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F ederal

reserve

Ba n k

of

Dallas

DALLAS. TEXAS 75222

Circular No. 70-28
February 5 , 1970

REGULATION Z
TRUTH IN LENDING

To Banks, Other Financial Institutions,
Trade Associations, and Others Concerned
in the Eleventh Federal Reserve District:

On January 29, 1970, the Board of Governors
of the Federal Reserve System announced the approval
of eight additional interpretations, including three
changes in interpretations issued previously, of pro­
visions of its Regulation Z, Truth in Lending, which
went into effect July 1, 1 969 .
Copies of these interpretations are enclosed.
Yours very truly,
P. E. Coldwell
President
Enclosures (9 )

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

For immediate release

January 29, 1970

The Board of Governors of the Federal Reserve System
today issued eight interpretations of provisions in its Truth in
Lending Regulation Z including three changes in interpretations
issued previously.

Interpretations issued today relate to:

Premiums for vendor's single interest insurance required
by creditor (amendment to previous interpretation).
Credit for business or commercial purposes--more than
4 family housing units.
Renewals of notes (amendment to previous interpretation).
Disclosures on multiple advance loans.
Premiums for insurance added to an existing balance.
Disclosure for demand loans.
Mortgages with demand features.
Refinancing and increasing--disclosures and effects on
the right of rescission (amendment to previous interpretation).

A copy of each interpretation is attached
-0 -

TITLE 12 - BANKS AND BANKING
CHAPTER II - FEDERAL RESERVE SYSTEM
SUBCHAPTER A - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Reg. Z]
PART 226 - TRUTH IN LENDING
Miscellaneous Interpretations
Interpretation § 226.404 is amended to read as follows:
§ 226.404 Premiums for vendor’s single interest insurance required by creditor
The question arises whether charges or premiums for single interest
insurance (Vendor's Single Interest Insurance) written in connection with a
credit transaction may be excluded from the finance charge under § 226.4(a)(6)
if the insurer waives subrogation.
If the insurer waives all right of subrogation against the customer
in a single interest policy of insurance against loss of or damage to property
(which may include coverage for skip, concealment, conversion, and embezzle­
ment) written in connection with a credit transaction, and the creditor com­
plies with the requirements of 5 226.4(a)(6), charges or premiums for such
insurance may be excluded from the amount of the finance charge on that
transaction.

However, if the insurer does not so waive subrogation in such

policy of insurance, the charges or premiums shall be included in the finance
charge.
(Interprets and applies 15 U.S.C. 1605)

-1 -

0 226*302

Credit for business or commercial purposes--more than 4 family
units
Under § 226.3(a), extensions of credit for business or

commercial purposes, other than agricultural purposes, are not subject
to Regulation Z.

The question arises as to whether an extension of credit

relating to a dwelling (as defined in i 226.2(p)) which contains more than
4 family housing units is an extension of credit for business or com­
mercial purposes.
Credit extended to an owner of a dwelling containing more than
4 family housing units for the purpose of acquiring, financing, refinancing,
improving, or maintaining that dwelling is an extension of credit for busi­
ness or commercial purposes.

(Interprets and applies 15 U.S.C. 1603)

Interpretation § 225.811 is amended to read as follows:
§ 226.811 Renewals of notes
Any renewal of an extension of credit providing for payment of the full
principal sum on a specified date shall not be considered a refinancing under
§ 226. (j), and no disclosures need be made in connection with such renewal,
provided:
(i)

All disclosures required under this "’art were T.-ade in connecti

with the original extension of credit or a prior renewal thereof;
(ii''

The amount of the renewal does not exceed the amount of the unpaid

balance plus any accrued and unpaid finance charge;
(iii)

The annual percentage rate (or rates) previously disclosed is not

increased; and
(iv)

The period for which renewal is made does not exceed by more than

4 days the period of the extension of credit for which disclosures were rade.
In instances in which disclosures are required to be made and renewal
is made by mail, the creditor way not know whether the customer will reduce his
obligation by a payment on principal or, if reduced, the amount of that reduction.
The question arises as to what disclosures should be made by wail to the customer
in these circumstances.
If the creditor knows the amount of the principal payment, all dis­
closures should be made on the basis of the resulting new amount financed.

If.

however, the creditor does not know whether the customer will reduce his original
obligation, or if so, by how much, he should disclose on the assumption that there
will be no reduction.

In such circumstances,at the creditors option,he may iqake

one or more additional disclosures based on one or more examples of graduated

principal reduction.

For example, if a single payment note for $1,000 at 7% is

proposed to be renewed for $1,000 at 8% for 3 months, in addition to the other
required disclosures, the creditor should disclose an amount financed of $1,000
with a finance charge of $20, and may, in addition, disclose that with a principal
payment of $300 the amount financed would be $700 with a finance charge of $14,
and with a principal payment of $500 the amount financed would be $500 with a
finance charge of $10.
(Interprets and applies 15 U.S.C. 1639)

§ 226*813

Disclosures on multiple advance loans
In connection with construction and other multiple advance loans

under § 226.8(i),which are payable in a single sum or permanently financed
by the same creditor at maturity of the construction phase with interest
only payable up to such maturity,and in which either the amount or date
of an advance is not determinable, the question arises whether a method
might be utilized to estimate the information to be disclosed under
§ 226.8(b)(2) and (3) and (d)(3).
In such cases,at the creditor's option, required information
may be estimated and disclosed as follows:
(1)

The following mathematical equations based upon assumed

continuous advances may be utilized in estimating the amount of the interest
component of the finance charge and the annual percentage rate by substi­
tuting the appropriate numerical amounts for the following symbols in the
equations:
(i)

Symbols:
L = Amount of loan commitment.
r = Stated annual interest rate expressed as a
decimal figure.
n = Number of interest payments to be made to maturity.
m = Number of interest periods (unit-periods) in 1 year.
? = Total amount of any prepaid finance charge under
§ 226.8(e).
B = Amount of any required deposit balance under § 226.8(e).

(ii)

If interest is computed from the date of each advance on

only the amounts advanced:
Estimated annual percentage rate = nrL + 2mP
n(L - 2? - 2B)
Estimated interest finance charge - nrL
2m

(iii)

If interest is computed on the full amount of the commit­

ment without regard for the dates of disbursements or actual amounts dis­
bursed :
Estimated annual percentage rate = 2nrL + 2mP
n(L - 2P - 2B)
Estimated interest finance charge - nrL
m

(? )

If the equations under subdivision (ii) of paragraph (1)

are utilized, the amounts of any required interest payments during the
construction phase may be omitted in making the disclosures required under
§ 226.8(b)(3); however, if the equations under subdivision (iii) of para­
graph (1) are utilized, then the amount of each scheduled interest payment
shall be disclosed as required under § 226.8(b)(3).
(3)

In the case of a combination construction loan and permanent

financing provided by the same creditor :
(i)

The amount of interest finance charge to be paid prior to

the due date of the first amortization payment shall be estimated as pres­
cribed under subdivisions (ii) or (iii) of paragraph (1) as the case may
be and shall be treated as prepaid finance charge for computational pur­
poses ; and

(ii)

Estimation of the annual percentage rate shall be made

without regard to the number of interest only payments to be made, assuming
the first payment period to be that interval between the date the finance
charge begins to accrue and the date the first amortization payment is due.
4.

Disclosures made in accordance with this interpretation, when

made along with the other disclosures required under § 226.8(b) and (d),
shall constitute "all other material disclosures required under this Part"
referred to under § 226.9(a):
Example I
A $20,000 construction loan commitment on which the precise dates
or amounts of advances are not determinable.

The obligation bears a stated

6% interest rate and interest is to be paid monthly on the amounts advanced,
and the total of the amounts advanced under the commitment plus any unpaid
interest is due and payable at the end of nine months from the date the
finance charge begins to accrue.

There is a loan fee of 1% ($200), but

there is no required deposit balance.

Substituting these terms for the

symbols, the equations become:
(9 x .06 x 20,000)+(2 x 12 x 200) =
9 x [(20,000 - (2 x 200)]

.0884 or 8.84% or 8-3/4%
estimated annual percentage rate.

9 x

.06
x 20,000=450 or
$450 estimated interest finance
2 x 12
of the finance charge.

chargecomponent

If the terms stated in the example were changed so that interest
would be computed on the full amount of the commitment from the date the
finance charge begins to accrue without regard for the dates of disburse­
ments or actual amounts of funds disbursed, the equations under (iii) above
become:
(2 x 9 x .06 x 2Q.000)+(2 x 12 x 200) *
9 x [(20,000 - (2 x 200)]
9 x

.06
12

.1497 or 14.97% or 15,% estimated
annual percentage rate.

x 20,000-900 or
$900 estimated interest finance
chargecomponent
of the finance charge. This interest would be payable
in 9 monthly payments of $100 each.
Example II

A $20,000 construction loan followed by permanent financing in
same amount.

Six per cent interest.

maturity of construction phase.
during construction phase.

One point loan fee.

Nine months to

Nine monthly payments of interest only

Twenty-year maturity on permanent financing to

be amortized in 240 equal monthly payments including interest and principal.
From mortgage amortization tables:
Amortization of a $20,000 67o 20-year loan in 240 equal monthly payments
including interest and principal requires each monthly payment to be
$143.29.
Total of 240 payments = 240 x $143.29 * $34,339.60
Subtract amount of loan principal

$20,000.00

Interest finance charge on permanent
financing

$14,389.60

Add:

Add:

Estimated interest finance charge
on construction phase (pursuant
to subdivision (ii))

450.00

Loan fee 1 point

200.00

Estimated finance charge

$15,039.60

(If the interest on the construction phase is computed on the
full amount of the commitment for the full time to maturity without regard
for the dates of disbursements or actual amounts disbursed pursuant to sub­
division (iii), the estimated interest finance charge for the construction
phase would be $900.00 which would result in a total estimated finance
charge of $15,489.60.)
Loan fee 1 point prepaid finance charge

$

200.00

For computational purposes consider interest
to be paid on construction phase as prepaid
(not to be disclosed as prepaid).
$

450.00

Total amount treated as prepaid finance
charge for computational purposes

650.00

Computational
Purposes
Amount of loan

$20,000

Deduct total of
estimated finance charge
treated as prepaid

$

$

Disclosure
Purposes

$ 20,000

650

Deduct actual amount of
prepaid finance charge

200

Estimated amount financed
for computational purposes $19,350

Amount financed to be
disclosed

$19,800

-

9-

Adjust first payment period (period of construction loan plus
period from maturity date of construction loan to due date of first amorti­
zation payment) by dividing the period of the construction loan by 2 and
adding the period of time between the maturity date of the construction
loan and the date the first amortization payment is due.
9 months divided by 2 = 4 1/2 months plus 1 month - 5 1/2 months
From Appendix A (Page A2) of Volume I of the Board's Annual Per­
centage Rate Tables, read across to 5 months and on the line below opposite
15 days (1/2 month) read + 9.0.

This adjustment should be added to the

number of regular amortization payments to determine the number of payments
in utilizing the Annual Percentage Rate Tables:
240 monthly payments Jr adjustment 9.0 = 249
Following the directions on

age 1 of Volume I:

Estimated finance charge $15,039.60 x 100 * $1,503,960 which should be
divided by the estimated amount financed for computational purposes:
$1,503,960 i 19,350 = $ 7 7 . 7 2 estimated finance charge p e r $100
of estimated amount financed for computational purposes.
Refer to page 309M of Volume I, read down number of payments
column to 249; read across to 78.71 (which is nearest to $77.72 computed
above), and read up to 6.25% which is the estimated annual percentage rate
to be disclosed.
In the example where the interest on the construction phase is
computed on the full amount of the commitment without regard for the dates
of advances or actual amounts advanced, the estimated finance charge per

$100 of amount financed is $81.96.

On page 309M of Volume I, read down

to the 249th payment line and across to $82.39 which is the nearest amount
to $81.96, and read up to 6.50% which is the estimated annual percentage
rate to be disclosed.
(Interprets and applies 15 U.S.C. 1638 and 15 U.S.C. 1639)

-1 1 -

§ 226.814

Premiums for Insurance added to an existing balance
Subsequent to the consummation of a consumer credit transaction the

customer may wish to purchase optional insurance in connection with the obliga­
tion.

Typically, mortgage life and disability insurance may be offered to

the customer at some date after consummation under a plan in which the lender
will advance the amount of the premium due and add that amount to the existing
unpaid balance of the obligation.

Generally, each instalment on the original

obligation paid during the period before the next premium is due will be
increased proportionately to liquidate the amount of the additional advance
plus any finance charge.

Additional advances are made automatically for renewal

premiums as they become due unless the borrower requests discontinuance of
the coverage.

The question arises as to the required disclosures.

In such cases the insurance agreement may be considered a single
separate transaction, and the disclosures required under 5 226.8, at the
creditor's option, need be made only prior to the time the agreement is
executed and only with respect to the amount of the initial advance.

For

example, a mortgage life and disability insurance plan in which the annual
premium advanced was $145 repayable in 12 monthly instalments of $12.61 added
to the regular monthly mortgage payments would be disclosed as an ’’amount
financed11 of $145, a "finance charge” of $6.32, and a ’’total of payments" of
$151.32.

Additional disclosures as applicable under § 226.8 would, of course,

be made.

If, as in some cases, only a portion of the advance is liquidated

during the premium period with the remainder payable at the end of the mortgage
contract, the creditor would likewise calculate the amount of finance charge
which would accrue on the advance until paid in full.

In some cases the advance is secured by a security interest
in real property which is used or expected to be used as the principal
residence of the customer.

In those cases the premium advance agreement

is rescindable under § 226.9, and notice of the right of rescission
provided in § 226.9(b) need only be given at the time the agreement is
executed.

Subsequent advances for renewal premiums are not subject to

the right of rescission.

(Interprets and applies 15 U.S.C. 1630 and 15 U.S.C. 1639)

-13-

§ 226.815

Disclosure for demand loans
Section 226.8(b)(3) requires a creditor to disclose the number,

amount and due dates or periods of payments scheduled to repay an extension
of credit other than open end and, in appropriate cases, the total of
payments.

The question arises as to how these requirements should be met

in the case of demand loans.
Section 226.4(g) provides that for the purpose of calculating the
finance charge and annual percentage rate, demand loans are considered to
have a one-half year maturity unless the obligation is alternatively payable
upon a stated maturity, in which case the stated maturity shall be used.
In order to comply with the requirements of § 226.8(b)(3), if no
alternative maturity date is specified, the creditor need disclose only the
due dates or periods of payments of all scheduled interest payments for the
first one-half year.

In such cases, the creditor need not disclose the

number, amounts or total of payments or identify any balloon payment.
Effective May 1, 1970, creditors shall disclose the fact that the obligation
is payable on demand.
If an alternative maturity date is specified, all disclosures
required under § 226.8(b)(3) shall be made, using that date.
(Interprets and applies 15 U.S.C. 1639)

§ 226.816

Mortgages with demand features
In some cases real estate mortgages are written for a stated

period, for example one year, with the provision that they shall be payable
on demand after expiration of that period, provided that until such demand

,

is made the principal and interest shall be paid in scheduled periodic
instalments until paid in full.

The obligation is thus payable according to

a specified amortization schedule subject to the holder's right to demand
payment after the stated period.
The question arises whether the creditor may make disclosures
based on the specified amortization schedule or whether disclosures must
be made on the basis of the maturity established by the expiration of the
stated period.
In such cases the creditor may make disclosures based on the
specified amortization schedule, provided he disclose clearly and con­
spicuously that the obligation is payable on demand after the stated period
together with the fact that disclosures are made on the basis of the
specified amortization schedule.

Otherwise, disclosures shall be based

upon the earliest date demand for payment in full may be made under the
terms of the mortgage showing the unpaid balance due at that time as a
"balloon payment."
The disclosure requirements of this interpretation shall become
effective May 1, 1970.
(Interprets and applies 15 U.S.C. 1639)

Interpretation § 226.903 is amended to read as follows:
§ 226.903

Refinancing and increasing--disclosures and effects on the
right of rescission
In some cases the creditor of an obligation will refinance

that obligation at the request of a customer by permitting the customer
to execute a new note, contract, or other document evidencing the trans­
action under the terms of which one or more of the original credit terms,
including the maturity date of the obligation, are changed.

Except as

provided in § 2 2 6 . 8 1 1 such refinancing constitutes a new transaction,
and all disclosures required under § 226.3 must be made.

The question

arises as to whether that transaction is subject to the right of rescission
under § 226.9 where the obligation is already secured by a security
interest in real property which is used or expected to be used as the
principal residence of that customer.
If the amount of such new transaction does not exceed the amount
of the unpaid balance plus any accrued and unpaid finance charge on the
existing obligation, S 226.9 does not apply to the transaction.
If, however, such new transaction is for an increased amount,
that is, for an amount in excess of the amount of the unpaid balance plus
any accrued and unpaid finance charge on the existing obligation, § 226.9
applies to the transaction.

However, such right of rescission applies

only to such excess and does not affect the existing obligation (or
related security interest) for the unpaid balance plus accrued unpaid
finance charge.

The underscored language was inserted to conform this interpretation
to Interpretation § 226.811, as amended.
-16-

If a transaction is refinanced by a creditor other than the
creditor of the existing obligation, the entire transaction is subject
to § 226.9.
(Interprets and applies 15 U.S.C.

1639)

Dated at Washington, D. C., the 28th day of January, 1970.
By order of the Board of Governors*

(Signed)
(SEAL)

-17-

Kenneth A. Kenyon
Kenneth A, Kenyon,
Deputy Secretary.