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Federal r e s e r v e Ba n k o f D allas DALLAS, TEXAS 75222 Circular No. 82-92 August 12, 1982 REGULATION Z Proposed Rule Change TO ALL MEMBER BANKS AND OTHERS CONERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board o f G overnors o f the Federal R ese r v e System has published for c o m m e n t proposed changes in its rules concerning the tre a tm e n t o f seller's points in Truth in Lending disclosures. A tta ch ed is a copy o f the Board's press r e le a se dated July 21, 1982. The full te x t o f the proposed rule and proposed revisions to o f fic ia l s t a f f com m en tary may be obtained, upon request, from this Bank's D ep artm en t o f C om m unications, Financial and C om m unity A ffairs. Interested parties are invited to submit their c o m m e n ts to the S ecretary, Board o f Governors o f the Federal R ese r v e System , Washington, D .C ., 20551. All m aterial su b m itted should refer to D o c k e t No. R -0413, and must be r e c e iv e d by August 27, 1982. Q uestions regarding the proposed changes should be d irected to D ean A. Pankonien in this Bank's Legal D ep artm en t, Extension 6171. Additional c o p ies o f this circular will be furnished upon request to the D epartm ent o f C om m unications, Financial and Com m unity A ffairs, Extension 6289. Sincerely yours, William H. W allace First Vice President A tta ch m e n t Banks and others are encouraged to use the following incoming W A TS numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (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) FEDERAL RESERVE press release For immediate release July 21, 1982 The Federal Reserve Board today announced that it is seeking comment on possible changes in the Board's rules concerning ways to deal with seller's points — reduced rate financing — in Truth in Lending disclosures. The Board requested comment by August 27, 1982. In revising its Regulation Z (Truth in Lending) last year under the Truth in Lending Simplification and Reform Act, the Board decided, in the interests of providing simple and easily used rules, to exclude seller's points from the finance charge and annual percentage rate (APR) that must be disclosed in credit transactions. Since then, many financing arrangements have been developed, at a time of unusually high interest rates, for offering consumers financing at rates below rates prevailing in the market. Two such plans are becoming increasingly common where lenders make direct loans to purchasers of homes or other items. One is a "seller's buydown", where a home seller pays an amount to a lender to secure for the buyer of the property a below-market financing rate for the first few years of a long-term mortgage. The other is the "zero percent mortgage rate", where the seller makes a payment to a lender to induce the lender to offer to finance a property without a stated interest rate. This generally calls for a large down payment and total payment within a relatively short time. In either case, the seller must either absorb the payment made to the lender (that is, reduce what the seller is prepared to accept for the property), or increase the price of the property. If the cost of the property is increased to compensate the seller for the concessionary financing terms that the seller "buys" from the lender, a cost (OVER) -2 - of financing may occur that is not, under the present rules, reflected in the finance charge and APR disclosure. This may impair the buyer's ability to compare the actual purchase price and financing costs of different properties. Similarly, advertising of properties where such below-market financing arrange ments are offered may be misleading. The Board is therefore proposing two alternative methods for dealing with this problem under Regulation Z, and it requests comment on any other possible ways of dealing with seller's points. Both Board proposals would apply to disclosures given for loans to purchase homes or other property where reduced rate financing is involved. Both would apply to the advertising by sellers who provide reduced rate financing, when a rate of interest is advertised. The proposed alternative changes are described in the attached portion of the Board's notice in this matter. The full notice may be obtained from the Board or from the Federal Reserve Banks. It should be noted for comment in the course of that the Board makes a number ofspecific requests describing its proposals. The Board is planning to make any change in its rules that it may adopt effective as early as feasible. However, the Board requested comment as to how much time would be necessary for creditors to change procedures and forms. Boardasked also whether a different effective date rules should apply torevised for the advertising of reduced rate financing plans. Attachment The
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