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Federal Reserve Bank
OF DALLAS
W IL L IA M
H. W ALLACE
FIRST V IC E PR ES ID EN T
AND C H IE F O PER ATING O FFIC ER
DALLAS, T EXA S 7 5 2 2 2
January 5, 1988
C i r c u l a r 88-1
TO:
The Chief Executive O f f i c e r of a l l
member banks and o t h e r s concerned in
t he Eleventh Federal Reserve D i s t r i c t
SUBJECT
Request for public comment on proposed revisions to the Official
Staff Commentaries on Regulation B (Equal Credit Opportunity), Regulation E
(Electronic Fund Transfers), and Regulation Z (Truth in Lending)
DETAILS
The Board of Governors o f t he Federal Reserve System has r e q u e st e d
p u b l i c comment on proposed r e v i s i o n s t o t he o f f i c i a l s t a f f commentary f o r
t h r e e of i t s consumer c r e d i t p r o t e c t i o n r e g u l a t i o n s - - R e g u l a t i o n s B, E, and Z.
Comments should be addressed t o Mr. William W. Wiles, S e c r e t a r y ,
Board of Governors of the Federal Reserve System, Washington, D.C. 20551.
Correspondence should r e f e r t o EC-1 f o r Regul ati on B, EFT-2 f o r Regul ati on E,
and TIL-1 f o r Regulati on Z and must be r e c ei v e d by February 12, 1988.
ATTACHMENTS
The Board's pre ss r e l e a s e and the m a t e r i a l as pu blis he d in the
Federal R e g i s t e r a re a t t a c h e d .
MORE INFORMATION
Questions r e ga r di ng t h e s e proposed r e v i s i o n s should be d i r e c t e d to
Dean A. Pankonien o f - t h i s Bank's Legal Department a t (214) 651-6228. For
a d d i t i o n a l copi es of t h i s c i r c u l a r p l e a s e c o n t a c t t he Publi c A f f a i r s
Department a t (214) 651-6289.
S i n c e r e l y yours
For additional copies of any c ircu lar please conta c t the Public A ffairs D ep artm en t a t (214) 6 51 -6 2 8 9 . Banks and others are
encouraged to use the follow ing incom ing W A TS numbers in contacting this Bank (800) 4 4 2 -7 1 4 0 (intrastate) and (800)
5 2 7 -9 2 0 0 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERALRESERVEpressrelease
For immediate r e l e a s e
December 10, 1987
The Federal Reserve Board today i s s u e d f o r p u b l i c comment proposed
r e v i s i o n s t o t he o f f i c i a l s t a f f commentary f o r t h r e e of i t s consumer c r e d i t
p r o t e c t i o n r e q u l a t i o n s - - R e q u l a t i o n R (Equal C r e d i t O p p o r t u n i t y ) , Req ul ati on E
( E l e c t r o n i c Fund T r a n s f e r s ) and Requ lat i on Z (Truth in Lendinq).
The proposed r e v i s i o n s t o t h e s t a f f commentary f o r Requl ati on R
address i s s u e s c oncerninq c o n s i d e r a t i o n o f aqe in e v a l u a t i n g c r e d i t w o r t h i n e s s ,
s i g n a t u r e r e q u i r e m e n t s , record r e t e n t i o n and c o l l e c t i o n o f monit or ing i n f o r m a t i o n .
The proposed r e v i s i o n s t o t h e s t a f f commentary f o r Reg ul ati on E c l a r i f y
q u e s t i o n s t h a t have a r i s e n as a r e s u l t of t h e amendments adopted by t h e Board
in August 1987.
In q e n e r a l , t h e q u e s t i o n s p e r t a i n t o p o i n t - o f - s a l e / a u t o m a t e d
c l e a r i n q h o u s e s e r v i c e s , such as i n s t i t u t i o n s ' r e s p o n s i b i l i t i e s c oncerning p e r i o d i c
s t a t e m e n t s , c ar d i s su a n c e and e r r o r r e s o l u t i o n .
Proposed r e v i s i o n s t o t h e Regu l at i on Z s t a f f commentary a d dr e s s
d i s c l o s u r e q u e s t i o n s r a i s e d by t h e emergence o f c on v er si on f e a t u r e s in a d j u s t a b l e r a t e mortgages and t h e impo si ti on of fe e s t h a t a r e c o n si d e re d f i n a n c e charqes a t
t he time a c r e d i t card plan i s renewed.
Proposed commentary i s a l s o i nc lude d
which i n t e r p r e t s t h e Bo ar d' s r e c e n t r u l e implementing t h e requirement of t he
Competitive E q u a l i t y Banking Act t h a t a d , i u s t a b l e - r a t e mortgages c o n t a i n a maximum
in terest rate.
The Boar d's n o t i c e s a r e a t t a c h e d .
- 0.
Attachments
Federal Register / Vol. 52. No. 240 / Tuesday, December 15, 1987 / Proposed Rules______ 47589
FEDERAL RESERVE SYSTEM
12 CFR Part 202
[Reg. B; EC-1]
Equal Credit Opportunity; Proposed
Update to Official Staff Commentary
Board of Governors of the
Federal Reserve System.
ACTION: Proposed official staff
interpretation.
AGENCY:
The Board is publishing for
comment proposed revisions to the
official staff commentary to Regulation
B (Equal Credit Opportunity). The
commentary applies and interprets the
requirements of Regulation B and is a
substitute for individual staff
interpretations of the regulation. The
proposed revisions address issues
concerning consideration of age in
evaluating creditworthiness, signature
requirements, record retention and
collection of monitoring information.
DATE: Comments must be received on or
before February 12,1988.
ADDRESS: Comments should be mailed
to William W. Wiles, Secretary, Board
of Governors of the Federal Reserve
System, Washington, DC 20551, or
delivered to the 20th Street courtyard
entrance (20th Street between C Street
and Constitution Avenue NW.,
Washington, DC) between 8:45 a.m. and
5:15 p.m. weekdays. Comments should
include a reference to EC-1. Comments
may be inspected in Room B-1122
between 8:45 a.m. and 5:15 p.m.
weekdays.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Kathleen S. Brueger or Leonard N.
Chanin, Staff Attorneys, or Adrienne D.
Hurt, Senior Attorney, Division of
Consumer and Community Affairs, at
(202) 452-2412 or 452-3667; for the
hearing impaired only , contact
Eamestine Hill or Dorothea Thompson,
Telecommunication Device for the Deaf
47590
Federal Register / Vol. 52, No. 240 / Tuesday, December 15, 1987 /. Proposed Rules
at (202) 452-3544, Board of Governors of
the Federal Reserve System,
Washington, DC 20551.
s u p p le m e n ta ry in fo rm a tio n :
(1) General
The Equal Credit Opportunity Act
(ECOA) (15 U.S.C. 1691 el seq.) makes it
unlawful for creditors to discriminate in
any aspect of a credit transaction on the
basis of race, color, religion, national
origin, sex, marital status, age, receipt of
public assistance, or the exercise of
rights under the Consumer Credit
Protection Act. This statute is
implemented by the Board's Regulation
B (12 CFR Part 202).
'
On November 20,1985, an official
staff commentary was published to
interpret the regulations, along with a
final rule revising Regulation B (50 FR
48018). The commentary is designed to
provide guidance to creditors in
applying the regulation to specific
transactions. The commentary is
updated periodically to address
significant questions that arise. The
previous update w as published in April
1987 (52 FR 10732). This notice contains
the proposed second update. It is
expected that it will be adopted in final
form in March 1988.
(2) Proposed Revisions
The following is a brief description of
the proposed revisions to the
commentary:
Section 202.6—Rules Concerning
Evaluation o f A pplications
6(b) Specific Rules Concerning Use of
Information
Paragraph 6(b)(2). Comment 6(b)(2)—1
would be am ended to clarify that while
I 202.6(b)(2)(iv) permits favoring
persons age 62 and older, that paragraph
does not permit favoring a larger age
group (such as persons aga 55 and
o;der). To offer a program favoring a
larger age group, the creditor must rely
cn the special purpose crndit provisions
cf section 202.8.
Comment 6(b)(2)—3 would be am ended
to clarify that age or age-rslated
information about an applicant cannot
be the sole factor in determining
creditworthiness or in formulating credit
terms and conditions.
Section 202.7—R ules Concerning
E xtensions o f Credit
7(d) Signature of Spouse or Other Person
Paragraph 7(d)(5). Comment 7(d)(5)—2
would be revised in light of U nited
Sta tes v. IT T Consum er Financial Corp..
813 F.2d 487 (9th Cir. 1987) to clarify the
rules on when a creditor may require
additional signatures on a credit
obligation. In the ITT case, the U.S.
Court of Appeals for the Ninth Circuit
held that the future earnings of a spouse
are not community property. Therefore,
when an applicant relies on the spouse’s
future earnings to establish
creditworthiness, a creditor may
condition the extension of credit on the
nonapplicant spouse’s signing the credit
obligation.
W hether an applicant is relying on the
future earnings of a nonapplicant spouse
is for the creditor to determine. Because
§ 202.5(c)(2)(iv) permits a creditor
routinely to request information about a
nonapplicant spouse, the mere fact that
the nonapplicant spouse's income is
listed on an application form is
insufficient to show that the applicant is
relying on the spouse’s income.
A third sentence would be added to
comment 7(d)(5)—2 to incorporate the
holding of ITT. Some creditors have
asked whether, given the IT T ruling,
they are required to obtain the signature
of the applicant’s spouse whose future
earnings are relied on for an extension
of credit. Creditors have also asked
whether they may differentiate on the
basis of marital status when future
earnings are relied on—that is, whether
a creditor may follow the practice of not
requiring the signature of a spouse
whose earnings are relied on if it is the
creditor’s policy to require the signature
of a person not m arried to th e applicant
whose future earnings are relied on. (In
the case of a spouse, the creditor would
be assuming that, under community
property state law, the spouse's future
earnings—unlike the future earnings of a
nonspouse—will become community
property.) Additional language has been
added to make clear that such a practice
is permissible, referencing § 202.6(c)—
which allows the consideration of state
property laws.
Section 202.12—R ecord Retention
12(b) Preservation of Records
Comment 12(b)—1 would be revised to
clarify the rules for record retention of
documents (for example, notifications cf
action taken) in computerized systems.
Section 202.13— Inform ation fo r
M onitoring Purposes
13(a) Information to Be Requested
Comment 13(a)—5 would be revised to
clarify the monitoring information rules
regarding open-end lines of credit.
List o f S u b jects in 12 CFR Part 202
Banks, Banking, Civil rights.
Consumer protection, Credit, Federal
Reserve System, Marital status
discrimination, Minority groups.
Penalties, Religious discrimination, Sex
discrimination. Women.
Certain conventions have been used
to highlight the proposed revisions. New
language is shown inside bold-faced
arrows, while language that would be
removed is set off with brackets.
(3) Text of Proposed Revisions
Pursuant to authority granted in
section 703 of the Equal Credit
Opportunity Act (15 U.S.C. 1691b), the
Board proposes to amend the official
staff commentary to Regulation B (12
CFR Part 202 Supp. I) as follows:
PART 202—[AMENDED]
1. The authority citation for Part 202
continues to read:
Authority: 15 U.S.C. 1691 et seq.
2. The proposed revisions amend the
commentary (12 CFR Part 202, Supp. I)
by revising comments 6(b)(2)—1, 6(b)(2)—
3, 7(d)(5)—2 , 12(b)—1 and 13(a)—5 and read
as follows:
Supplement I—Official Staff
Commentary
*
*
*
*
*
Section 202.6—R ules Concerning
Evaluation o f A pplications
*
*
*
*
*
6(b) Specific rules concerning use o f
inform ation.
*
*
*
*
*
Paragraph 6(b)(2)
1. Favoring the elderly. Any system of
evaluating credit-worthiness may favor a
credit applicant who is age 62 or older. ► A
credit program offering more favorable credit
terms to applicants at an age lower tharnC2 is
permissible, however, only if the program
meets the special-purpose credit
requirements of § 202.8. M
*
*
*
*
*
3. C onsideration o f age in a judgm ental
system . In a judgmental system, defined in
§ 202.2(t). a creditor may not take age directly
into account in any aspect of the credit
transaction. For example, '.he creditor m :y
not reject an application or terminate an
account because the applicant is 60 yea-s old.
But a creditor that uses a judgmental sys;em
may relate the applicant's age to other
information about the applicant that the
creditor considers in evaluating
creditworthiness. For example:
• A creditor may consider the applicant's
occupation and length of time to retirement to
ascertain whether the applicant's income
(including retirement income) will support the
extension of credit to its maturity.
• A creditor may consider the adequacy of
a.ty security offered when the term of the
credit extension exceeds the life expectancy
of the applicant and the cost of realizing on
the collateral could exceed the applicant's
equity. (An elderly applicant might not
Federal Register / Vol. 52, No. 240 / Tuesday, December 15, 1987 / Proposed Rules
qualify for a 5 percent down, 30-year
mortgage loan but might qualify with a larger
downpaym ent or a shorter loan maturity.)
•
A creditor may consider the applicant's
age to assess the significance of the length of
the applicant's employment (a young
applicant may have just entered the job
market) or length of time at an address (an
elderly applicant may recently have retired
and moved from a long-term residence).
► As the exam ples above illustrate, the
evaluation m ust be m ade in an
individualized, case-by-case m a n n e r and it is
impermissible for a creditor, in deciding
whether to extend credit or in setting the
terms and conditions, to consider age-related
information solely. Age-related information
may be considered only in evaluating other
"pertinent elements of creditworthiness" that
are draw n from the particular facts and
circumstances concerning the application in
q u e stio n .*
*
*
*
*
*
Section 202.7—R ules Concerning E xtensions
o f Credit
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
12(b) Preservation of records.
1. Copies. A copy of the original record
includes carbon copies, photocopies,
microfilm or microfiche copies, or copies
produced by a ny other accurate retrieval
system, such a s documents stored and
reproduced by computer. ► A creditor who
uses a computerized or mechanized system
need not keep a written copy of a document
(for example, an adverse action notice) if it
can regenerate all pertinent information in a
timely m anner for exam ination or other
purpo ses.*
*
*
*
*
*
*
[FR Doc. 87-28698 Filed 12-14-87; 8:45 am]
Section 202.12— R ecord R etention
*
*
*
2. ► R eliance onM incom e o f another
person ► — individ ual c r e d its . A n applicant
who requests individual credit relying on the
income of another person ([s u c h a s ]
► including.* a spouse ► i n a noncommunity
property s t a t e s ) may be required to provide
the signature of the other person to make the
income available to pay the debt. In
community property states, the signature ► o f
a s p o u s e * may be required if the applicant
relies on the ► s p o u s e ' s * separate income
► . * [ o f another person, i.e., incom e] ► I f
the applicant relies on the spouse's future
e a rn in g s* that as a m atter of stlate law
► are-* [ i s ] not community property [ . ] ► ,
the creditor may but need not require the
spouse's signature. The option of not
requiring the spouse’s signature is
permissible regardless of whether the
creditor requires the signature of a nonspouse
whose future earnings are relied on by the
applicant. (See S 202.6(c) on consideration of
state property laws.)-*
*
*
5. Transactions not covered. The
information-collection requirements of
§ 202.13(a) apply to applications for credit
primarily for the purchase or refinancing of a
dwelling that is or will become the
applicant's principal residence. Therefore,
[applications for home-equity lines and
o th e r] applications for credit secured by the
applicant's principal residence but made
primarily for a purpose other than the
purchase or refinancing of the principal
residence (such as loans for home
improvement and debt consolidation) are not
subject to the information-collection
requirements of § 202.13(a). ► A n application
for an open-end home equity line of credit is
not subject to § 202.13 unless it is readily
apparent to the creditor during the
application process (for example, by the
documentation involved) that the purpose of
the line is for the purchase or refinancing of a
principal dw elling.*
*
Paragraph 7(d)(5)
*
*
Board of Governors of the Federal Reserve
System. December 9,1987.
William YV. Wiles,
Secretary o f the Board.
7(d) Signature o f spouse or o ther person.
*
Section 202.13— Inform ation fo r M onitoring
Purposes
13(a) Information to be requested.
*
BILLING CODE 62 10-01-*!
12 CFR Part 205
[Reg. E; EFT-2]
Electronic Fund Transfer; Proposed
Update to Official Staff Commentary
a g e n c y : Board of Governors of the
Federal Reserve System.
a c t i o n : Proposed official staff
interpretation.
The Board is publishing for
comment proposed changes to the
official staff commentary to Regulation
E (Electronic Fund Transfers). The
commentary applies and interprets the
requirements of Regulation E and is a
substitute for individual staff
interpretations of the regulation. The
proposed revisions address questions
that have arisen about the regulation,
including amendments adopted by the
Board in August 1987 dealing with POS/
ACH services. The proposed revisions
deal, for example, with the
responsibilities of a service-providing
institution concerning periodic
statements, card issuance, and error
resolution.
d a t e : Comments must be received on or
before February 12,1988.
a d d r e s s : Comments should be mailed
to William W. Wiles, Secretary, Board
of Governors of the Federal Reserve
System, Washington, DC 20551. or
su m m ary :
47591
delivered to the 20th Street courtyard
entrance (between C Street and
Constitution Avenue NW.), Washington.
DC between 8:45 a.m. and 5:15 p.m.
weekdays. Comments should include a
reference to EFT-2. Comments may be
inspected in Room B-1122 betw een 8:45
a.m. and 5:15 p.m. weekdays.
FOR FURTHER INFORMATION CONTACT:
Kathleen S. Brueger, Staff Attorney, or
Gerald P. Hurst or John C. Wood, Senior
Attorneys, Division of Consumer and
Community Affairs, at (202) 452-3667 or
(202) 452-2412. For the hearing-impaired
only, contact Earnestine Hill or
Dorothea Thompson,
Telecommunications Device for the
Deaf, at (202) 452-3544, Board of
Governors of the Federal Reserve
System, Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
(1) G eneral
The Electronic Fund Transfer Act (15
U.S.C. 1693 et seq.) governs any transfer
of funds that is electronically initiated
and that debits or credits a consumer's
account. This statute is implemented by
the Board’s Regulation E (12 CFR Part
205).
Effective September 24,1981, an
official staff commentary (EFT-2, Supp.
II to 12 CFR Part 205) w as published to
interpret the regulation. The
commentary is designed to provide
guidance to financial institutions in
applying the regulation to specific
situations. The commentary is updated
periodically to address significant
questions that arise. This notice
contains the proposed sixth update. It is
expected that the update will be
adopted in final form in March 1988. The
previous updates were published on
April 6,1983 (48 FR 14880), October 18,
1984 (49 FR 40794), April 3,1985 (50 FR
13180), April 21, 1986 (51 FR 13484), and
April 3, 1987 (52 FR 10734).
(2) P rop osed R ev isio n s
Following is a brief description of the
proposed revisions to the commentary:
Section 205.3— E xem ptions
Q uestion 3-6. Question 3-6 would be
revised to make clear that section 913 of
the EFT Act does not require an
employer to give its employees the
choice of receiving their salary by check
as an alternative to direct deposit.
Instead, an employer may comply with
section 913 by allowing each employee
to choose the institution to receive the
direct deposits.
47592
Federal Register / Vol. 52, No. 240
Section 205.14— Services O ffered b y
F inancial Institution s N o t Holding
Consum er's A ccount
Q uestion 14-4. Question 14—4 would
be revised to make clear that if the
service provider complies with the
conditions set forth in the August 1987
amendments to the regulation (52 FR
30904), it need not provide a periodic
statement. The question as currently
written could be viewed as requiring a
service-providing institution to provide a
periodic statem ent to consumers in all
cases.
Q uestion 14-5. This question is a new
question. It would clarify that in any
POS/ACH program where the-service
provider does not issue debit cards that
will actually be used to initiate transfers
through the system, the service provider
must provide periodic statem ents to
consumers.
Q uestion 14-6. This question is also
new. It deals with the responsibility of a
service provider with regard to error
resolution. It would clarify that the
service provider must reimburse the
consumer for any fees or charges
incurred as a result of the error.
Q uestion 14-7. This question would be
added to the commentary to address an
issue concerning the periodic statement
provided by the account-holding
institution. Specifically, the question
would make clear that the statement
need not show, with respect to POS/
ACH transactions, information other
than the transaction description set
forth in § 205.9(b)(1).
List of Subjects in 12 CFR Part 205
Banks, Banking, Consumer protection.
Electronic fund transfers, Federal
Reserve System, Penalties.
Certain conventions have been used
to highlight the revisions. New language
is shown inside bold-faced arrows,
while language to be removed is set off
with brackets.
(3) Text of Proposed Revisions
Pursuant to authority granted in
section 904 of the Electronic Fund
Transfer Act. 15 U.S.C. 1693b, the Board
proposes to amend the official staff
commentary to Regulation E (12 CFR
Part 205, Supp. II) as follows:
PART 205—[AMENDED]
1. The authority citation for Part 205
continues to read:
Authority: Pub. L. 95-630, 92 Stat. 3730 (13
U.S.C. 1093b).
2. The proposed revisions amend the
official staff commentary on Regulation
E (EFT-2, Supp. II to 12 CFR Part 205) by
revising questions 3-6 and 14-4 and by
J Tuesday, December 15, 1987 / Proposed Rules
adding questions 14-5,14-6, and 14-7,
and read as follows:
Supplement II—Official Staff
Interpretations
Section 205.3— E xem ptions
*
*
*
*
*
Q 3-0: Com pulsory use— salary paym ents.
Preauthorized transfers from a financial
institution to a consumer's account at the
same institution are exempt from the act and
regulation generally but are subject to the
statutory prohibition against requiring an
employee (as a condition of employment) to
receive payroll deposits by electronic means
at a particular institution. Does this
prohibition apply to a financial institution as
an employer?
A: Yes. The prohibition applies to all
employers, including financial institutions. To
comply with the law, a n employer could [ ,
for exam ple.J give its employees a choice of
► institutions to receive directly deposited
payments, or a choice of-* the method of
receiving payment—such as having their pay
deposited at a particular institution, or
receiving payment by check or cash.
As in the case of preauthorized loan
payments, the compulsory-use prohibition
does not require an employer to offer
alternative m eans of payment to employees
who agreed to electronic deposits at a
particular financial institution before May 10.
1980. However, if an employee asks to
terminate this arrangement, the employer
should honor the request. (§ 205.3(d)(2),
section 913)
*
*
*
*
*
Section 205.14— Services O ffered b y
F inancial In stitu tio n s N ot Holding
C onsum er’s A ccount
*
*
*
*
*
Q 14-4: P eriodic statem ent—serviceproviding institution. Does the serviceproviding institution have to provide to the
consumer a periodic statem ent showing
transfers other than electronic fund transfers
made with the service provider's access
device?
A: No. ► A n d if the service provider
complies with the conditions set forth in the
regulation, it need not provide any periodic
statem ent.-* (§ 205.14(a)(2)^(i)-(v)'*)
► Q 14-5: Issuance o f card b y serviceproviding institution. M ay a service provider
provide a PO S/ACH service without sending
periodic statem ents, if it issues its own card
but then allows the consumer to use another
card (such as a bank-issued debit or credit
card) to initiate transfers through the PO S/
ACH system?
A: No. In order to take advantage of the
exception, the debit card for initiating
transfers through the system must be the one
issued by the service provider. Similarly, a
service provider that does not issue debit
cards remains subject to the requirement to
send periodic statements. (§ 205.14(a)(2)(i))-*
► Q 14-6: E rror resolution—respo nsib ility
o f service-providing institution. In a POS/
ACH transaction, the consumer properly
notifies the service-providing institution of an
alleged error. W hat is the service provider's
responsibility?
A: The service provider must investigate
and resolve the error as set forth in the
regulation. If an error in fact occurred, any
fees or charges imposed as a result of the
error, either by the service provider or by the
account-holding institution (for example,
overdraft or dishonor fees) m ust be
reimbursed to the consumer by the service
provider. ( |§ 205.11 and 205.14(a)(3)-(a)(6))-*
►
Q 14-7: C ontent o f perio dic sta tem en t
For POS/ACH transactions, is the accountholding institution required to disclose all the
items specified in § 205.9(b) on its periodic
statement?
A: No. The periodic statem ent need contain
only the transaction descriptive information
specified in § 205.9(b)(1). (§ 205.14(b)(1))-*
*
*
*
*
*
Board of Governors of the Federal Reserve
System. December 9,1987.
William W. Wiles,
Secretary o f the Board.
|FR Doc. 87-28699 Filed 12-14-87; 8:45 am)
BILLING CODE 6 2 1 0-01-U
12 CFR Part 226
I R e g .Z ; T IL-1]
Truth In Lending; Proposed Update to
Official Staff Commentary
a o e n c y : Board of Governors of the
Federal Reserve System.
a c t i o n : Proposed official staff
interpretation.
The Board is publishing for
comment proposed revisions to the
official staff commentaiy to Regulation
Z (Truth in Lending). The commentary
applies and interprets the requirements
of Regulation Z and is a substitute for
individual staff interpretations of the
regulation. The proposed revisions
address a variety of questions that have
arisen about the regulation, and include
new m aterial and changes in existing
material. The proposed changes
address, for example, disclosure
questions raised by the emergence of
conversion features in adjustable-rate
mortgages, as well as the imposition of
fees that are considered finance charges
at the time a credit card plan is
renewed. Proposed commentary also is
included which interprets the Board's
recent rule implementing the
requirement of the Competitive Equality
Banking Act that adjustable-rate
mortgages contain a maximum interest
rate.
DATE: Comments must be received on or
before February 12,1988.
a d d r e s s : Comments should be mailed
to William W. Wiles, Secretary, Board
of Governors of the Federal Reserve
SUMMARY:
Federal Register / Vol. 52, No. 240 / Tuesday, December 15, 1987 / Proposed Rules
System, Washington, DC 20551, or
delivered to the 20th Street courtyard
entrance (20th Street, betw een C Street
and Constitution Avenue, N W .,.
Washington, DC) between 8:45 a.m. and
5:15 p.m. weekdays. Comments should
include a reference to TIL-1. Comments
may be inspected in Room B-1122
betw een 8:45 and 5:15 p.m. weekdays.
FOR FURTHER INFORMATION CONTACT:
The following attorneys in the Division
of Consumer and Community Affairs, at
(202) 452-3667 or (202) 452-2412:
Subparts A and B—Kathleen S. Brueger,
Gerald P. Hurst, John C. Wood
Subpart C—Michael S. Bylsma, Leonard
N. Chanin, Thomas J. Noto
Subpart D—Adrienne D. Hurt, Sharon T.
Bowman
For the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), Eam estine Hill or Dorothea
Thompson, at (202) 452-3544, Board of
Governors of the Federal Reserve
System, Washington, DC 20o51.
SUPPLEMENTARY INFORMATION:
(1) G eneral
The Truth in Lending Act (15 U.S.C.
1601 etseq .) governs consumer credit
transactions and is implemented by the
Board's Regulation Z (12 CFR Part 226).
Effective October 13,1981, an official
staff commentary (TIL-1, Supp. I to 12
CFR Part 226) w as published to interpret
the regulation. The commentary is
designed to provide guidance to
creditors in applying the regulation to
specific transactions and is updated
periodically to address significant
questions that arise. There have been
six general updates so far—the first in
September 1982 (47 FR 41338), the
second in April 1983 (48 FR 14882), the
third in April 1984 (49 FR 13482), the
fourth in April 1985 (50 FR 13181), the
fifth in April 1986 (51 FR 11422), and the
sixth in April 1987 (52 FR 10875). There
was also a limited update concerning
fees for the use of automated teller
machines, which w as adopted in
October 1984 (49 FR 40560). This notice
contains the proposed seventh general
update. It is expected that it will be
adopted in final form in March 1988 with
optional compliance until the uniform
effective date of October 1 for
mandatory compliance.
(2) P rop osed R e v isio n s
The following is a brief description of
the proposed revisions to the
commentary:
Subpart A — G eneral
Section 226.4— Finance Charge— 1(c)
Charges E xcluded from the Finance
Charge— Paragraph 4(c)(4). A cross
reference would be added to comment
4(c)(4)-2—participation fees. The cross
reference is to the commentary to
§ 226.14(c), computation of the annual
percentage rate on periodic statements.
Comment 14(c)-7 discusses those
situations w hen finance charges need
not be included in the annual percentage
rate computed for the periodic
statement. Comment 14(c)—7 currently
deals with fees related to the opening of
the account. In this update, the Board
proposes to also exclude certain account
renewal fees from the computation of
the annual percentage rate on periodic
statements.
Subpart B—O pen-end Credit
Section 226.6—In itia l D isclosure
Statem ent—6(a) F inance Charge—
Paragraph 6(a)(2). Comment 6(a)(2)-7
would be revised to include a reference
to new § 226.30 and the commentary to
that section. Section 226.30 requires
creditors to include a provision setting a
maximum interest rate in their dwellingsecured credit contracts that provide for
changes in the interest rate.
Section 226.7—Periodic S tatem ent—
7(h) O ther Charges. Comment 7(h)-l
would be revised to clarify the treatment
of taxes and filing or notary fees that
are excluded from the finance charge
under § 226.4(e). Even though the
§ 226.4(e) items are not required to be
disclosed as "other charges” under
§ 226.6(b), creditors may include such
charges in a disclosure of “other
charges" on the initial disclosures.
Similarly, these charges may be
included in the amount show n as
"closing costs” or “settlement costs” on
the periodic statement, if the charges
were itemized and disclosed as part of
the closing or settlement costs on the
initial disclosure statement. The revised
comment clarifies this point.
Section 226.14— D eterm ination o f
A nn ual Percentage R ate—14(c) A nnual
Percentage R ate fo r Periodic
Statem ents. Comment 14(c)-7 currently
discusses the exclusion of charges
related to opening an account from
inclusion in the annual percentage rate
computation. This comment would be
revised to also exclude fees that are
imposed for renewal of an account,
provided the fees are not imposed as a
result of specific transactions or specific
account activity. This proposal is based
on the idea that charges related to the
renewal of an account, w hen they are
not related to specific transactions or
specific activity, result in the same
problems already identified in this
comment with respect to fees related to
the opening of an account. Including the
fees, such as charges that are only
imposed on customers that do not
47593
charge a certain amount on their credit
card annually, in the computation of the
annual percentage rate would, in many
cases, result in significant distortions of
the annual percentage rate and the
delivery of possibly misleading
information to consumers.
Subpart C—C losed-end Credit
Section 226.18— C ontent o f
D isclosures—18(b) A m o un t Financed—
Paragraph 18(b)(3). Comment 18(b)(3)—1.
addressing the treatment of prepaid
finance charges in calculations of the
amount financed, would be deleted and
a new comment 18(b)(3)-l substituted in
ifs place. The new comment clarifies
and more fully explains the treatment of
prepaid finance charges, which has been
the source of considerable confusion.
The new comment is not intended to
change the existing rules under
.
§ 226.18(b), but merely to clarify when
creditors have an option to treat certain
fees as prepaid finance charges and
what the implications of that choice are
under § 226.18(b).
18(c) Item ization o f A m ount
Financed— Paragraph 18(c)(l)(iv).
Comment 18(c)(l)(iv)-l, addressing the
itemization of prepaid finance charges,
would be supplemented by a new
sentence at the beginning which clarifies
that only those finance charges
deducted from the principal loan amount
under § 226.18(b)(3) should be itemized
as prepaid finance charges under
§ 226.18(c)(l)(iv). The revision is made
in conjunction with the clarification to
comment 18(b)(3)—1 and is not intended
to change the substance of existing
rules.
18(f) Variable Rate. Comment 18(f)—
9
would be added to discuss the
disclosure requirements under this
section for variable-rate transactions
containing an option permitting
consumers to convert to a fixed rate.
The conversion option is a variable-rate
feature that must be disclosed. The
comment explains how the disclosures
should be given. Consistent with the
revision being made to comment
18(f)(4)—1, described below, it clarifies
that only one hypothetical example
should be disclosed, such as an example
of payment terms resulting from changes
in the index.
This comment is similar to the
paragraph on conversion options
proposed in the fifth commentary update
in December 1985. That proposal was
not adopted then because it was
expected to be incorporated into a
uniform ajustable-rate morigage
disclosure regulation. This regulation
was proposed by the Board in
November, 1986, In the likely event the
47594
Federal Register / Vol. 52, No. 240 / Tuesday, December 15, 1987 / Proposed Rules
uniform disclosure regulation is adopted
in the near future, comment 18(f)—9
would apply only to transactions not
covered by the new requirements.
Paragraph 18(f)(2). Comment 18(f)(2)—
1 would be revised by adding a cross
reference to the requirement in new
§ 226.30 that a maximum interest rate
limitation be included in certain
variable-rate transactions.
Paragraph 18(f)(4). Comment 18(f)(4)—
1 would be revised to clarify that section
18(f)(4) requires only one example of the
effects of a rate increase on payment
terms. The comment states that in
transactions with more than one
variable-rate feature, only one
hypothetical example may be included
in the segregated disclosures.
Subpart D—M iscellaneous
Section 226.28—E ffect on S ta te
Law s—28(a) Inconsistent D isclosure
R equirem ents. Comment 28(a)-13 would
be added to reflect the Board's 1985
determination of the effect of the Truth
in Lending Act on a provision of the
consumer credit law of Arizona. On
September 4,1987, the Board also
published for public comment a
proposed determination of the Federal
law ’s effect on a provision of the
consumer credit law of Indiana (52 FR
33596), and will likely make a final
determination on this proposal later this
year. That determination is expected to
be incorported into the final
commentary update.
Section 226.30—Lim itations on R ates.
On November 9,1987, the Board
published a final rule amending
Regulation Z to incorporate the
substance of section 1204 of the
Competitive Equality Banking Act
(CEBA) into the regulation (52 FR 43178;
technical corrections to original notice
at 52 FR 45611 (1987). The rule requires
creditors who offer dwelling-secured
loans with an adjustable interest rate to
include a maximum rate ceiling in their
credit agreements entered into on or
after December 9,1987. The following
comments would be included as part of
the commentary to § 226.30.
Comments 30-1 through 30-5 would
explain the scope of the rule's coverage;
including examples of w hat types of
obligations are covered and not covered.
Generally stated, the rule is that any
post-effective date credit obligation is
subject to the interest rate ceiling
requirement if it: (1) Is secured by a
dwelling, (2) contractually allows for
interest rate increases, and (3) requires
initial Truth in Lending Act (TILA)
disclosures. A credit obligation subject
to the TILA may also become subject to
§ 226.30 in two other instances: (1) If a
security interest in a dwelling is added
to an obligation that allows for interest
rate increases, or (2) a variable rate
feature is added to a dwelling-secured
credit obligation.
The scope of the substantive law
requirement of section 1204 of CEBA is
limited to obligations subject to the
TILA and Regulation Z. Comment 30-6
generally explains that the other
provisions of the regulation relating to
TILA disclosures and their
corresponding commentaries apply to
§ 226.30 w here appropriate (such as
definitions and exemptions), unless
otherwise specified in the commentary
to § 228.30. For example, for purposes of
coverage, the refinancing and
assumption rules of § 226.20 (a) and (b)
apply. O n the other hand, for purposes
of increasing a m axim um in terest rate
originally im posed under § 226.30 only
the refinancing and assumption rules in
proposed comments 11 and 12 to this
section would apply.
Comments 30-7 through 30-9 explain
the requirement to specify the interest
rate ceiling in credit contracts, including
how the rate may be stated and that
multiple rates may be s e t
Comment 30-10 would be included to
explain that the maximum rate ceiling
must be applicable to increases after
default. This comment applies only in
situ atio nsin which a post-default
agreement is still considered part of the
original obligation subject to Regulation
Z.
Comments 30-11 and 30-12 explain
when the maximum interest rate ceiling
originally set on an obligation m ay be
increased.
Comment 30-13 further explains the
relief provided in footnote 50 to § 226.30.
List o f Subjects in 12 CFR Part 226
Advertising, Banks, Banking,
Consumer protection. Credit, Federal
Reserve System, Finance, Penalties,
Rate limitations. Truth in lending.
Certain conventions have been used
to highlight the proposed revisions. New
language is shown inside bold-faced
arrows, while language that would be
deleted is set off with brackets.
(3) Text of Proposed Revisions
Pursuant to authority granted in
section 105 of the Truth in Lending Act
(15 U.S.C. 1604 as amended) and section
1204 of the Competitive Equality
Banking Act, Pub. L. 100-86,101 Stat.
552, the Board proposes to amend the
official staff commentary to Regulation
Z (12 CFR Part 226 Supp. I) as follows:
1. The authority citation for Part 226
continues to read:
Authority: Sec. 105, Truth in Lending A c t
as am ended by sec. 605. Pub. L. 96-221, 94
Stat. 170 (15 U.S.C. 1604 e t seq.); sec. 1204(c),
Competitive Equality Banking Act, Pub. L
100-86.101 Stat, 552.
2. The proposed revisions am end the
commentary (TIL-1,12 CFR Part 226
Supp. I) by revising comments 4(c)[4)-2;
amending comment 6(a)(2)—7 by adding
two sentences after the second
sentence; revising comment 7(h)-l,
14(c)-7,18(b)(3)—1; amending comment
18(c)(l)(iv)—1 by adding a new first
sentence; adding comment 18(f)—9;
revising comments 18(f)(2)—1 and
18(f)(4)—1; and adding comments 28(a)13 and 30-1 through 30-13 to read as
follows:
Subpart A—General
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Section 226.4— Finance Charge
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4(c) Charges E xclu ded from the Finance
Charge
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Paragraph 4(c)(4)
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2. P articipation fe e s—exclusions. * * *
(See the commentary to § 226.4(b)(2). ► A l s o ,
see comment 14(c)-7 for treatm ent of certain
types of fees excluded in determining the
annual percentage rate for the periodic
statem ent.-4 }
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Subpart B—Open-end Credit
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Section 226.6 In itia l D isclosure S tatem ent
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6(a) Finance Charge
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Paragraph 6(a)(2)
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7. V ariable-rate plan—lim itation s on
increase. In disclosing any limitations on rate
increases, limitations such a s the maximum
increase per year or the maximum increase
over the duration of the plan must be
disclosed. W hen there are no limitations, the
creditor may, but need not, disclose that fact.
► (A maximum interest rate must be included
in dwelling-secured open-end credit plans
under which the interest rate may be
changed. See § 226.30 and the commentary to
that section.)-* Legal limits such as usury or
rate ceilings * * *
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Section 226.7—Periodic S tatem en t
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7(h) O ther Charges
1. Identification. In identifying any "other
charges'’ actually imposed during the billing
cycle, the type is adequately described as
"late charge" or “membership fee.” for
example. Similarly, “closing costs" or
"settlem ent costs," for example, may be used
to describe charges imposed in connection
with real estate transactions that are
excluded from the finance charge under
Federal Register / Vol. 52, No. 240 / Tuesday, December 15, 1987 / Proposed Rules
5 226.4(c)(7), if the sam e term (such as
“closing costs") w a s used in the initial
disclosures and if the creditor chose to
itemize and individually disclose the costs
included in that term. ► E v e n though the
taxes and filing or notary fees excluded from
the finance charge under § 226.4(e) are not
required to be disclosed as “other charges"
under S 226.6(b). these charges m ay be
included in the amount show n as "closing
costs” or "settlem ent costs” on the periodic
statem ent, if the charges were itemized and
disclosed a s part of the “closing costs” or
“settlement costs” on the initial disclosure
statem ent.-* (See comment 6(b)—1 for
examples of “other charges.")
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Section 228.14— D eterm ination o f A n nua l
P ercentage R ate
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14(c) Annual Percentage R ate for Periodic
Statem ents
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7.
Charges rela ted to opening ► o r
renewing-* account. Footnote 33 is
applicable to § 226.14(c)(2) and (c)(3). The
charges involved here do not relate to a
specific transaction or to ►s p e c if ic - * activity
on the account, but relate solely to the
opening ► o r renewing-* of the account. ► A s
a re su lt a fee that is charged annually to
renew a credit card account if the customer
has not m et certain account usage criteria—
and thus m ay not be excluded from the
finance charge under § 226.4(c)(4) (see
comment 4(c)(4)—2)—would not b e included
in the calculation of the annual percentage
rate.-* Inclusion of these charges in the
an nual percentage rate calculation results in
significant distortions o f the annual
percentage rate and delivery of a possibly
misleading disclosure to consumers. The rule
in footnote 33 applies even if the loan fee,
points, o r simitar charges are billed on a
subsequent periodic statem ent or withheld
from the proceeds of the first advance oq the
account.
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Subpart C—Closed-end Credit
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Section 22& 18—C ontent o f D isclosures
18(b) A m ount F inanced
Paragraph 18(b)(3)
1. P repaid fin a n ce charges. ►P r e p a i d
finance charges that are paid separately in
cash or by check should be deducted under
1226.18(b)(3).in calculating the amount
financed. To illustrate:
•
A consumer applies for a loan of $2,500
with a $40 loan fee. The face amount of the
note is $2,500 and the consumer pays the loan
fee separately b y cash or check a t closing.
T he principal loan amount for purposes of
§ 226.18(b)(1) is $2,500 and $40 should be
deducted under 5 226.18(b)(3), thereby
yielding an amount financed of $2,460.
In some instances, a s w hen loan fees are
financed by the creditor, finance charges are
incorporated in the face amount of the
obligation. Creditors h av e the option, when
the charges are not add-on or discount
charges, of either including o r not including
the finance charges in the principal loan
amount that they determine under
§ 226.18(b)(1). W hen the finance charges are
included in the principal loan amount, they
should be deducted as prepaid finance
charges under S 226.18(b)(3).
W hen the finance charges are not included
in the principal loan amount, they should not
be deducted under § 228.18(b)(3). The
following examples illustrate the application
of $ 226.18(b) to this type of transaction. Each
example assum es a loan request of $2,500
with a loan fee of $40: the creditor assesses
the loan fee by increasing the face amount of
the note to $2,540.
• If the creditor determ ines the principal
loan amount under § 226.18(b)(1) to be $2,540,
it has included the loan fee in the principal
loan am ount a nd should deduct $40 as a
prepaid finance charge under $ 226.18(b)(3),
thereby obtaining an amount financed of
$2,500.
• If the creditor determ ines the principal
loan amount under 5 226.18(b)(1) to be $2,500,
it has not included the loan fee in the
principal loan amount and should not deduct
any amount under § 226.18(b)(3), thereby
obtaining an amount financed of $2,500.-*
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18(c) Item ization o f A m o unt F inanced
P aragraph 18(c)(l)(iv)
1. P repaid fin a n ce charge. ► P r e p a i d
finance charges that are deducted under
5 228.18(b)(3) must be disclosed under this
section-* * * *
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interest rate be included in certain variablerate transactions.)-*
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► a C onversion feature. In variable-rate
transactions with an option permitting
consumers to convert to a fixed-rate loan, the
conversion option is a variable-rate feature
that should be disclosed. In making
disclosures under $ 226.18(f), creditors should
disclose the fact that the rate may increase
upon conversion and identify the index used
to set the fixed rate, any limitations on the
increase resulting from conversion, and the
effect of an increase. Because {226.18(f)(4)
permits only one hypothetical exam ple in the
segregated disclosures (such as an example
of the effect on paym ents resulting from
changes in the index), a second hypothetical
exam ple w ould not be given.-*
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Paragraph 18(f)(4)
1. H ypothetical exam ple. T he example
may, at the creditor’s option, appear apart
from the other disclosure. The creditor may
provide either a standard example that
illustrates the term s and conditions of that
type of credit offered by that creditor or an
exam ple th at directly reflects the terms and
conditions of the particular transaction. ► I n
transactions with more than one variablerate feature, only one hypothetical example
should be provided in the segregated
disclosures.-*
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Subpart D—Miscellaneous
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Section 226.28—E ffe ct on S ta te Law s
28(a) Incon sistent D isclosure R equirem ents
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► 1 3 . Preem ption determ ination—A rizona.
Effective October 1,1986, the Board has
determ ined that the following provision in the
state law o f Arizona is preem pted by the
federal law:
• Section 8-621A.2—Use of the term “ the
total sum of $ ___ " in certain notices
provided to borrowers. This term describes
the same item that is disclosed under federal
law as the “total of payments." Since the
state law requires the use of a different term
than federal law to describe the sam e item,
the state-required term is preempted. The
notice itself is not pre em p ted .^
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18(f) V ariable R ate
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47595
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Paragraph 18(f)(2)
1. lim ita tio n s. This includes any maximum
imposed on the amount of an increase in the
rate at any time, as well as any maximum on
the total increase over the life of the
transaction. W hen there are no limitations,
the creditor may, but need not, disclose that
fact. Limitations do not include legal limits in
the nature of usury or rate ceilings under
state or federal statutes or regulations. ► ( S e e
5 226.30 for the rule requiring that a maximum
Section 226.30—Lim itation on R ates
1. Scope o f coverage. T he requirement of
this section applies to dwelling-secured
consum er credit obligations—both open-end
and closed-end credit—entered into on or
after December 9,1987 that are subject to the
Truth in Lending Act and Regulation Z, in
which the annual percentage rate m ay
increase after consummation (or during the
term of the plan, in the case of open-end
credit) a s a result of an increase in the
interest rate component of the finance
charge—whether those increases are tied to
an index or formula or are within a creditor's
discretion. The section applies to credit sales
as well as loans. Examples of obligations
subject to this section include:
• Dwelling-secured credit obligations that
require variable rate disclosures under the
regulation because the interest rate may
Increase during the term of the obligation.
(See the commentaries to sections
§§ 228.6(a)(2)n.l2 and 226.18(f).)
• Dwelling-secured open-end credit plans
that do not require variable rate disclosures
under the regulation but w here the creditor
reserves the contractual right to increase the
interest rate—periodic rate and
corresponding annual percentage rate—
during the term of the plan.
In c o n tra st the following obligations are
not subject to this section, because there is
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Federal Register / Vol. 52, No. 240 / Tuepd<?y, December 15, 1987 / Proposed Rules
no contractual right to increase the interest
rate during the term of the obligation.
• "Shared-equity" or “sharedappreciation" mortgages as described in
comment 18(f)—6.
• Fixed-rate closed-end balloon payment
mortgage loans and fixed-rate open-end plans
with a stated term that the creditor may, but
does not have a contractual legal obligation
to, renew at maturity.
2. R efina nced obligations. On or after
December 9,1907, when a credit obligation is
refinanced, as defined in § 226.20(a) the new
obligation is subject to the requirement of
this section if it is dwelling-secured and
allows for increases in the interest rate.
3. A ssum ptions. On or after December 9,
1987, when a credit obligation is assumed, as
defined in § 226.20(b), the obligation becomes
subject to the requirement of this section if it
is dwelling-secured and allows for increases
in the interest rate.
4. M odifications o f obligations.
Modifications of agreements entered into
prior to December 9,1987 are generally not
covered by this section. For example,
increasing the credit limit on a dwellingsecured, open-end plan with a variable
interest rate entered into before the effective
date of the rule does not m ake the obligation
subject to the requirement of this section. If,
however, a security interest in a dwelling is
ad ded on or after December 9,1987 to a pre
existing credit obligation that allows for
interest rate changes, the obligation becomes
subject to the requirement of this section.
Similarly, if on or after December 9,1987, a
variable interest rate feature is added to a
pre-existing dwelling-secured credit
obligation, the obligation becomes subject to
the requirement of this section.
5. Land trusts. In some states, a land trust
is used in residential real estate transactions.
(See discussion in comment 3(a)—8).) If a
consumer-purpose loan that allows for
interest rate changes is secured by an
assignment of a beneficial interest in a land
trust that holds title to a consumer's dwelling,
that loan is subject to the requirement of this
section.
8. R elationship to other sections. Unless
otherwise provided for in the commentary to
this section, other provisions of the
regulations such as definitions, exemptions,
rules and interpretations also apply to this
section where appropriate. To illustrate:
• An adjustable interest rate businesspurpose loan is not subject to this section
even if the loan is secured by a dwelling
because such credit extensions are not
subject to the regulation. (See generally
§ 226.3(a))
• Creditors subject to the requirement of
this section are only those that fall within the
definition of a creditor in §226.2(a)(17).
7. Consum er credit contract. Creditors are
required to specify a lifetime maximum
interest rate ceiling in their credit contracts—
the instrument that creates personal liability
and generally contains the terms and
conditions of the agreement (for example, a
promissory note or home-equity line of credit
agreement). This requirement is subject to the
general "clear and conspicuous” standard of
the regulation, but no specific rule is
prescribed regarding the format of the
requirement. In some states, the signing of a
commitment letter may create a binding
obligation, for example, constituting
"consum m ation” as defined in § 226.2(a)(13).
The maximum interest rate ceiling must be
included in the credit contract, but a creditor
has the option of including the rate ceiling in
the commitment instrument as well.
8. M anner o f stating the rate ceiling. The
maximum interest rate must be stated either
as a specified amount or in any other m anner
that would allow the consumer to easily
ascertain, at the time of entering into the
obligation, w hat the lifetime interest rate
ceiling will be over the term of the obligation.
For example, the following statem ents would
be sufficiently specific:
• The maximum interest rate will not
exceed X%.
• The interest rate will never be higher
than X percentage points above the initial
rate of Y%.
• The interest rate will not exceed X%, or
X percentage points above (a rate to be
determ ined at some future point in time],
whichever is less.
• The maximum interest rate will not
exceed X% or the state usury ceiling,
whichever is less.
The following statem ents would not
comply with this section:
• The interest rate will never be higher
than X percentage points over the going
m arket rate.
• The interest rate will never be higher
than X percentage points above [a rate to be
determined at some future point in time).
• The interest rate will not exceed the
state usury ceiling which is currently X%.
A creditor m ay state the maximum rate in
terms of a maximum annual percentage rate
that may be imposed. Under an open-end
credit plan, this would be the corresponding
annual percentage rate. (See generally
§ 226.6(a)(2).)
9. M ultiple in terest rate ceilings. Creditors
are not prohibited from setting multiple
interest rate ceilings. For example, on loans
with multiple variable rate features, creditors
m ay establish a maximum interest rate for
each feature. To illustrate, in a variable rate
loan that has an option to convert to a fixed
rate, a creditor may set one maximum
interest rate for the initially imposed indexbased variable rate feature and another for
the conversion option. Of course, a creditor
may establish one maximum interest rate
applicable to all features.
10. Interest rate charged a fter default. State
law may allow an interest rate after default
higher than the contract rate in effect at the
time of default: however, the interest rate
after default must be subject to a maximum
interest rate set forth in a credit obligation
that is otherwise subject to the requirement
of this section. This rule applies only in
stituations in which a post-default agreement
is still considered part of the original
obligation.
11. Increasing the in terest rate ceiling—
general rule. Generally, a creditor may not
increase the maximum interest rate originally
set on a credit obligation unless the consumer
and the creditor enter into a new obligation.
Therefore, under an open-end plan subject to
this section, a creditor may not increase the
maximum rate ceiling imposed merely
because there is an increase in the credit
limit. If an open-end plan is closed and
another opened, a new rate ceiling may be
imposed. Furthermore, w here an open-end
plan subject to this section has a fixed
maturity and a creditor renew s the plan at
maturity, or converts the plan to closed-end
credit, without having a legal obligation to
renew or convert, a new maximum interest
rate may be set at that time. If under the
initial-agreement, the creditor js obligated to
renew or convert the plan, the maximum
interest rate originally imposed cannot be
increased upon renew al or conversion. For a
closed-end credit transaction, a new interest
rate ceiling may be set only if the transaction
is satisfied and replaced by a new obligation
that is dwelling-secured and allows for
increases in the interest rate. (The exceptions
to the general on refinancings in
§ 226.20(a)(l)-(5) do not apply with respect to
increases in the rate ceiling.)
12. Increasing the in terest rate ceiling—
assum ption o f an obligation. If an obligation
subject to this section is assum ed by a new
obligor and the original is released from
liability, the maximum interest rate set on the
obligation may be increased as part of the
assumption agreement. (This rule applies
whether or not the transaction constitutes an
assumption as defined in § 226.20(b).)
13. Transition rules. Linder footnote 50, if
creditors properly include the maximum rate
ceiling in their credit contracts, creditors
need not revise their Truth in Lending
disclosure statem ent forms to add the
disclosures about limitations on an increase
required by §§ 226.6(a)(2) n.12 and 226.18(f)(2)
until October 1,1988. After that date,
creditors are required to state the limitations
on a increase as part of their Truth in Lending
disclosures as well as stating the maximum
interest rate ceiling in their credit contracts.
References
Statute: Competitive Equality Banking Act
of 1987, Pub. L. No. 100-86, 101 Stat. 552.
O ther sections: Sections 226.6(a)(2) n.12
and 226.18(f)(2).
P revious regulation: None.
1987 changes: This section implements
section 1204 of the Competitive Equaiity
Banking Act of 1987, Pub. L. No. 100-W>, 101
Stat. 552 which provides that, effective
December 9, 1987, adjustable rate mortgages
must include a limitation on the interest rate
that may apply during the term of the
mortgage loan. An adjustable rate mortgage
loan is defined in section 1204 as "any loan
secured by a lien on a one-to-four family
dwelling unit, including a condominium unit,
cooperative housing unit, or mobile home,
where the loan is made pursuant to an
agreement under which (he creditor may.
from time to time adjusl the rate of interest."
The rule in this section incorporates section
1204 inlo Regulation Z and limits the scope of
section 1204 to dwelling-secured consumer
credit subject to the Truth in Lending Act. in
which a creditor has the contractual right to
increase the interest rate during the term of
the credit obligation.-*
Federal Register / Vol. 52, No. 240 / Tuesday, December 15, 1987 / Proposed Rules
Board of Governors of the Federal Reserve
System. December 9,1987.
William W. W iles,
Secretary o f the Board.
[FR Doc. 87-28700 Filed 12-14-87; 8:45 am]
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