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Federal R eserve Bank OF DALLAS R O B E R T D. M c T E E R , J R . p re s id e n t AND CHIEF EXECUTIVE O F F IC E R MaXCll 1 1996 DALLAS, TEXAS 75265-5906 Notice 96-25 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Request for Public Comment on Regulation Z (Truth in Lending) DETAILS The Board of Governors of the Federal Reserve System is requesting public comment on whether the rules under Truth in Lending provide adequate protection for consumers seeking home-equity lines of credit. The comments received will be used by the Board in preparing a report to Congress on this issue as required by the Riegle Community Development and Regulatory Improvement Act of 1994. The Board must receive comments by April 1, 1996. Please address com ments 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-0913. ATTACHMENT A copy of the Board’s notice as it appears on pages 2968-69, Vol. 61, No. 20, of the Federal Register dated January 30, 1996, is attached. MORE INFORMATION For more information, please contact Eugene Coy at (214) 922-6201. For additional copies of this Bank’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, F or additional copies, bankers and others are encouraged to use one of the following toll-free num bers 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 A ntonio 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) 2968 Federal Register / Vol. 61, No. 20 / Tuesday, January 30, 1996 / Proposed Rules 1988, require creditors to give consumers extensive disclosures and an educational brochure for home-equity plans at the time an application is provided. For example, creditors m ust provide information about payment terms, fees imposed u nder the plans, and, for variable-rate plans, information about the index used to determine the rate and a fifteen-year history of changes in the index values. In addition, the law imposes certain substantive limitations on home-equity plans, such as limiting the right of creditors to terminate a plan and accelerate an outstanding balance or to change the terms of a plan after it has been opened. FOR FURTHER INFORMATION CONTACT: The Board’s Regulation Z (12 CFR Obrea Poindexter, Staff Attorney, part 226) im plements the Truth in Division of Consumer and Community Lending Act. Regulation Z requirements Affairs, Board of Governors of the for home-equity lines of credit closely Federal Reserve System, at (202) 452— mirror the statutory requirements. As 3667 or 452—2412. For users of Telecommunications Device for the Deaf the statute sets forth specific requirements that are restrictive in (TDD), please contact Dorothea many cases, the rules implementing the Thompson at (202) 452—3544. statute are similarly restrictive. SUPPLEMENTARY INFORMATION: Specific rules on home-equity lines of credit are contained in Regulation Z, I. Background §§ 226.5b, 226.6(e), 226.9(c)(3), and The Home Ownership and. Equity 226.16(d) and its accompanying Protection Act (HOEPA) amendments to commentary. Requirements for homethe Truth in Lending Act, contained in equity lines of credit apply to all openthe Riegle Community Development and end credit plans secured by a Regulatory Improvement Act of 1994 consum er’s dwelling. The rules require (RCDRIA) require special disclosures creditors offering home-equity plans and impose substantive limitations on (and third-parties in some instances) to certain closed-end home-equity loans give specific disclosures about costs and w ith rates or fees above a certain terms and limits how creditors may percentage or amount. The requirements structure programs. and prohibitions contained in the Format and Timing o f Disclosures HOEPA, which became effective in October 1995, do not apply to open-end In most cases, at the time a consumer home-secured lines of credit. The is provided w ith an application for a legislative history notes that home-secured line of credit, disclosures congressional hearings on home-equity m ust be given. These disclosures must lending practices revealed little be in writing, grouped together, and evidence of abusive practices in the segregated from all unrelated open-end home-equity credit market. information. Each consum er m ust also The legislative history also states that, if be given an educational pam phlet the market changes or if the Board finds prepared by the Board entitled “When that open-end credit plans are being Your Home is On the Line: What You used to circumvent the HOEPA, the Should Know About Home Equity Lines Board has the authority to address of Credit,” or a sim ilar substitute. abu sesund er section 152(d) of the Program-specific initial disclosures HOEPA. m ust be given in writing before the first In addition, the RCDRIA directs the transaction is made under the plan. Board to conduct a study and submit a Content o f Disclosures report to the Congress, including Creditors offering home-equity plans recommendations for legislation, on must provide information to consumers w hether existing rules for open-end that is required under section 226.5b of home-equity lending programs provide the regulation. This includes, but is not consumers obtaining home-equity lines limited to, the following: of credit w ith adequate protections. (1) The payment terms, including the II. Current Rules for Home-Equity Lines length of the draw and any repayment o f Credit period, an explanation of how the minimum periodic payment will be The Home Equity Loan Consumer Protection Act amendm ents to the Truth determined and the timing of payments, and an example based on a $10,000 in Lending Act, enacted in November to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551. Comments also may be delivered to Room B—2222 of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard station in the Eccles Building courtyard on 20th Street NW. (between Constitution Avenue and C Street) at any time. Comments may be inspected in Room M P-500 of the M artin Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board’s rules regarding the availability of information. FEDERAL RESERVE SYSTEM 12 CFR Part 226 [ R e g u la tio n Z; D o c k e t N o. R -0913] Truth in Lending AGENCY: Board of Governors of the Federal Reserve System. ACTION: Request for comments. The Board is soliciting comment on w hether the Truth in Lending Act cost disclosure and other rules for open-end home-secured lines of credit provide adequate consumer protections. The Riegle Community Development and Regulatory Improvement Act of 1994 directs the Board to submit a report to the Congress regarding this matter. Under present law, creditors offering open-end homeequity lending programs have to provide detailed disclosures at the time a consum er applies for a line of credit. The law also imposes specific substantive limitations on how these programs may be structured; however they are not subject to the type of disclosure and restrictions imposed by the Home Ownership and Equity Act of 1994 for closed-end credit. DATES: Comments m ust be received on or before April 1,1996. ADDRESSES: Comments should refer to Docket No. R-0913, and may be m ailed SUMMARY: Federal Register / Vol. 61, No. 20 / Tuesday, January 30, 1996 / Proposed Rules outstanding balance and a recent annual percentage rate (APR):1 (2) The APR; (3) Fees imposed by the creditor and third parties; (4) A statement that negative am ortization may occur and that as a result a consum er’s equity in a home may decrease; and (5) Several statements, including a statement that loss of the home could occur in the event of default. Subsequent Disclosures Subject to certain limitations on changes in terms, creditors are generally required to send the consumer a fifteenday advance notice if a term on the plan is changed. In addition, a notice must also be sent if additional extensions of credit are prohibited or if the credit lim it is reduced; this notice m ust be sent no later than three business days after the action is taken. 12 CFR 226.9(c) Limitations on Home-equity Plans Regulation Z prescribes substantive limitations on the changes that a creditor can make in the annual percentage rate, termination of a plan, and any other change in the credit terms that were initially disclosed. For example, a creditor cannot terminate a plan and dem and repayment of the entire outstanding balance unless the consumer has engaged in fraud or misrepresentation, failed to meet the repayment terms, or adversely affected the creditor’s security by action or inaction. A creditor generally cannot change a term unless the change was provided for in the initial agreement, the consumer agrees to the change in writing, or the change is insignificant or “unequivocally beneficial” to the consumer throughout the remainder of the plan; and cannot apply a new index and margin unless the original index becomes unavailable. 12 CFR 226.5b(f) Advertising Creditors generally trigger additional disclosures, in advertisements, if they advertise account-opening disclosures relating to finance charges and other significant charges or repayment terms for a plan. If a home-equity plan advertisement contains a trigger term, creditors m ust also state the following: (1) The periodic rate used to compute the finance charge (expressed as an APR); 1The example must show the minim um periodic payment and the time it would take to repay the $10,000 balance if the consumer made only those payments and obtained no additional credit extensions. (2) Loan fees that are a percentage of the credit limit, along w ith an estimate of other plan fees; and (3) The maximum APR that could be imposed in a variable-rate plan. If a minimum payment for the homeequity plan is stated, the advertisement must also state if a balloon payment will result. For a variable-rate plan, if the advertisement states a rate other than one based on the contract’s index and margin, the advertisement must also state how long the introductory rate will be in effect. The introductory rate and the fully-indexed rate m ust be disclosed w ith equal prominence. In addition, creditors cannot advertise home-equity plans as “free money” (or using a similar term) and cannot discuss the tax consequences of interest deductions in a misleading way. 12 CFR 226.16(d) III. Request for Comments The Board requests comment on w hether the existing home-equity lending rules provide adequate protections for consumers and whether any statutory or regulatory changes are warranted to ensure adequate disclosure and other consumer protections in connection with open-end home-equity lines of credit. The Board will submit its report to the Congress in early fall 1996, based on the comments of interested parties and its own analysis. By order o f the B oard of G overnors of the Federal Reserve System , January 24,1996. William W. Wiles, Secretary o f the Board. [FR Doc. 96-1651 Filed 1 -2 9 -9 6 ; 8:45 am] BILLING CODE 6 2 1 0 -0 1 -P 2969
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