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Federal Reserve Bank OF DALLAS ROBERT D. M C T E E R , J R . DALLAS, TEXAS P R E S ID E N T A N D C H IE F E X E C U T IV E O F F IC E R „ . „ _____ December 9, 1996 75265-5906 Notice 96-124 TO: The Chief Executive Officer of each m em ber bank and others concerned in the Eleventh Federal Reserve District SUBJECT Request for Comment on the Official Staff Commentary to Regulation Z (Truth in Lending) and Correction to Regulation O DETAILS The Board of Governors of the Federal Reserve System is requesting public comment on proposed revisions to the Official Staff Commentary to Regulation Z (Truth in Lending). The proposed revisions provide guidance on the treatm ent of some fees paid in connection with mortgage loans and tolerances for accuracy in disclosing the finance charge and other costs. They also discuss such issues as the treatment of debt cancella tion agreements and duties of creditors that provide periodic statements electronically. Comments must be received by January 6, 1997. Please address comments to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551. All comments should refer to Docket No. R-0942. The Board also published a correction to recent amendments to Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks) as announced in this Bank’s notice 96-116. The final rule incorrectly stated that the effective date of the amendments was November 4, 1996, instead of November 8, 1996. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) ATTACHMENT A copy of the Board’s notice as it appears on pages 60223-29, Vol. 61, No. 230, of the Federal Register dated November 27, 1996, is attached. MORE INFORMATION For more information regarding Regulation Z, please contact Eugene Coy at (214) 922-6201. For more information regarding Regulation O, please contact Jane Anne Schmoker at (214) 922-5101. For additional copies of this Bank’s notice, please contact the Public Affairs Departm ent at (214) 922-5254. Sincerely yours, . 60223 Proposed Rules Federal Register ' Vol. 61, No. 230 Wednesday, November 27, 1996 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. FEDERAL RESERVE SYSTEM 12CFR Part 226 [R eg ulatio n Z; D o c ket N o. R -0 9 4 2 ] Truth in Lending Board of Governors of the Federal Reserve System. ACTION: P roposed rule; official staff interpretation. AGENCY: T he Board is publishing for com m ent proposed revisions to the official staff com m entary to Regulation Z (Truth in Lending). The commentary applies and interprets the requirem ents of Regulation Z. T he proposed update provides guidance on issues relating to the treatm ent of certain fees paid in connection w ith mortgage loans. It addresses new tolerances for accuracy in disclosing th e am ount of the finance charge and other affected cost disclosures. In addition, the proposed update discusses issues such as the treatm ent of debt cancellation agreements an d a creditor’s duties if providing p erio dic statem ents via electronic m eans. DATES: Com m ents m ust be received on or before January 6, 1997. ADDRESSES: Com m ents should refer to ' Docket No. R—0942, and may be mailed to W illiam W. W iles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., W ashington, DC 20551. Com m ents also m ay be delivered to Room B -2222 of the Eccles Building betw een 8:45 a.m. an d 5:15 p.m. w eekdays, or to the guard station in the Eccles Building courtyard on 20th Street, N.W. (betw een Constitution Avenue an d C Street) at any time. Com ments may be inspected in Room M P-500 of th e M artin Building between 9:00 a.m. and 5:00 p.m. weekdays, except as pro vided in 12 CFR 261.8 of the Board’s Rules Regarding Availability of Information. FOR FURTHER INFORMATION CONTACT: Jane E. A hrens or James A. M ichaels, Senior A ttorneys, or S heilah A. Goodman or SUMMARY: Manley W illiam s, Staff Attorneys, Division of C onsum er and Com m unity Affairs, Board of G overnors of the Federal Reserve System , at (202) 452 3667 or 452-2412; for users of Telecom m unications Device for the Deaf (TDD) only, contact D orothea T hom pson at (202) 452-3544. SUPPLEMENTARY INFORMATION: I. Background The purp ose of th e T ruth in Lending Act (TILA; 15 U.S.C. 1601 et seq.) is to prom ote th e inform ed use of consum er credit by requiring disclosures about its term s an d cost. T he act requires creditors to disclose th e cost of credit as a dollar am ou nt (the finance charge) and as an ann ual percentage rate (the APR). Uniform ity in credito rs’ disclosures is in tend ed to assist consum ers in com parison shopping. The TILA requires add ition al disclosures for loans secured by a co n su m er’s hom e and perm its consum ers to rescind certain transactions th at involve their principal dwelling. The act is im plem ented by th e Board’s R egulation Z (12 CFR Part 226). The Board’s official staff com m entary (12 CFR Part 226 (Supp. I)) interprets the regulation, and provides guidance to creditors in applying the regulation to specific transactions. The com mentary is a substitute for in div id ual staff interpretations; it is u pdated periodically to address significant questions th at arise. The Board expects to adopt revisions to the com m entary in final form in M arch 1997; to the extent t h j revisions im pose new requirem ents on creditors, com pliance w ould be optional u n til O ctober 1,1997, the effective date for m andatory com pliance. On Septem ber 19, 1996, the Board published am endm ents to Regulation Z (61 FR 49237) im plem enting the T ruth in Lending Act A m endm ents of 1995 (“ 1995 A m en d m en ts,” Pub. L. 104-29, 109 Stat. 271). T he am endm ents clarify the treatm ent of fees typically associated w ith real estate-related lending, and revise tolerances for finance charge calculations for loans secured by real estate or dw ellings. In the same rulem aking, the Board also addressed the treatm ent of fees charged in connection w ith debt cancellation agreements. In large m easure, the proposed com m entary incorporates the supplem entary inform ation accom panying th at rulem aking. II. Proposed Revisions S u p p le m e n t I— O fficial S ta ff Interpretations Introduction Com ment 1-5 up d ates the reference to the regulation’s appendices. Subpart A — General Section 226.2—Definitions 2(a)(25) S ecu rity Interest Com ment 2(a)(25)—6 refers to model form H -9, w h ich w as revised in the Septem ber 1996 rulem aking. The com m ent reflects changes to the form ’s text. Section 226.4— F inance Charge 4(a) D efinition Com m ents 4(a)-3 an d —4 are deleted, and subsequent com m ents redesignated, in accord w ith th e revision and reorganization of § 226.4(a) in the Septem ber 1996 rulem aking. Paragraph 4(a)(1) Parties Charges b y Third Com m ent 4(a)(1)—1 retains the exam ple of third-party charges currently in com m ent 4(a)—3.i. The example illustrates that am ounts charged by a th ird party are in c lu d ed in the finance charge if the creditor requires the use of the th ird party, even if the consum er may choose th e service provider. Com m ent 4(a)(l)-2 addresses the treatm ent of a n n u ity prem ium s associated w ith som e reverse mortgages. The Board proposes to treat the cost of th e prem ium s as a finance charge w hen th e purchase of an an nuity is effectively required in c id en t to the credit. 4(a)(2) Special rule; closing agent charges Proposed com m ent 4(a)(2)—1 retains th e substance of th e guidance currently in com m ent 4(a)-4; that is, charges by a third-party closing agent are finance charges only if th e creditor requires the particular charge or service, or to the extent the creditor retains any portion of th e fee (unless the charge is otherw ise excluded). T echnical am endm ents conform the text to new § 226.4(a)(2)— such as replacing “settlem ent agent” w ith “closing ag en t”—w ithout any substantive change. The com m ent also clarifies that th e special rule applies only to the th ird party serving as a closing agent for the particular loan. Charges by a th ird party w ho is not the 60224 Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Proposed Rules closing agent for the loan but w ho provides services typically perform ed by closing agents (recording the mortgage, for example) are covered by the general rule for third-party charges in paragraph 4(a)(1). Paragraph 4(a)(3) Special Rule; M ortgage Broker Fees Com m ents 4(a)(3)—1 and - 2 address the treatm ent of mortgage broker fees. U nder the 1995 A m endm ents, mortgage broker fees paid by the borrow er are finance charges (unless otherw ise excluded). Com m ent 4(a)(3)—1 clarifies th at mortgage broker fees may be excluded from th e finance charge if the fee w ou ld be excluded w hen charged by th e creditor. The com m ent also provides th at if the mortgage broker charges an application fee, the fee m ay be excluded from the finance charge if the broker charges the fee to all applicants, w hether or not credit is extended. Proposed com m ent 4(a)(3)-2 discusses th e scope of the special rule for mortgage broker fees. It addresses the treatm ent of com pensation paid by the creditor to a mortgage broker in addition to—or substitution for—com pensation paid by the consum er to the broker. 4(b) E xam ples o f F inance Charges Paragraph Fees 4(b)( 10) Debt Cancellation Proposed com m ent 4(b)(10)-l clarifies that for purposes of Regulation Z, the term “ debt cancellation agreem ent” inclu des a specialized type of agreem ent know n as guaranteed autom obile protection or “GAP” agreements. 4(c) Charges E xcluded From the F inance Charge Paragraph 4(c)(5) N um erous creditors have asked for additional guidance on certain finance charges paid by a noncreditor seller on a con sum er’s behalf before loan closing. Com m ent 4(c)(5)-2 currently states that these paym ents, such as for mortgage insurance prem ium s, should be excluded from the finance charge as seller’s points. The proposal clarifies the standards for determ ining w h en to exclude such am ounts from the finance charge. Section 228.17(c)(1) states that disclosures m ust be based on the co n su m er’s legal obligation. Com ment 17(c)(1)—3 provides guidance for disclosing the effect of paym ents by a seller or another th ird party that reduce, for exam ple, a co nsum er’s interest rate. D isclosures should reflect th e paym ent only if the consum er is no longer legally bo u n d to the creditor for the am ount paid, Com ment 4(c)(5)—2 w o u ld be revised to clarify th at the same standard app lies for am ounts p aid by n oncreditor sellers. 4(d) Insurance a n d D ebt C ancellation Coverage Paragraph 4(d)(3) C ancellation Fees V oluntary D ebt Proposed com m ent 4(d)(3)—1 clarifies th at fees for GAP agreem ents m ust be disclosed in accord w ith paragraph 4(d)(3) rather th an the property insurance provisions of paragraph 4(d)(2). Proposed com m ent 4(d)(3)—2 clarifies th at creditors m ay characterize debt cancellation fees as insu rance prem ium s in their TILA disclosures only if the debt cancellation coverage constitutes insurance u n d e r state law. 4(e) Certain S ecu rity Interest Charges Section 226.4(e) excludes certain security interest charges paid to public officials from the finance charge if the am ounts are item ized a n d disclosed. As an exam ple, com m ent 4 (e )-l lists a tax im posed solely on the creditor that is charged to the consum er. To ease com pliance, the proposed revision also provides a cross reference to com m ent 4(a)-7 (to be redesignated as 4(a)~5), w h ich also addresses th e treatm ent of taxes. S ubpart B—O pen-E nd Credit Section 226.5—General D isclosure R equirem ents 5(b) T im e o f D isclosures 5(b)(2) Periodic S ta tem ents Subpart C—Closed-End Credit Section 226.17—General D isclosure R equirem ents 17(c) Basis o f D isclosures a n d Use o f E stim ates Paragraph 17(c)(2)(ii) Proposed com m ent 17(c)(2)(ii)-l addresses the new rule applicable to the disclosure of per-diem interest charges. U nder the rule, any num erical disclosure affected by the per-diem interest charge is considered accurate if it is based on the inform ation know n to the creditor at the tim e the disclosure is prepared, w hether or not th e disclosure of per-diem interest is accurate w hen it is received by the consum er. The proposed com m ent clarifies that in such cases, the resulting finance charge is considered accurate w ith o u t regard to the tolerance for errors u n d er § 226.18(d)(1). The Board requests com m ent on w h eth er a conform ing com m ent to paragraph 31(d)(3) is necessary. 17(f) Early D isclosures Paragraph 17(f)(2) The Board proposes to reorganize com m ent 17(f)—1 an d to add proposed com m ent 17(f)(2)—1 to conform to the n ew regulation. C om m ent 17(f)~l inclu des an additional exam ple relating to mortgage loans. The revision also clarifies th at for purposes of determ ining if redisclosure is required, the changed term s m ust be redisclosed according to the rules for accuracy in paragraph 17(f) rather th a n the tolerances in § 226.18(d) or 226.22(a). Section 226.18—Content of D isclosures Paragraph 5(b)(2)(H) 18(c) Com ment 5(b)(2)(ii)-3 resp ond s to technological developm ents in the way credit transactions are con du cted via electronic m eans; it provides guidance on w hen periodic statem ents m ay be provided electronically, for exam ple, via hom e banking systems. The proposal is part of a general review that w ill seek to adapt current rules to the way electronic disclosures m ay be provided an d retained. For exam ple, the Board has addressed sim ilar issues in recent proposed am endm ents to Regulation E (Electronic F und Transfers, 12 CFR Part 205, 61 FR 19696, May 2,1996) and Regulation CC (Expedited F und s A vailability, 12 CFR Part 229, 61 FR 27802). Com m ent 18(c)-4 provides that in transactions subject to the Real Estate Settlem ent Procedures A ct (RESPA), no item ization of the am ount financed is required w ith the early TILA disclosures if the creditor com plies w ith the good faith estim ate requirem ents of RESPA. T he com m ent w ould be am ended to clarify th at in such transactions, if redisclosure is required u n d er § 226.19(a)(2), no item ization need be provided if, at or prior to consum m ation, the consum er receives a settlem ent statem ent th at conforms w ith th e substantive requirem ents of RESPA. T he D epartm ent of H ousing and U rban Developm ent (HUD) recently solicited com m ent on w h ether creditors, in transactions subject to RESPA, sho uld be allow ed to show only the total am ount collected for escrow on the settlem ent statem ent, rather than item izing these am ounts. Com ment Item ization o f A m o u n t F inanced Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Proposed Rules 18(c)(l)(iv) w o u ld be revised and expand ed to add ress how creditors c m determ ine th e p o rtion of the total am ount collected for an escrow account that is a p repaid finance charge, if any. 18(d) F inance Charge Paragraph 18(d)(2) Proposed com m ent 18(d)(2)—1 incorporates the guidance formerly found in com m ent 18(d)—2 that was rem oved as p art of the recent reorganization of § 226.18(d). Paragraph 18(n) Cancellation Insurance and debt Proposed com m ent 18(n)-2 provides guidance for disclosing debt cancellation fees u n d er § 226.4(d)(3). The proposed com m ent clarifies that creditors m ay disclose debt cancellation fees as insu ran ce prem ium s only if the coverage is insuran ce u n d er state law, consistent w ith proposed com m ent 4(d)(3)—2. Section 226.19—Certain Residential Mortgage an d Variable-Rate Transactions Paragraph 19(a)(2) Required Redisclosure C om m ent 19(a)(2) is revised for consistency w ith proposed com m ent 17(f)(2)—1. Section 226.22—D eterm ination of the A nnual Percentage Rate 22(a) A ccu ra cy o f th e A n n u a l Percentage R ate Paragraphs 22(a)(4) a n d (a)(5) Sections 226.22(a)(4) and (a)(5) provide tw o additional APR tolerances for mortgage loans w hen the finance charge has been m isstated but is considered accurate. The proposed com m ents provide specific exam ples of these tolerances. Section 226.23—Right of Rescission 23(g) Tolerances fo r A ccuracy Paragraph 23(g)(2) Tolerance O ne Percent Proposed com m ent 23(g)(2)-l clarifies that the phrase “n ew ad vance” has the same m eaning in paragraph 23(g)(2) as it has in com m ent 23(f)—4. Both rules address rescission rights w hen homesecured loans are refinanced. Paragraph 23(h) Foreclosures Special R ules fo r Proposed com m ent 2 3 (h )-l clarifies that the special rules for foreclosures un der paragraph 23(h) only apply to transactions th a t w ere originally subject to rescission u n d e r paragraph 226.23(a)(1). Paragraph 23(h)(l)(i) Proposed com m ent 2 3 (h )(l)(i)-l clarifies that a consu m er may rescind a loan in foreclosure if a mortgage broker fee is om itted or understated, w ithout regard to the dollar am ou nt involved. An exam ple illustrates the rule. Su b pa rt E— S p ecial R ules fo r Certaiit H om e M ortgage Transactions Section 226.31—G eneral Rules 31(c) T im ing o f disclosures Section 226.31(c) discusses the tim ing rules for p roviding disclosures to consum ers for transactions covered by § 226.32 (§ 226.3(c)(1)) and reverse mortgages (§ 226.31(c)(2)). Com ment 3 1 (c )(l)-l, w h ich states th at disclosures are furnished w h en received by the consum er, is redesignated as com m ent 3 1 (c)-l to reflect that th e rule applies to all transactions covered by § 226.31(c). Section 226.32— R equirem ents for Certain C losed-end H om e Mortgages 32(b) D efinitions Paragraph 32(b)(l)(i) Com m ent 32(b)(l)(i)—1 is revised to clarify th at p er diem interest, typically paid in a lum p sum at closing, is nonetheless interest, an d is not a com ponent of “ p o ints and fees” u n d er paragraph 32(b)(1). 32(c) D isclosures 32(c)(3) R egular p a ym e n t Balloon p ay m en ts are prohibited in loans that are covered by § 226.32 and have a term of less th a n five years. Proposed com m ent 32(c)(3)-2 clarifies that if a loan w ith a term of five years or m ore provides for a balloon paym ent, the balloon paym ent m ust be disclosed u n d er this paragraph. Section 226.33—R equirem ents for Reverse Mortgages 33(a) D efinition Paragraph 33(a)(2) U nder § 226.33, a reverse mortgages can becom e d u e an d payable only after the consum er dies, th e dw elling is transferred, or th e consum er ceases to occupy the d w elling as a principal dw elling. Som e states require mortgages to have a definite m aturity date. The proposed com m ent clarifies how a transaction can com ply w ith those laws and have a definite m aturity date w hile rem aining a reverse mortgage un der §226.33. A p p en d ices G a n d H— O pen-End a n d Closed-End M odel Form s and Clauses Com m ent app. G and H -2 w ould be revised, co nsistent w ith com m ents 60225 4(d)(3)—1 and 18(n)-2, to reflect that creditors sh o u ld not characterize debt cancellation fees as insurance prem ium s unless su ch coverage is insurance u n d er state law. A p p e n d ix H —Closed-End M odel Forms a nd Clauses The Board m odified the current m odel form H -9 in the September 1996 rulem aking. Proposed com m ent app. H 11 w ould clarify th at the revised H -9 is substantially sim ilar to the current H -9, and creditors'm ay continue to use the prior version. Creditors are encouraged to use th e revised version w hen reordering or reprinting forms. III. Form o f Comment Letters C om m ent letters should refer to Docket No. R -0942, and, w hen possible, should use a stan d ard courier typeface w ith a type size of 10 or 12 characters per inch. T his w ill enable the Board to convert the text in m achine-readable form through electronic scanning, and w ill facilitate autom ated retrieval of com m ents for review . Also, if accom panied by an original docum ent in paper form, com m ents may be subm itted on 3Vz-inch or 5V4-inch com puter diskettes in any IBMcom patible DOS-based format. List o f Subjects in 12 CFR Part 226 A dvertising, Banks, banking, C onsum er protection, Credit, Federal Reserve System , Mortgages, Reporting and recordkeeping requirem ents, T ruth in lending. Text of Proposed Revisions Certain conv en tion s have been used to highlight the proposed revisions to the regulation. N ew language is show n inside bold-faced arrows, while language that w o uld be deleted is set off w ith bold-faced brackets. Comments are num bered to com ply w ith new Federal Register publication rules. For th e reasons set forth in the pream ble, th e Board proposes to am end 12 CFR Part 226 as follows: PART 226— TRUTH IN LENDING (REGULATION Z) 1. The au tho rity citation for part 226 con tinues to read as follows: Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5). 2. In S u p p lem en t I to Part 226, u nder Introduction, the last sentence in paragraph 5. w o u ld be revised to read as follows: 60226 Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Proposed Rules Supplement I—Official Staff Interpretations Introduction * * * * * 5. Comment designations. * * * ►C o m m e n ts to the-<J [T he] appendices may be citedft*-, for exam ple,-^ as Comments app. [through J-2.J * * * * * 3. S up plem ent I to Part 226, u n d er Section 226.2—D efinitions, u n d er paragraph 2(a)(25), is am ended by rem oving the last two sentences of the second u ndesignated paragraph of paragraph 6. 4. In S u pplem en t I to Part 226, u n d er Section 226.4— F inance Charge, the following am endm ents w ou ld be m ade: a. U nder 4(a) D efinition., paragraphs 3. and 4. w o u ld be rem oved and paragraphs 5. through 7. w o uld be redesignated as paragraphs 3. through 5., respectively, and new paragraphs 4(a)(1), 4(a)(2), a n d 4(a)(3) w o u ld be added preceding 4(b); b. U nder 4(b) E xam ples o f fin a n ce charges., a new paragraph 4(b)(10) w ould be added; c. U nder 4(c) Charges exclu d ed fro m the fin a n ce charge., u n d er 4(c)(5) paragraph 2. w o u ld be revised; d. U nder 4(d), th e paragraph heading w ould be revised, and a new paragraph 4(d)(3) w o u ld be added; and e. U nder 4(e) Certain secu rity interest charges., paragraph l.i. w o uld be revised. The add ition s and revisions w ould read as follows: * * * * * * * * * * * * ► Paragraph 4(a)(1) Charges by third parties. 1. Choosing the provider o f a required service. An example of a third-party charge included in the finance charge is the cost of required mortgage insurance, even if the consumer is allowed to choose the insurer. 2. Annuities associated with reverse mortgages. Some creditors may offer annuities in connection with a reverse mortgage transaction. The amount of the premium is a finance charge if the creditor in effect requires the purchase of the annuity incident to the credit. Examples include the following: i. The credit documents reflect the purchase of an annuity from a specific provider or providers. ~ ii. The creditor assesses an additional charges on consumers who do not purchase an annuity from a specific provider. iii. The annuity is intended to supplement or replace the creditor’s payments to the consumer either immediately or at some future date. * * * * 4(b) Examples o f finance charges. * Section 226.4—Finance Charge 4(a) Definition. * * * Subpart A— General * Paragraph 4(a)(2) Special rule; closing agent charges. 1. General. This rule applies to charges by a third party serving as the closing agent for the particular loan. Unless a charge is otherwise excluded (for example, a real estate-related closing cost under § 226.4(c)(7) or a fee paid in a comparable cash transaction), a fee charged by a third-party closing agent is included in the finance charge if the creditor requires the imposition of the charge or the provision of the service, or to the extent the creditor retains any portion of the charge. For example, a courier fee charged by a third-party closing agent is a finance charge if the creditor requires the use of a courier. Paragraph 4(a)(3) Special rule; mortgage broker fees. 1. Special rule— mortgage broker fees. A fee charged by a mortgage broker is excluded from the finance charge if it is the type of fee that is also excluded when charged by the creditor. To exclude an application fee from the finance charge, a mortgage broker must charge the fee to all applicants for credit, whether or not credit is extended. 2. Compensation by lender. Compensation paid by a creditor to a mortgage broker under an arrangement between those parties is not included in the finance charge. For example, where a consumer is obligated to pay points to the creditor and a fee to a mortgage broker, those charges must be disclosed as finance charges. Under a separate arrangement between the creditor and the broker, the creditor may also agree to compensate the broker, such as in “yield spread prem ium s” or “back points.” This compensation paid by the creditor to the broker is not a finance charge.-^ * * * * ► Paragraph 4(b)(10) Debt cancellation fees. 1. Definition. The term “debt cancellation agreement” refers to a contract between a borrower and a creditor providing for satisfaction of all or part of the debt when a specified event occurs. The term includes guaranteed automobile protection or “GAP” agreements, which cancel the remaining debt after property insurance benefits are exhausted.-*! * * * * * * * 4(d) Insurancd>-and debt cancellation coverage-^. * * * * * * * * * 4(e) Certain security interest charges. 1. Examples. i. Excludable charges. Sums m ust be actually paid to public officials to be excluded from the finance charge under § 226.4(e)(1). Examples are charges or other fees required for filing or recording security agreements, mortgages, continuation statements, and similar documents, as well as intangible property or other taxes imposed by the state solely on the creditor [and payable by] ► a n d charged to -^ the consumer (if the tax must be paid to record a security interest). ► ( S e e comment 4(a)-5 (formerly 4(a)-7) regarding the treatment of taxes, generally.).-^ * * * * * 5. In S upp lem ent I to Part 226, u n d er Section 226.5— General D isclosure R equirem ents, u n d e r Paragraph 5(b)(2)(H)., paragraph 3. w ou ld be revised to read as follows: * * * * * Subpart B—Open-End Credit Section 226.5—General Disclosure Requirements * * * * * 5(b) Timing o f disclosures. * * * * * 5(b)(2) Periodic statements. * * * * * * Paragraph 5(b)(2)(H). * 2. O ther seller-paid am ounts. Mortgage in surance prem iu m s a n d other ► f i n a n c e d charges are som etim es paid at or before consum m ation or settlem ent on the borrow er’s b ehalf by a noncreditor seller. [In such cases th e ] ► T h e creditor should treat th e paym ent m ade by th e seller as seller’s points and exclude it from th e finance charge ► i f the consum er is not legally b o u n d to the creditor for the charge*^. A creditor w ho gives disclosures before the paym ent has been m ade should base them on the best inform ation reasonably * ^P aragraph 4(d)(3). 1. General. Fees charged for the specialized form of debt cancellation agreement known as guaranteed automobile protection or “GAP” agreements must be disclosed according to § 226. 4(d)(3) rather than according to § 226. 4(d)(2) for property insurance. 2. Disclosures. Creditors can comply with § 226. 4(d)(3) by providing a disclosure that refers to debt cancellation coverage whether or not the agreement is considered insurance. Creditors may use the model credit insurance disclosures only if the debt cancellation coverage constitutes insurance under state law .-^ * Paragraph 4(c)(5). * available!, as called for by th e estim ate provisions of th e re g u la tio n ]. * * * * * * * * * 3. Calling fo r periodic statements. The creditor may permit consumers to call for their periodic statements, but may not require them to do so. If the consumer wishes to pick up the statement and the plan has a free-ride period, the statement ►( i n c lu d i n g a statement provided by electronic m eans)-^ must be made available in accordance with the 14-day rule. * * * * * 6. In S upplem ent I to Part 226, u n d er Section 226.17— General D isclosure R equirem ents, the following am endm ents w ould be made; Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Proposed Rules a. U nder 17(c) Basis o f disclosures a n d use o f estim ates, a n ew paragraph 17(c)(2)(ii) w ou ld be added; and b. U n der 17(f) Early disclosures, paragraphs 1. introductory text, 1. i., the last sentence of 1. ii., an d 1. iii. w ould be revised and a heading w o u ld be a d d e d to paragraph 1. ii; an d a new paragraph 17(f)(2) preceding 17(g) w o u ld be added. The ad d itio n s and revisions w ould read as follows: * * * * * Subpart C—Closed-End Credit Section 226.17—General Disclosure Requirements * * * * * must either redisclose the changed terms or furnish a complete set of new disclosures before consummation. Redisclosure is required even if the disclosures made on July 1 are based on estimates and marked as such. ► B . In a regular transaction, if early disclosures are marked as estimates and the disclosed annual percentage rate is within Vs of 1 percentage point of the rate at consummation, the creditor need not redisclose the changed terms (including the annual percentage rate).-^ ii. ►JVonmorfgage loan.-^l * * * (See § 226.18(d)^-(2)-^ [and footnote 41] of this part.) iii. ► Mortgage loan. At the time TILA disclosures are prepared in July, the loan closing is scheduled for July 31 and the creditor does not plan to collect per-diem interest at consummation. Consummation actually occurs on August 5, and per-diem interest for the remainder of August is collected as a prepaid finance charge. Assuming there were no other changes requiring redisclosure, the creditor may rely on the disclosures prepared in July that were accurate when they were prepared. However, if the creditor prepares new disclosures in August that will be provided at consummation, the new disclosures must take into account the amount of the per-diem interest known to the creditor at that time.-<3 [If early disclosures are marked as estimates and the disclosed annual percentage rate is w ithin tolerance at consummation, the creditor need not redisclose the changed terms (including the annual percentage rate).] ► Paragraph 17(f)(2). 1. Irregular transactions. For purposes of this paragraph, a transaction is deemed to be “irregular” according to the definition in footnote 46 of § 226.22(a)(3). 60227 § 226.18(c) if the creditor complies with ►R E S P A ’s requirements for a - ^ [th e] good faith estim ate[s] ► and settlement statem ent.-^ [requirement.] The itemization of the amount financed need not be given, even though the content and timing of the good faith estimate[s] ( ► a n d settlement statem ent-^ under RESPA differ from the ►re q u ire m e n ts o f-^ § ► § 226.18(c)fc*-and 19(a)(2)-"< (requirement), ► i f the settlement statement is substituted for the itemization when redisclosure is required under § 226.19(a)(2), it m ust be delivered to the consumer at or prior to consummation.'*!! * * * * * Paragraph 18(c)(l)(iv). * * * * * [2. Prepaid mortgage insurance premiums. RESPA requires creditors to give consumers 17(c) Basis o f disclosures and use o f a settlement statement disclosing the costs estimates. associated w ith mortgage loan transactions. * * * * * Included on the settlement statement are ► Paragraph 17(c)(2)(ii). mortgage insurance premiums collected at 1. Per-diem interest. This paragraph settlement that are prepaid finance charges. applies to any numerical disclosure (such as In calculating the total amount of prepaid the finance charge or annual percentage rate) finance charges, creditors should use the that is affected by the amount of the per-diem amount for mortgage insurance listed on the interest charge that will be collected at line for mortgage insurance on the settlement consummation. If the amount of per-diem statement (line 1002 on HUD-1 or HUD 1 interest used in preparing the disclosures for A), without adjustment, even if the actual consummation is based on the information amount collected at settlement may vary known to the creditor at the time the because of RESPA’s escrow accounting rules. disclosure document is prepared, the Figures for mortgage insurance disclosed in disclosures are considered accurate under conformance with RESPA shall be deemed to this rule, and the affected disclosures are also be accurate for purposes of Regulation Z.] considered accurate. For example, if the ► 2 . Escrow items. RESPA requires amount of per-diem interest used to prepare creditors to give consumers a good faith disclosures is less than the amount of perestimate and settlement statement disclosing diem interest charged at consummation, and the costs associated with mortgage loan as a result the finance charge is understated transactions. Included in these disclosures by $200, the disclosed finance charge is are amounts which are paid at or before considered accurate even though the consummation and placed in an escrow or understatement is not w ithin the $100 impound account. Typically some, but not tolerance of § 226.18(d)(1). In this example, if * * * * * all, of the escrow items are prepaid finance in addition to the understatement related to 7. In S upplem ent I to Part 226, un der charges, such as mortgage insurance the per-diem interest, a $90 fee is incorrectly premiums. omitted from the finance charge, causing it to Section 226.18— C ontent o f Disclosures, Regardless of how the escrow amounts are the following am endm ents w o u ld be be understated by a total of $290, the finance shown on the good faith estimate or made: charge is considered accurate because the settlement statement for RESPA purposes, a. U nder 18(c) Item ization o f A m o u n t $90 fee is within the tolerance in creditors must be able to identify the amount § 226.1 8(d)(1).^ F inanced., paragraph 4. w o u ld be attributable to finance charges in order to * * * * * revised; calculate the total prepaid finance charge b. U nder 18(c)(l)(iv)., paragraph 2. 17(f) Early disclosures. under § 226 18(c)(l)(iv). w o uld be revised; 1. Change in rate or other terms. i. Item ized amounts. If the amounts paid c. U nder 18(d) F inance charge., a new into escrow are individually itemized on the Redisclosure is required for changes that occur between the time disclosures are made paragraph 18(d)(2) O ther credit, w ould good faith estimate and the settlement and consummation if the annual percentage statement, the creditor may use the itemized be added after paragraph 1; and rate in the consummated transaction exceeds amount even if the actual amount collected d. U nder 18(n) Insurance., the the limits prescribed in ► t h i s section, even at settlement varies because of RESPA’s heading w ould be revised and if the initial disclosures would be considered escrow accounting rules. For example, if the paragraph 2. w o uld be added. accurate under the tolerances in §§ 226.18(d) itemized amount on the settlement statement The revisions and additions w ould or 226.2 2 ( a ) . [§ 226.22(a) (1/8 of 1 includes mortgage insurance, creditors may read as follows: percentage point in regular transactions and rely on the amount listed on line 1002 of the * * * * * . 1/4 of one percentage point in irregular HUD-1 or HUD 1-A, even though an transactions. Redisclosure is also required, adjustment to the aggregate amount of the Section 226.18—Content of Disclosures even if the annual percentage rate is within escrow items may be shown on another line * * * * * the permitted tolerance, if the disclosures in the 1000 series. If an itemized escrow 18(c) Itemization o f am ount financed. were not based on estimates in accordance amount that is a finance charge is disclosed * * * * * with § 226.17(c)(2) and labeled as such.] To in conformance with RESPA, it shall be illustrate: 4. RESPA transactions. The Real Estate deemed to be accurate for purposes of i. ► General. A .< i If disclosures are made Settlement Procedures Act (RESPA) requires Regulation Z. in a regular transaction on July 1, the creditors to provide good faith ii. Lump-sum amounts. If an amount paid transaction is consummated on July 15, and estimate [s ] of closing costs ► and a into escrow is listed as a lump sum on the the actual annual percentage rate varies by settlement statement listing the amounts paid good faith estimate and the settlement statement, and if that amount includes some more than 1/8 of 1 percentage point from the by the consumer<l. Transactions subject to costs that are finance charges, the creditor disclosed annual percentage rate, the creditor RESPA are exempt from the requirements of 60228 Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Proposed Rules must identify the amount attributable to finance charges to calculate the total prepaid finance charge under § 226.18(c)(l)(iv). To determine the amount attributable to the finance charge, creditors must use single item accounting, as defined under RESPA (24 CFR §§ 3500.17(b) and (d)(2)). Alternatively, creditors may treat the entire amount paid into escrow as a prepaid finance charge.-^! * •*• 1* * * 18(d) Finance charge. * * * * * ► Paragraph 18(d)(2) Other credit. 1. Tolerance. When a finance charge error results in a miscalculation of the amount financed, or of some other numerical disclosure for which the regulation provides no specific tolerance, the miscalculation does not violate the act or the regulation if the finance charge error is within the permissible tolerance under this paragraph.-^ * * * * * Paragraph 18(n) Insurance ► a n d debt cancellation. -<l * * * * * ► 2 . Debt cancellation. Creditors may use the model credit insurance disclosures only if the debt cancellation coverage constitutes insurance under state law. Otherwise, they may provide a parallel disclosure that refers to debt cancellation coverage.-^ * * * * * 8. In Supplement I to Part 226, under Section 226.19— Certain Residential Mortgage and Variable-Rate Transactions, under 19(a)(2) Redisclosure required., the first sentence of paragraph 1. w ould be revised to read as follows: * * * * * Section 226.19— Certain Residential Mortgage and Variable-Rate Transactions * * * * * Paragraph 19(a)(2) Redisclosure required. 1. Conditions fo r redisclosure. Creditors must make new disclosures if the annual percentage rate at consummation differs from the estimate originally disclosed by more than Vs of 1 percentage point in regular transactions or of 1 percentage point in irregular transactions, as defined in ►f o o t n o te 46 of -^§ 226.22^(a)(3)-^N* * * * * * * * the tolerance of V» of 1 percent provided under § 226.22(a)(2). In that case, an annual percentage rate corresponding to a $100 understatement of the finance charge would not be considered accurate. Paragraph 22(aJ(5) A dditional tolerance for mortgage loans. 1. Example. This paragraph contains an additional tolerance for a disclosed annual percentage rate that is incorrect but is closer to the actual annual percentage rate than the rate that would be considered accurate under the tolerance in § 226.22(a)(4). To illustrate: in an irregular transaction subject to a Vi of 1 percent tolerance, if the actual annual percentage rate is 9.00 percent and a $75 omission from the finance charge corresponds to a rate of 8.50 percent that is considered accurate under § 226.22(a)(4), a disclosed APR of 8.65 percent is w ithin the tolerance in § 226.22(a)(5). In this example of an understated finance charge, a disclosed annual percentage rate below 8.50 or above 9.25 percent will not be considered accurate.-^ * * * * * 10. In Supplement I to Part 226, Section 226.23—Right o f Rescission w ould be amended by adding new 23(g) and (23)(h) to read as follows: * * * * * Section 226.23—Right o f Rescission * * * * * ► 2 3 / g j Tolerances for accuracy. Paragraph 23(g)(2) One percent tolerance. 1. New advance. The phrase “new advance” has the same meaning as in comment 23(f)—4. 23(h) Special Rules fo r Foreclosures. 1. Rescission. Section 226.23(h) applies only to transactions that are subject to rescission under § 226.23(a)(1). Paragraph 23(h)(l)(i). 1. Mortgage broker fees. A consumer may rescind a loan in foreclosure if a mortgage broker fee was omitted or understated, without regard to the dollar am ount involved. For example, a consumer—s right to rescind a loan in foreclosure is triggered by a $10 understatement of a mortgage broker fee; an understatement of more than $35. in other finance charges also triggers rescission.-^ * * * * * 11. In Supplement I to Part 226, under 9. In Supplement I to Part 226, Section Section 226.31—General Rules, under 226.22— Determination o f the A nnual Paragraph 31(c)(1) paragraph 1. would be Percentage Rate, would be amended by redesignated as paragraph 1. under 31(c), and adding new paragraphs 22(a)(4) and 22(a)(5) paragraph 2., under Paragraph 31 (c)(1) to read as follows: would be redesignated as paragraph 1. * * * * * 12. In Supplement I to Part 226, under Section 226.32—Requirements fo r Certain Section 226.22— Determination o f the Closed-End Home Mortgages, the following A nnual Percentage Rate amendments would be made: 22(a) Accuracy of the annual percentage a. Under Paragraph 32(b)(l)(i)., paragraph rate. 1. would be revised; and * * * * * b. Under 32(c)(3)., a new paragraph 2. would be added. ^■Paragraph 22(a)(4) Mortgage loans. The revisions and additions would read as 1. Example. If a creditor improperly omits a $75 fee from the finance charge on a regular follows: * * * . * transaction, the understated finance charge is * considered accurate under § 226.18(d)(1), and Section 226.32— Requirements fo r Certain the annual percentage rate corresponding to Closed-End Home Mortgages that understated finance charge also is * * * * * considered accurate even if it falls outside 32(b) Definitions. Paragraph 32(b)(l)(i). ► l . General. Section 226.32(b)(l)(i) includes in the total “points and fees” items defined as finance charges under §§ 226.4(a) and 226.(4)(b). Items excluded from the finance charge under other provisions of § 226.4 are not included in the total “points and fees” under paragraph 32(b)(l)(i), but may be included in "points and fees” under paragraphs 32(b)(l)(ii) and 32(b)(l)(iii). Interest, including per diem interest, is excluded from “points and fees” under § 226.32(b)(1). * * * * * 32(c) Disclosures. * * * * * 32(c)(3) Regular paym ent. * * * * * ► 2 . Balloon paym ents. If a loan with a term of five years or more provides for a balloon payment, the balloon payment must be disclosed. For a loan with a term of less than five years, a balloon payment is prohibited.-^ * * * * * 13. In Supplement I to Part 226, under Section 226.33— Requirements fo r Reverse Mortgages, under Paragraph 33(a)(2), in paragraph 2., the third and fourth sentences would be revised and a new sentence would be added at the end of the paragraph to read as follows. * * * * * Section 226.33—Requirements fo r Reverse Mortgages 33(a) Definition. * * * * * Paragraph 33(a)(2). * * * * * 2. Definite term or m aturity date. * * * Stating a definite maturity date or term of repayment in an obligation does not violate the definition of a reverse-mortgage transaction if the maturity date or term of repayment used would ► n o t - ^ [in no easel operate to cause maturity prior to the occurrence of any of the m aturity events recognized in the regulation. ► F o r example, some reverse mortgage programs specify that the final maturity date is the borrower’s 150th birthday; other programs include a shorter term but provide that the term is automatically extended for consecutive periods if none of the other maturity events has yet occurred. These programs would be perm issible.-^ [For example, a provision that allows a reversemortgage loan to become due and payable only after the consumer’s death, transfer, or cessation of occupancy, or after a specified term, but w hich automatically extends the term for consecutive periods as long as none of the events specified in this section had yet occurred would be permissible.] * * * * * 14. In S upplem ent I to Part 226, u n d er APPENDICES G A N D H— OPEN-END A N D CLOSED-END MODEL FORMS A N D CLAUSES, a new paragraph 2. w o u ld be ad d e d to read as follows: * * * * * Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 / Proposed Rules Appendices G and H—Open-End and Closed-End Model Forms and Clauses * * * * * ► 2 . Debt cancellation coverage. The regulation does not authorize creditors to characterize debt cancellation fees as , insurance premiums for purposes of this regulation. Creditors may provide a disclosure that refers to debt cancellation coverage whether or not the agreement is considered insurance. Creditors may use the model credit insurance disclosures only if the debt cancellation coverage constitutes insurance under state law .-^ * * * * * 15. In Supplement I to Part 226, under A ppendix H—Closed-End Model Forms and Clauses, a new sentence would be added to the end of paragraph 11. to read as follows: * * * * * Appendix H—Closed-End Model Forms and Clauses * * * * * 11. Models H -8 and H-9. * * * ► T h e prior version of model form H -9 is substantially similar to the current version and creditors may continue to use it, as appropriate. Creditors are encouraged, however, to use the current version when reordering or reprinting forms. By order of the Board of Governors of the Federal Reserve System, acting through the Secretary of the Board under delegated authority, November 14, 1996. William W. Wiles, Secretary o f the Board [FR Doc. 96-29639 Filed 11-26-96; 8:45 am] BILLING CODE 6 2 1 0 - 0 1 -P 60229
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