payment mortgages made under the Department of Housing and Urban Develop m ent’s FHA Section 245 Experimental Fi nancing Program. You'have requested th at the Board staff review and verify th at the attached tables, when used in accordance with the attached instructions, yield an ac curate annual percentage rate for purposes of Regulation Z. The staff has reviewed the attached mate rials and concludes that, subject to the limi tations set forth below, use of the tables in accordance with the Instructions which ac company them results in an accurate annual percentage rate. It should be noted th a t this approach may be used only when the first payment period, i.e.. the period from the date on which the finance charge begins to accrue to the date of the first payment, falls within the ranges describe in the minor Irregularities provi sions of Regulation Z, $ 226.5(d) and Inter pretation § 226.503. This means th a t the first payment must be due not more than 62 days after consummation of the loan in order for use of the tables to yield an accu rate annual percentage rate. Use of this method also presumes th a t the monthly payments have been properly calculated using HUD Handbood 4240.2, dated October 27, 1976. Finally, we note th a t these tables and instructions cannot be used for gradu ated payment plans involving private mort gage insurance premiums, unless such insur ance premiums are computed in the same manner as the FHA mortgage insurance premiums involved in the Section 245 Grad uated Payment Mortgage program. This is an official staff Interpretation of Regulation Z. issued in accordance with § 226.1(d)(2) of the regulation, and it is strictly limited to the situation discussed herein. Sincerely, N a t h a n i e l E. B u t l e r , Associate Director. Board of Governors of th e Federal Reserve System, Septem ber 5, 1978. G r i f f i t h L. G arw o o d , Deputy Secretary of the Board.