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F ed e r a l Re s e r v e Ba n k DALLAS, TEXAS of D allas 75222 Circular No. 76-153 November 8, 1976 REGULATION Z—TRUTH-IN-LENDING Notice of Proposed Rulemaking on the D isclosure of V ariable Interest Rate Loans TO ALL BANKS, OTHER CREDITORS, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: On October 21, 1976, the Board of G overnors of the Federal R eserve System proposed to amend Regulation Z—T ru th - in -L e n d in g —to r e q u ire d isc lo su re to the custom er, in advance of signing a loan agreem ent, of any v aria b le rate clause in the con tract and a num ber of related m a tters. P re v io u sly , on December 18, 1974 (see C irc u lar No. 74-335, dated December 31, 1974), the Board proposed to r e q u ire d isc lo s u re that: (1) the annual p ercen tage rate might v a ry ; (2) the conditions u n d e r which the ra te might be changed; and (3) if applicable, the ra n g e within which the rate could v a r y . After considering suggestions for additional d isc lo su re s in comment received, and in light of the grow ing u se of variab le rate loans, p a rtic u la rly in m ortgages, the Board decided to propose th e following additional d isc lo s u re requirem ents: — T he manner in which the change in the annual p ercen tag e rate might be imple mented (for exam ple, by sh ortening o r lengthening th e maturity of the loan, by changing the amount of periodic p aym ents, o r by a change in th e amount due on the loan at m aturity, if the loan is not en tirely rep aid by the periodic p a y m e n ts ) . — A statement of the effect on th e amount of the periodic paym ent that would re su lt from a ch an g e, immediately after consummation of th e loan, assum ing both a d e c re a se and an increase of o n e - q u a rte r of one p e rc e n t in the annual p erc en tag e rate (or a g r e a te r change if the contract perm its) when th e re is no change in the m aturity of the loan. — A statement of how such a variation of a q u a r t e r of one p e rc e n t in the annual p erce n ta g e rate (or a g r e a t e r change if perm itted by the contract) would affect the maturity of the loan, when no ch an g e is made in the periodic paym ent. T he last two req uirem ents would apply to a typical home mortgage loan contract containing a v aria b le interest rate p ro v isio n . They would not apply to some other t r a n s actions, such as sin g le payment loans and loans p ayable upon dem and. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 P rin ted on the following pa g es is th e tex t of the B oa rd 's notice as subm itted for publication in th e FEDERAL REGISTER. Comments on the p ro p osed amendments should be submitted in w riting to th e S e c r e ta ry , Board of G overnors of the Federal R e serv e System , Washington, D .C . 20551, to be received not later th an November 29, 1976. All material subm itted should include the docket num ber R-0003. S in cerely y o u r s , T . W. Plant F irst Vice P re sid e n t FEDERAL RESERVE SYSTEM [12 CFR PART 226] [Reg. Z] [Docket No. R-0003] Notice of Proposed Rulemaking on the Disclosure of Variable Interest Rate Loans The Board of Governors of the Federal Reserve System is publishing for comment a proposed amendment to Regulation Z to require creditors to disclose to customers, in advance of their becoming obligated on a credit contract, a variable interest rate clause if the contract, note, or other instrument evidencing the obligation so provides. On December 27, 1974, the Board published for comment in the Federal Register (39 F.R. 44779) a proposed amend ment to Regulation Z, S 226.8(b)(8), which would have required disclosure of the fact that the annual percentage rate is subject to change, the conditions under which the rate may be changed and, if applicable, the maximum and minimum rates stipulated in the credit contract. The comments received by the Board on its earlier pro posal generally supported mandatory disclosure of variable rate clauses, but several commenters suggested that the proposed regu lation did not require disclosure of sufficient information to enable customers to compare variable rate loans with fixed rate loans or to alert customers to the impact of a change in rates. Therefore, the proposed amendment has been expanded to require -2 - disclosure of certain additional information that may be necessary for a meaningful evaluation of the economic consequences to the customer of a variable rate loan. This new proposed amendment to S 226.8(b) establishes disclosure requirements for certain other than open end credit plans in which the annual percentage rate is prospectively subject to change. The Truth in Lending disclosures given to the customer prior to the consummation of the original extension of credit would include: (1) the conditions under which any change in rate may occur; (2) the manner in which the change in rate may be effected, e.g., change of maturity, change in periodic payments, or change in the amount due at maturity; (3) a statement of the change in the amount of the periodic payment caused by an immediate decrease and increase of one quarter of one percentage point in the annual percentage rate (or a greater change if that is permitted in the contract), assuming no change in maturity; and (4) a statement of the change in maturity caused by an immediate decrease and increase of one quarter of one percentage point in the annual percentage rate (or a greater change if that is permitted in the contract) assuming no change in the amount of the periodic payment. -3 - The third and fourth disclosures would be applicable primarily to a typical real estate mortgage transaction but would not apply to some other credit transactions, such as single payment loans and demand loans. An example of how these disclosures could be made, assuming a 20-year, level monthly payment real estate mortgage for $40,000 at an initial annual percentage rate of 9%, in which the mortgage note permitted a maximum incremental change of one percentage point in the annual percentage rate, and in which the change could be effected either by changing the amount of the monthly payment or by changing the maturity, is shown below: A. Based on the principal outstanding at the time this con tract is consummated, if the annual percentage rate were decreased one percentage point, to 8%, under the terms of this contract, the monthly payment to principal and interest would be decreased by $25.32. If the annual percentage rate were increased one percentage point, to 10%, under the terms of this contract, the monthly payment to principal and interest would be increased by $26.11. Under either condition the maturity of the debt and the number of payments would remain unchanged. B. Based on the principal outstanding at the time this contract is consummated, if the annual percentage rate were decreased one percentage point, to 8%, under the terms of this contract, the number of monthly payments would be decreased by 36. If the annual percentage rate were increased one percentage point, to 102, under the terms of this contract, the number of -4 - monthly payments would be increased by 75. Under either condition the amount of the monthly payment to principal and interest would remain unchanged. This example is presented for illustrative purposes only and does not indicate that any particular format or substantive credit terms are required by the Board. Pursuant to the authority granted in 15 U.S.C. S 1604(1970), the Board proposes to amend Regulation Z, 12 C.F.R. Part 226, as follows: 1. Section 226.8(b) would be amended by the addition of subparagraph (8) as follows: S 226.8— Credit other than open end— Specific Disclosures * * * (b) * * * (8) If the annual percentage S 226.8(b)(2) is prospectively subject to * * rate as disclosed under change, the following additional disclosures shall be made: (i) The fact that the annual percentage rate is subject to change and the conditions under which such rate may change, including: (A) identification of the index, if any, with respect to which such change in annual percentage rate is tied; and (B) any limitation on such change; (ii) the manner (such as a change in payment amounts, number of scheduled periodic payments, or change in the amount due at maturity) in which any change in the annual percentage rate may be effected; -5 (iii) if the obligation is repayable in substantially equal instalments at substantially equal intervals (including those obligations providing for "balloon" payments) and the change could be effected by a change in the periodic payment amount, a statement of the estimated decrease and increase in the amount of the payment caused by a hypothetical immediate decrease and increase of the maximum amount of incremental change in the annual percentage rate allowed by the contract, or if there is no such limitation, a change of one quarter of one percentage point, based upon the number of scheduled periodic payments and original amount financed disclosed at consummation; (iv) if the obligation is repayable in substantially equal instalments at substantially equal intervals (including those obligations providing for "balloon" payments) and the change could be effected by a change in the number of periodic payments, a state ment of the estimated decrease and increase in the number of periodic payments caused by a hypothetical immediate decrease and increase of the maximum amount of incremental change in the annual percentage rate allowed by the contract, or if there is no such limitation, a change of one quarter of one percentage point, based upon the periodic payment amount and the original amount financed disclosed at consummation. Any change in the annual percentage rate within the condi tions or limitations disclosed in accordance with this paragraph is a subsequent occurence under § 226.6(g) and is not a refinancing under § 226.8(j). -6 - 2. Should the Board adopt the proposed amendment after considering the comments received, S 226.810 would be rescinded, and an effective date would be set far enough in advance to allow for the orderly change of forms where necessary. 3. To aid in the consideration of these matters by the Board, interested persons are invited to submit relevant data, views, comments, or arguments. Any such material should be submitted in writing to the Secretary, The Board of Governors of the Federal Reserve System, Washington, D. C. 20551, to be received at the Board not later than November 29, 1976. All material submitted should include the docket number R-0003. 4. This notice is published pursuant to S 553(b) of Title 5 United States Code and S 262.2(a) of the Rules of Procedure of the Board of Governors of the Federal Reserve System (12 CFR 262.2(a)). By order of the Board of Governors, October 20, 1976. (signed) Theodore E. Allison Theodore E. Allison Secretary of the Board [SEAL]