The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
F ederal R eser v e B ank
OF DALLAS
ROBERT
D. M c T E E R , J R .
PRESIDENT
AND CHIEF E X ECU TIV E O F F IC E R
DALLAS , TE XAS
January 2, 1996
75265-5906
Notice 96-01
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Request for Public Comment on
Revisions to the Official Staff Commentary
to Regulation Z (Truth in Lending)
DETAILS
The Board of Governors of the Federal Reserve System has requested public
comment on proposed revisions to the Official Staff Commentary to Regulation Z (Truth
in Lending).
The proposed update provides guidance mainly on issues related to reverse
mortgages and mortgages bearing rates above a certain percentage or fees above a
certain amount. Reverse mortgage transactions provide advances primarily to elderly
homeowners and rely principally on the home’s value for repayment triggered by a
permanent move from the home, death, or sale of the home.
The revisions also address issues of general interest, such as the treatment of
debt cancellation contracts and a card issuer’s responsibilities when a cardholder asserts
a claim or defense relating to a merchant dispute.
The Board must receive comments by February 2, 1996. Comments should
be addressed 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-0903.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 62764-72, Vol. 60, No.
235, of the Federal Register dated December 7, 1995, is attached.
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)
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,
FEDERAL REGISTER
December 7, 1995
Pages 62764-72
Request for Comments on
Proposed Revisions to
the Official Staff" Commentary
on Regulation Z
(Truth in Lending)
Proposed Rules
■ Federal Register
Vol. 60, No. 235
Thursday, December 7, 1995
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.
and mortgages bearing rates or fees
above a certain percentage or amount),
Jane Ahrens, Senior Attorney, or Kyung
Cho-Miller, Kurt Schumacher, or
Manley Williams, Staff Attorneys,
Division of Consumer and Community
Affairs, Board of Governors of the
Federal Reserve System, at (202) 4523667 or 452-2412. For users of
Telecommunications Device for the Deaf
(TDD) only, please contact Dorthea
Thompson, at (202) 452-3544.
homeowners and rely principally on the
home’s value for repayment. In large
measure, the proposed commentary
incorporates the supplementary
information accompanying that
rulemaking, and addresses other issues
that have arisen since the publication of
the final rule.
The Congress recently amended TILA
FEDERAL RESERVE SYSTEM
provisions concerning finance charge
disclosures for home mortgage loans.
12 CFR Part 226
The Truth in Lending Act Amendments
[Regulation Z; Docket No. R-0903]
of 1995 (“1995 Act,” Public Law 104SUPPLEMENTARY INFORMATION
29,109 Stat. 271) clarify the treatment
Truth in Lending
I. Background
of several fees typically associated with
AGENCY: Board of Governors of the
real estate-related lending, and revise
The purpose of the Truth in Lending
Federal Reserve System.
tolerances for finance charge
Act (TILA; 15 U.S.C. 1601 et seq.) is to
ACTION: Proposed rule; official staff
calculations for loans secured by real
promote the informed use of consumer
interpretation.
credit by requiring disclosures about its estate or dwellings. The statutory
amendments, which were enacted in
terms and cost. The act requires
SUMMARY: The Board is publishing for
response to a number of lawsuits, also
creditors
to
disclose
credit
terms
and
comment proposed revisions to the
address consumer remedies for
the
cost
of
credit
as
an
annual
official staff commentary to Regulation
creditors’ past and future disclosure
percentage
rate
(APR).
The
act
requires
Z (Truth in Lending). The commentary
violations. The 1995 Act became
applies and interprets the requirements additional disclosures for loans secured effective immediately for provisions
by
a
consumer’s
home,
and
permits
of Regulation Z. The proposed update
consumers to cancel certain transactions relating to tolerances, past and future
provides guidance mainly on issues
liability, and the exclusion of certain
that involve their principal dwelling. It
relating to reverse mortgages and
closing costs from the finance charge
also
imposes
limitations
on
some,
credit
mortgages bearing rates above a certain
calculation. The statutory amendments
transactions secured by a consumer’s
percentage or fees above a certain
that exclude certain real estate related
principal
dwelling.
The
act
is
amount. It also addresses issues of
closing costs from the finance charge
implemented
by
the
Board’s
Regulation
general interest, such as the treatment of
Z (12 CFR part 226). The Board also has generally codify interpretations
debt cancellation contracts and a card
previously issued by the Board, and no
an official staff commentary (12 CFR
issuer’s responsibilities when a
further revisions to the commentary are
part
226
(Supp.
I))
that
interprets
the
cardholder asserts a claim or defense
contemplated at this time.
regulation,
and
provides
guidance
to
relating to a merchant dispute.
Another statutory provision
creditors in applying the regulation to
DATES: Comments must be received on
categorizes all brokers fees paid by the
specific transactions. It is updated
or before February 2,1996.
consumer to the broker (or to the
periodically to address significant
ADDRESSES: Comments should refer to
creditor for delivery to the broker) as
questions that arise, and is a substitute
Docket No. R-0903, and may be mailed
finance charges; this provision will
for individual staff interpretations. The
to William W. Wiles, Secretary, Board of Board expects to adopt amendments in
become effective 60 days after the Board
Governors of the Federal Reserve
issues a final rule or no later than 12
final form in March 1996 with
System, 20th Street and Constitution
months after enactment of the
compliance optional until October 1,
Avenue, N.W., Washington, DC 20551.
amendments to the act. It is anticipated
1996, the effective date for mandatory
Comments also may be delivered to
that the Board will issue a proposed
compliance.
Room B—2222 of the Eccles Building
amendment to Regulation Z addressing
On March 24,1995, the Board
between 8:45 a.m. and 5:15 p.m.
published amendments to Regulation Z brokers fees during the first quarter of
weekdays, or to the guard station in the
implementing the Home Ownership and 1996, and will make any changes to the
Eccles Building courtyard on 20th
Equity Protection Act of 1994, contained commentary relating to the treatment of
Street, N.W. (between Constitution
brokers fees as part of that rulemaking.
in the Riegle Community Development
Avenue and C Street) at any time.
and Regulatory Improvement Act of
II. Proposed Commentary
Comments may be inspected in Room
1994, Public Law 103-325,108 Stat.
MP-500 of the Martin Building between 2160 (60 FR 15463). These amendments, Subpart A—General
9:00 a.m. and 5:00 p.m. weekdays,
which became effective on October 1,
Section 226.4—Finance Charge
except as provided in 12 CFR 261.8 of
impose new disclosure requirements
4(a) Definition
the Board’s rules regarding the
and substantive limitations on certain
availability of information.
closed-end mortgage loans bearing rates
Proposed comment 4(a)-8 addresses
FOR FURTHER INFORMATION CONTACT: For
or fees above a certain percentage or
the treatment of fees charged in
Subparts A and B (open-end credit),
amount. The amendments also-impose
connection with debt cancellation
Jane Jensen Gell or Obrea O. Poindexter, new disclosure requirements for reverse agreements. In the case of motor vehicle
Staff Attorneys; for Subparts A, C and E mortgage transactions, which provide
loans, debt cancellation agreements
(closed-end credit, reverse mortgages,
advances primarily to elderly
(sometimes referred to as “gap”
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules
agreements) offer protection to
consumers in the event the vehicle is
stolen or destroyed and the motor
vehicle insurance proceeds are
insufficient to extinguish the debt.
Under these agreements, in return for a
fee paid, the consumer is not held liable
for the remaining balance due on the
loan. Other types of agreements may
provide for debt cancellation if the
borrower dies or becomes disabled. In
some states, debt cancellation
agreements may be regulated as or
otherwise considered insurance
contracts.
The Board has received questions
from creditors about the proper
treatment of fees for debt cancellation
agreements. Section 226.4(d) allows a
creditor to exclude optional credit life
and certain property insurance
premiums from the finance charge if the
creditor meets certain conditions,
including disclosure of the premium.
Some creditors believe that debt
cancellation fees should uniformly be
treated as § 226.4(d) insurance
premiums under the regulation. These
creditors generally believe that the fees
for optional debt cancellation contracts
should be excluded from the finance
charge. An alternative view is that the
fees may be treated as insurance
premiums only if the contract is
considered insurance under state law.
Proposed comment 4(a)—8 follows the
state law analysis. The proposed
comment provides that if a debt
cancellation agreement is regulated as or
considered insurance under state law,
the fee may be excludable from the
finance charge in accordance with the
rules in § 226.4(d). That is, under the
proposed comment the fee may be
excludable if the insurance is properly
characterized as credit life, accident,
health or loss-of-income insurance as
specified in § 226.4(d)(1), or as
insurance against loss of or damage to
property, or against liability arising out
of the ownership or use of property as
specified in § 226.4(d)(2). Insurance
protecting the creditor against credit
loss is a finance charge. (See
§ 226.4(b)(5) and accompanying
commentary.)
If state law does not regulate or
consider the agreement to be insurance,
then the general rules in § 226.4(a)
apply. Under § 226.4(a), debt
cancellation fees paid to a creditor are
treated as finance charges because they
are charged by the creditor as an
incident to the extension of credit and,
although optional, the fees are not of a
type payable in a comparable cash
transaction.
4(d) Insurance
Comment 4(d)—5 would be revised to
clarify that insurance is deemed to be
required—and the premiums treated
and disclosed as finance charges—when
a consumer has several alternatives to
fulfill a condition to a credit extension,
one of which is to purchase insurance
from the creditor and the consumer
elects that option. For example, where,
as a condition to obtaining a credit card,
a consumer must purchase a life
insurance policy from the creditor,
assign an existing policy, or pledge
another form of security, such as a
certificate of deposit, if the consumer
purchases the insurance from the
creditor, the premiums are finance
charges.
Subpart B—Open-end Credit
Section 226.6—Initial Disclosure
Statement
6(b) Other Charges
Comment 6(b)—1 would be revised to
state that a membership fee to join an
organization is an “other charge” if the
primary benefit of membership is the
opportunity to apply for a credit card
and other benefits are incidental. For
example, if an organization offers, in
addition to the opportunity for a credit
card account, only minor benefits such
as a newsletter and a member
information hotline, a fee to join the
organization should be disclosed as an
“other charge.”
Section 226.12—Special Credit Card
Rules
12(c) Right o f Cardholder to Assert
Claims or Defenses Against Card Issuer
12(c)(2) Adverse Credit Reports
Prohibited
Proposed comment 12(c)(2)-2
provides guidance on when a card
issuer may consider a dispute settled for
purposes of reporting an amount in
dispute as delinquent. Until the card
issuer conducts a reasonable
investigation, the disputed amount may
not be collected or reported as
delinquent.
Section 226.14—Determination of
Annual Percentage Rate
14(c) Annual Percentage Rate for
Periodic Statements
Comment 14(c)—10 would provide
guidance on calculating the APR on
periodic statements when a transaction
occurs at the end of one cycle, but is
posted to the account in a subsequent
cycle, such as when a cardholder
obtains a cash advance (for which there
is a transaction fee) on the last day of
62765
a billing cycle and the transaction is
posted to the cardholder’s account on
the second day of the following cycle.
The transaction (and fee, if applicable)
are included on the statement reflecting
the cycle in which the transaction
posted, and the proposed comment
clarifies how creditors calculate the
APR to reflect the delay in posting.
Subpart C—Closed-end Credit
Section 17—General Disclosure
Requirements
17(c) Basis o f Disclosure and Use of
Estimates
Paragraph 17(c)(1)
Comment 17(c)(l)-10 would be
revised to clarify that if a contract for a
variable rate transaction provides for a
delay in the implementation of changes
to an index value, the creditor may use
any index value in effect during the
delay period. For example, if a contract
specifies that rate changes are based on
the index value in effect 45 days before
the change date, the creditor may use
any index value in effect within that 45day delay period.
Proposed comment 17(c)(l)-18
addresses pawn transactions. There has
been some confusion about the coverage
and compliance of pawn transactions
under the TILA. The comment clarifies
how some of the items required to be
disclosed under § 226.18 such as the
amount financed, the finance charge,
and the percentage should be disclosed.
Disclosure of these transactions under
the open-end credit provisions is not
addressed based on the belief'that
typically pawn transactions are not
open-end credit transactions.
Section 18—Content of Disclosures
18(c) Itemization o f Am ount Financed
Paragraph 18(c)(l)(iii)
Proposed comment 18(c)(l)(iii)—2
concerns the treatment of certain
charges known as “upcharges” that
creditors may sometimes add to a fee
charged by a third party for services
such as maintenance and service
contracts on automobiles. The comment,
which only applies in cases where a
creditor charges the same amount of an
upcharge in both cash and credit
transactions, offers flexibility in how
creditors can choose to itemize and
disclose the amount charged for the
service (including the amount of the
upcharge). The treatment of these fees
for purposes of disclosures under the
TTLA does not govern the imposition or
amount of such upcharges.
62766
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules
Section 226.20—Subsequent Disclosure
Requirements
20(a) Refinancings
The Board has been asked whether
certain actions constitute adding a
variable-rate feature for purposes of this
section. Comment 20(a)-3 would be
revised to clarify that changing the
index on a variable-rate transaction is
not adding a variable-rate feature, nor is
substituting an index for one that no
longer exists.
Subpart E—Special Rules for Certain
Home Mortgage Transactions
Section 226.31—General Rules
31(c) Timing o f Disclosures
31(c)(1) Disclosures for Certain Closedend Home Mortgages
Numerous creditors have suggested
that the rule for furnishing disclosures
should be deemed to be satisfied as long
as the creditor places the disclosures in
the mail three days prior to
consummation. The word “furnish” for
purposes of § 226.32 disclosures has the
same meaning as “deliver” for the other
disclosure requirements of Regulation Z.
Accordingly, proposed comment
31(c)(1)—1 clarifies that disclosures are
furnished, or delivered, when received
by the consumer, not when mailed by
the creditor.
Proposed comment 31(c)(l)-2 clarifies
that creditors may rely on the definition
of “business days” in comment 2(a)(6)2 for purposes of complying with the
timing requirements for furnishing
disclosures under this section.
31(c)(l)(i) Change in Terms
Proposed comment 31(c)(l)(i)—1
clarifies that a creditor must provide
new § 226.32(c) disclosures if a change
in terms (whether in the formal written
agreement or otherwise, such as an oral
agreement affecting the amount of a fee
required to be paid at closing) makes the
previously provided disclosures
inaccurate.
31(c)(l)(iii) Consumer’s Waiver o f
Waiting Period Before Consummation
Proposed comment 31(c)(l)(iii)-l
provides guidance on circumstances in
which the consumer may modify or
waive the right to the three-day waiting
period to meet bona fide personal
financial emergencies. Generally,
whether a bona fide personal financial
emergency exists is a matter to be
decided between the parties. The
provisions in comments 23(e)-l and
34(e)-2 apply to this section. For
example, a consumer’s waiver does not
automatically insulate the creditor from
liability for failing to provide the threeday waiting period.
published each yearend and
incorporated into the commentary the
following spring.
31(c)(2) Disclosures for Reverse
Paragraph 32(b)(1)
Mortgages
Proposed comment 31(c)(2)—1 clarifies Paragraph 32(b)(l)(i)
the definition of “business day” for
Comment 32(b)(l)(i)—1 clarifies the
purposes of providing reverse mortgage
scope of items defined as finance
disclosures to consumers.
charges under § 226.4 that are
considered “points and fees.”
31(d) Basis o f Disclosures and Use o f
Estimates
Paragraph 32(b)(1)(H)
Section 226.31(d) mirrors the
Proposed comment 32(b)(l)(ii)—1
provisions in § 226.5(c) and § 226.17(c),
addresses the treatment o f mortgage
and allows the use of estimates when
brokers fees. Section 226.32(b)(1)
information necessary for an accurate
defines “points and fees” to include all
disclosure is unknown to the creditor,
finance charges (except interest or the
provided that the disclosure is clearly
time-price differential), as well as all
identified as an estimate. Proposed
compensation paid to mortgage brokers.
comment 31(d)—1 clarifies that when a
Accordingly, compensation paid to a
disclosure required by § 226.32 is
mortgage broker must be included as
marked as an estimate and becomes
inaccurate due to a change in terms that “points and fees” even if the amount is
not disclosed as a finance charge.
occurs before consummation, new
Section 32(b)(l)(ii) at the time it was
disclosures must be provided.
issued was interpreted to include all
Section 226.32—Requirements for
mortgage broker fees that are required to
Certain Closed-end Home Mortgages
be disclosed under the Real Estate
Settlement Procedures Act. Under that
32(a) Coverage
interpretation, amounts paid by
Paragraph 32(a)(l)(i)
creditors to mortgage brokers would be
included,- as are amounts paid by
Proposed comment 32(a)(l)(i)—1
consumers. Upon further analysis, a
clarifies when an application is
narrower interpretation is being
received, for purposes of determining
proposed. Proposed comment
which Treasury securities yield should
32(b)(l)(ii)-l states that for purposes of
be used to compare the APR. Proposed
the “points and fees” test, only
comment 32{a)(l)(i)-2 provides
mortgage broker fees paid by the
guidance on comparing loan maturities
consumer are inchided in the
to yields on Treasury securities, for
calculation. The comment further
purposes of determining whether a
clarifies that mortgage broker fees
mortgage loan is covered by § 226.32.
Proposed comment 32(a)(l)(i)-3 clarifies should not be double counted; that is,
where such fees are included in the
rules for calculating the APR for
finance charge, they are already
variable-rate, discount, premium, or
included as “points and fees” under
stepped-rate loans.
Proposed comment 32(a)(l)(i)-4
§ 226,32(b)(l)(i) and should not be
clarifies which Treasury security to use
counted again under § 226.32(b)(l)(ii).
for the APR test, and where the yields
32(c)(3) Regular payment
on these securities can be found.
Proposed comment 32(c)(3)—1 clarifies
Creditors may request the Board
that the regulation contemplates the
statistical release H-15 by calling (202)
disclosure of monthly or other regularly
452-3245. Treasury security yields are
scheduled periodic payments, such as
also available from the Federal Reserve
Bank of New York by calling (212) 720- bimonthy or quarterly. The comment
also clarifies that there must be at least
6619.
two payments, and they must be in an
Paragraph 32(a)(1)(H)
amount and occur at such intervals that
Creditors must follow the rules in
the payments fully amortize the loan.
§ 226.32 if, in part, the total points and
For the amount of the payment,
fees payable by the consumer at or
proposed comment 32(c)(3)-2 clarifies
before loan closing exceed the greater of that creditors may rely on § 226.18(g) for
$400 or 8 percent of the total loan
guidance.
amount. The Board is required to adjust
32(c)(4) Variable-rate
the $400 amount, based on the annual
percentage change in the Consumer
Proposed comment 32(c)(4)-l
Price Index as reported on June 1,
provides additional guidance on
effective January 1 of the following year. calculating “worst-case” payment
The Board anticipates that adjustments
examples when the transaction has
to the $400 dollar figure will be
more than one payment stream.
Federal Register / Vol. 60, No: 235 / Thursday, December 7, 1995 / Proposed Rules
32(d) Limitations
32(d)(l)(i) Balloon Payment
The statute and regulation prohibit
the use of balloon payments for
mortgages covered by § 226.32 that have
a term of less than five years. For such
loans, the repayment schedule must
fully amortize the outstanding principal
balance through “regular periodic
payments.” The proposed comment
provides guidance on the definition of
“regular periodic payments.”
32(d)(2) Negative Amortization
Proposed comment 32(d)(2)—1
clarifies that the prohibition against
including negative amortization in a
mortgage covered by § 226.32 does not
extend to increases in the principal
balance unrelated to the payment
schedule, such as an increase related to
the purchase of force-placed insurance.
32(d)(4) Increased Interest Rate
Proposed comment 32(d)(4)—1
clarifies that a rate increase in a
variable-rate transaction is not
prohibited by the act or regulation, even
if the rate increases after the consumer
has defaulted on the obligation.
32(d)(5) Rebates
Section 226.32(d)(5) restricts how
creditors may calculate refunds of
interest when a mortgage loan subject to
this section is accelerated due to a
consumer’s default. The proposed
comment clarifies that this restriction
applies to refunds of interest only, and
not to refunds of other items such as
origination fees or points. In addition,
the proposed comment clarifies that the
refund calculation includes odd-days
interest, regardless of when it is paid.
32(d)(7) Prepayment Penalty
Exception
Proposed comment 32(d)(7)—1
provides guidance on calculating a
consumer’s debt-to-income ratio.
Proposed comment 32(d)(7)—2 clarifies
that verification of employment satisfies
the regulation’s requirement that the
creditor obtain “payment records for
employment income.”
32(e) Prohibited Acts and Practices
32(e)(1) Repayment Ability
For mortgage loans subject to
§ 226.32, the regulation prohibits
creditors from engaging in a pattern or
practice of extending such credit based
on the consumer’s collateral without
regard to the consumer’s repayment
ability, including the consumer’s
current and expected income, current
obligations, and employment. Proposed
comment 32(e)(1)-! provides guidance
on determining the consumer’s
repayment ability. The comment
clarifies that creditors may rely on the
same information provided by the
consumer in connection with
§ 226.32(d)(7), or other information,
including information about unverified
income.
62767
outstanding loan balance) will be made
upon the occurrence of an event (for
example, the consumer’s death within a
certain period of time).
III. Form of Comment Letters
Comment letters should refer to
Docket No. R-0903, and, when possible,
should use a standard courier typeface
with a type size of 10 or 12 characters
per inch. This will enable the Board to
convert the text to machine-readable
form through electronic scanning, and
will facilitate automated retrieval of
comments for review. Also, along with
an original document in paper form,
commenters are encouraged to submit
their comments on 3V2 inch or 5V4 inch
computer diskettes in any IBMcompatible DOS-based format.
Section 226.33—Requirements for
Reverse Mortgages
The U.S. Department of Housing and
Urban Development (HUD) has
modified its software regarding reverse
mortgages originated under the Home
Equity Conversion Mortgage (HECM)
program to conform with die
requirements and the terminology used
for reverse mortgages under Regulation
Z and the appendices to the regulation.
(The HECM program has been
List of Subjects in 12 CFR Part 226
temporarily suspended, pending the
reauthorization of funding by the
Advertising, Banks, Banking,
Congress.) For example, HUD’s software Consumer protection, Credit, Federal
now allows creditors to use the initial
Reserve System, Mortgages, Reporting
interest rate, rather than the “expected
and recordkeeping requirements, Truth
interest rate,” in calculating the total
in lending.
annual loan cost rate for a variable-rate
Certain conventions have been used
transaction. Although creditors may
to highlight the proposed revisions to
find HUD’s software helpful in meeting the regulation. New language is shown
the disclosure requirements under
inside bold-faced arrows, while
Regulation Z, they should first take
language that would be deleted is set off
steps to verify the accuracy of the
with bold-faced brackets. Comments are
software, including any instructions,
numbered to comply with new Federal
before using it. Neither HUD nor the
Register publication rules.
Board provides a “safe harbor” to
For the reasons set forth in the
creditors regarding use of this software.
preamble, the Board proposes to amend
12 CFR part 226 as follows:
33(a) Definition
Proposed comment 33(a)—1 addresses PART 226—TRUTH IN LENPING
an implication relative to the definition (REGULATION Z)
of a reverse mortgage transaction under
1. The authority citation for part 226
the regulation. If a transaction
continues to read as follows:
structured as a reverse mortgage loan is
a recourse transaction (that is, one that
Authority: 12 U.S.C. 3809, 15 U.S.C. 1604
and 1637(c)(5).
v
imposes personal liability on the
consumer for the difference between the
2. In supplement I to Part 226, under
loan balance at maturity and the value
section 226.4—Finance Charge, the
of the property), it is not a reverse
following amendments would be made:
mortgage under § 226.33. Thus, if the
1. Under 4(a) Definition., a new
transaction is also closed-end, and the
paragraph 8. would be added: and
annual percentage rate or the points and
2. Under 4(d) Insurance., paragraph 5.
would be revised.
fees assessed in the transaction exceed
The additions and revisions read as
those specified in § 226.32(a)(1), the
transaction is covered by § 226.32. Such follows:
transactions may not generally contain a Supplement I—Official Staff
balloon payment or negative
Interpretations
amortization (both of which are found
*
■k
*
*
*
in reverse mortgages by definition).
Open-end credit plans are exempt from
Subpart A—General
the provisions of § 226.32(a).
*
*
*
*
*
33(c)(2) Payments to Consumer
Section 226.4— Finance Charge
Proposed comment 33(c)(2)—1
4(a) Definition.
provides guidance where the legal
*
*
*
*
*
obligation of a reverse mortgage
► 8 . Treatment o f Debt Cancellation
transaction includes a benefit, such as a Agreements. Some creditors may require debt
“death benefit,” in which a payment to
cancellation agreements while others may
the consumer’s estate (or a credit to the
offer them as an option. In the case of motor
62768
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules
vehicle loans, these agreements, sometimes
referred to as “gap” agreements, offer
protection to consumers if the vehicle is
stolen or destroyed and the motor vehicle
insurance proceeds are insufficient to
extinguish the debt. In return for a fee, the
consumer will not be held liable for the
remaining balance due on the loan. Other
types of agreements provide for debt
cancellation if the borrower dies or becomes
disabled. In some states these agreements are
regulated as or otherwise considered
insurance under state law.
i. Insurance. If the agreement is regulated
as or considered insurance under state law,
the fee paid by the consumer may be
excludable from the finance charge if it meets
the requirem ents in § 226.4(d). Insurance
protecting the creditor against credit loss,
however, is a finance charge under
§ 226.4(b)(5).
ii. Other. If the agreement is not considered
■j * * *
v. A membership or participation fee for a
package of services that includes an openend credit feature, unless the fee is required
w hether or not the open-end credit feature is
included. For example, a membership fee to
join a credit union is not an “other charge,”
even if membership is required to apply for
credit. ► F o r the fee to be excluded from
disclosure as an “other charge,” however, the
package of services must have some
substantive purpose other than access to the
credit feature. For example, if the primary
benefit of membership in an organization is
the opportunity to apply for a credit card,
and the other benefits offered are incidental
to the credit feature, the membership fee is
an “other charge.”- ^
*
*
*
*
*
i. The denominator shall be calculated as
if the transaction occurred on the first day of
the billing cycle, and
ii. The numerator shall include the amount
of the transaction charge plus all finance
charges derived from the application of the
periodic rate to the am ount of the transaction
(including all charges from a prior cycle).
*
*
*
*
*
6. In Supplement I to Part 226, under
Section 226.17—General Disclosure
Requirements, under Paragraph
17(c)(1)., paragraph 10. would be
revised and a new paragraph 18. would
be added to read as follows:
*
*
*
*
*
Subpart C—Closed-End Credit
Section 226.17—General Disclosure
Requirements
*
*
*
*
*
insurance under state law, debt cancellation
17(c) Basis o f disclosures and use o f
fees paid to the creditor, whether required or
estim ates.
optional, are incident to the extension of
Paragraph 17(c)(1).
credit and must be disclosed as a finance
*
*
*
*
*
charge. An optional debt cancellation fee
*
*
10. D iscounted and prem ium variable-rate
paid to a third-party is a finance charge only * * *
transactions. In some variable-rate
to the extent that the third-party shares the
Section 226.12— Special Credit Card
transactions, creditors may set ari initial
fee with the creditor. If a creditor cannot
Provisions
interest rate that is not determined by the
determine whether state law considers the
*
index or formula used to make later interest
agreement insurance, the fees must be treated * * * *
rate adjustments. Typically, this initial rate
12(c)(2) Adverse credit reports prohibited.
as if the agreement is not insurance.-^
charged to consumers is lower than the rate
*
*
*
*
*
*
*
*
*
*
w ould be if it were calculated using the
►
2
.
Settlem
ent
o
f
dispute.
A
card
issuer
Paragraph 4(d).
index or formula. However, in some cases the
may not consider a dispute settled and report initial rate may be higher. In a discounted
*
*
*
*
*
an amount disputed as delinquent or begin
transaction, for example, a creditor may
5. Required credit life insurance. Credit
collection of the disputed amount until it has calculate interest rates according to a formula
life, accident, health, or loss-of-income
completed
a
reasonable
investigation
of
the
using the six-month Treasury bill rate plus a
insurance m ust be voluntary in order for the
cardholder’s claim. In conducting an
2 percent margin. If the Treasury bill rate at
premium or charges to be excluded from the
investigation,
the
card
issuer
may
reasonably
consummation is 10 percent, the creditor
finance charge. W hether the insurance is in
request
the
cardholder’s
cooperation.
The
may forgo the 2 percent spread and charge
fact required or optional is a factual question.
card issuer may not automatically consider a
only 10 percent for a limited time, instead of
If the insurance is required, the premiums
dispute settled due to the cardholder’s failure setting an initial rate of 12 percent.
must be included in tile finance charge,
or refusal to comply w ith a particular
► i . - ^ When creditors use an initial
whether the insurance is purchased from the
re q u e st-^
interest rate that is not calculated using the
creditor or from a third party. If the
*
*
*
*
*
index or formula for later rate adjustments,
►c o n s u m e r is required to elect one of
the disclosures should reflect a composite
several options—such as-^ ionly option the
5. In supplement I to Part 226, under
annual percentage rate based on the initial
creditor gives the consumer is] to purchase
Section
226.14—Determination
of
rate for as long as it is charged and, for the
credit life insurance from the c r e d ito i^ ,'^
Annual Percentage Rate, under 14(c)
rem ainder of the term, the rate that would
[or to] assign an existing life insurance
have been applied using the index or formula
Annual percentage rate for periodic
policy, ► or pledge security such as a
statements., a new paragraph 10. would at the time of consummation. The rate at
certificate of deposit,-^ and the consumer
consummation need not be used if a contract
purchases the credit life insurance, the
be added to read as follows:
provides for a delay in the implementation of
premium m ust be included in the finance
*
*
*
*
*
changes in an index value. For example, if
charge. (If the consum er assigns a preexisting
the contract specifies that rate changes are
Section 226.14—Determination o f Annual
policy instead, no premium is included in
based on the index value in effect 45 days
the finance charge. ► T h e security interest
Percentage Rate
before the change date, creditors may use
would be disclosed under § 226.6(c) or
*
*
*
*
*
► a n y * ^ [the] index value in effect ► d u r i n g
§ 226.18(m).-^ See the commentary to
14(c) A nnual percentage rate fo r periodic
the 45 day perio d -^ [not more than 45 days]
§ 226.(4)(b) (7) and (8).)
statem ents.
before consummation in calculating a
*
*
*
* *
*
*
*
*
*
composite annual percentage rate.
3. In supplement I to part 226, under ► 1 0 . Transactions at end o f billing cycle.
► i i . - ^ The effect of the multiple rates
section 226.6—Initial Disclosure
m ust also be reflected in the calculation and
The annual percentage rate reflects
Statement, under 6(b) Other charges.,
disclosure of the finance charge, total of
transactions and charges imposed during the
payments, and payment schedule.
paragraph l.v. would be revised to read billing cycle. However, a transaction that
► i i i . - ^ If a loan contains a rate or payment
occurs at the end of a billing cycle may be
as follows:
cap that would prevent the initial rate or
impracticable to post until the following
*
*
*
*
*
payment, at the time of the first adjustment,
cycle, such as a cash advance that occurs on
Subpart B—Open-End Credit
the last day of a billing cycle. The transaction from changing to the rate determined by the
*
*
*
*
*
index or formula at consummation, the effect
is posted to the account in the following
cycle. In this case, the annual percentage rate of that rate or payment cap should be
Section 226.6—Initial Disclosure Statem ent
reflected in the disclosures.
shall be calculate as follows for the billing
*
*
*
*
*
► i v . - ^ Because these transactions involve
cycle in w hich the transaction and charges
irregular payment amounts, an annual
are posted:
6(b) Other charges.
4. In supplement I to part 226, under
Section 226.12—Spemal Credit Card
Provisions, under 12 (c)(2 ) Adverse
credit reports prohibited., new
paragraph 2. would be added to read as
follows:
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules
percentage rate tolerance of V« of 1 percent
applies, in accordance with § 226.2Z(a)(3) of
the regulation.
► v . - ^ Examples of discounted variablerate transactions include:
► A . - ^ A 30-year loan for $100,000 with
no prepaid finance charges and rates
determined by the Treasury bill rate plus 2
percent. Rate and payment adjustm ents are
made annually. Although the Treasury bill
rate at the time of consummation is 10
percent, the creditor sets the interest rate for
one year at 9 percent, instead of 12 percent
according to the formula. The disclosures
should reflect a composite annual percentage
rate of 11.63 percent based on 9 percent for
one year and 12 percent for 29 years.
Reflecting those two rate levels, the payment
schedule should show 12 payments of
$804.62 and 348 payments of $1,025.31. The
finance charge should be $266,463.32 and the
total of payments $366,463.32.
► B . - ^ Same loan as above, except w ith a
2 percent rate cap on periodic adjustments.
The disclosures should reflect a composite
annual percentage rate of 11.53 percent based
on 9 percent for the first year, 11 percent for
the second year, and 12 percent for the
remaining 28 years. Reflecting those three
rate levels, the payment schedule should
show 12 payments of $804.62,12 payments
of $950.09, and 336 payments of $1,024.34.
The finance charge should be $265,234.76 ‘
and the total of payments $365,234.76.
► C . - ^ Same loan as above, except w ith a
IV t. percent cap on payment adjustments.
The disclosures should reflect a composite
annual percentage rate of 11.64 percent,
based on 9 percent for one year and 12
percent for 29 years. Because of the payment
cap, five levels of payments should be
reflected. The payment schedule should
show 12 payments of $804.62,12 payments
of $864.97,12 payments of $929.84, 12
payments of $999.58, and 312 payments of
$1,070.04. The finance charge should be
$277,040.60, and the total of payments
$377,040.60.
► D . - ^ This paragraph does not apply to
variable-rate loans in w hich the initial
interest rate is set according to the index or
formula used for later adjustments but is not
set at the value of the index or formula at
consummation. For example, if a creditor
commits to an initial rate based on the
formula on a date prior to consummation, but
the index has moved during the period
between that time and consummation, a
creditor should base its disclosures on the
initial rate.
*
*
*
*
*
► 1 8 . Pawn Transactions. For a transaction
in w hich a consumer pledges or sells an item
to a creditor in return for a sum of money,
and retains the right to redeem the item for
a greater sum (the redemption price) within
a specified period of time:
i. The amount financed is the initial sum
paid to the consumer.
ii. The finance charge is the difference
between the initial sum paid to the consumer
and the redem ption price.
iii. The term of the transaction, for
calculating the annual percentage rate, is the?
62769
specified period of time agreed to by the
creditor and the consum er.-^
*
*
*
*
*
one year, the disclosures required under
§ 226.19(b) also must be given at that time.
*
*
*
*
*
7. In Supplement I to Part 226, under
Section 226.18— Content o f Disclosures,
under Paragraph 18(c)(l)(iii)„ a new
paragraph 2. would be added to read as
follows:
9. In Supplement I to Part 226, a new
Subpart E—Special Rules for Certain
Home Mortgage Transactions would be
added as follows:
*
*
*
*
*
Section 226.18— Content o f Disclosures
*
*
*
*
*
Paragraph 18(c)(l)(iii).
*
*
*
*
*
► 2 . Creditor-imposed charges added to
am ounts paid to others. A creditor that offers
an item for sale in both cash and credit
transactions sometimes adds an amount
(often referred to as an “upcharge”) to a fee
charged to a consumer by a third party for
a service (such as for a maintenance or
service contract) that is payable in an equal
amount in both types of transactions, and
retains that amount. At its option, the
creditor may list the total charge (including
the portion retained by it) as an amount paid
to others, or it may choose to reflect the
amounts in the manner in which they were
actually paid to or retained by the
appropriate parties.-^
*
*
*
*
*
8. In Supplement I to Part 226, under
Section 226.20 Subsequent Disclosure
Requirements, under Paragraph 20(a)
Refinancings., paragraph 3. would be
revised to read as follows:
*
*
*
*
*
Section 226.20—Subsequent Disclosure
Requirements
Paragraph 20(a) Refinancings.
*
*
*
*
*
3. Variable-rate.
► i . - ^ If a variable-rate feature was
properly disclosed under the regulation, a
rate change in accord with those disclosures
is not a refinancing. ► F o r example, no new
disclosures are required when the variablerate feature is invoked on a renewable
balloon-payment mortgage that was
previously disclosed as a variable-rate
transaction.-^ [For exam ple,^ renewable
balloon-payment mortgage that" was disclosed
as a variable-rate transaction is not subject to
new disclosure requirements when the
variable-rate feature is invoked. However,
even]
► i i . E ven-^ if it is not accomplished by
the cancellation of the old obligation and
substitution of a new one, a new transaction
subject to new disclosures results if the
creditor either:
► A . - ^ Increases the rate based on a
variable-rate feature that was not previously
disclosed, or
► B . - ^ Adds a variable-rate feature to the
obligation. ► A creditor does not add a
variable-rate feature by changing the index of
a variable-rate transaction or substituting a
new index for one that no longer exists.
iii.-^ If either of ► t h e above-^ [these] two
events occur in a transaction secured by a
principal dwelling with a term longer than
*
*
*
*
*
►S u b p a r t E—Special Rules for Certain
Home Mortgage Transactions
Section 226.31— General Rules
31(c) Tim ing o f disclosure.
Paragraph 31(c)(1) Disclosures fo r certain
closed-end hom e mortgages.
1. Furnishing disclosures. Disclosures are
considered furnished when received by the
consumer.
2. Pre-consummation waiting period. A
creditor must furnish the special disclosures
at least three business days prior to
consummation. For purposes of § 226.32,
“business day” means every calendar day
except Sundays and federal legal holidays.
For example, if disclosures are provided on
Friday, consummation could occur any time
on Tuesday, the third business day following
receipt of disclosures.
Paragraph 31(c)(l)(i) Change in terms.
1. Redisclosure required. Creditors must
provide new disclosures if the regular
payment or any other disclosure required by
§ 226.32(c) becomes inaccurate.
Paragraph 31(c)(l)(ii) Telephone
disclosures.
1. Telephone disclosures. Disclosures by
telephone m ust be furnished at least three
calendar days prior to consummation.
Paragraph 31(c)(l)(iii) Consumer's waiver
o f waiting period before consum mation.
1. M odification or waiver. A consumer may
modify or waive the right to the three-day
waiting period only after receiving the
disclosures required by § 226.32 and only if
the circumstances meet the criteria for
establishing a bona fide personal financial
emergency in § 226.23(e). Whether these
criteria are met are determined by the facts
surrounding individual situations. The
impending sale of the consum er’s home at
foreclosure is one example of a bona fide
personal financial emergency. Each
consumer entitled to the three-day waiting
period m ust sign a written statement for the
waiver to be effective.
Paragraph 31(c)(2) Disclosures fo r reverse
mortgages.
1. Business days. For purposes of
providing reverse mortgage disclosures,
“business day” means a day on w hich the
creditor’s offices are open to the public for
carrying on substantially all of its business
functions.
2. O pen-end plans. Disclosures for openend reverse mortgages must be provided
three business days before the first
transaction under the plan (see § 226.5(b)(1)).
31(d) Basis o f disclosures and use o f
estimates.
1. Redisclosure. When a disclosure
required by § 226.32 is based on and labeled
as an estimate and becomes inaccurate due
to a change in terms that occurs before
consummation, new disclosures m ust be
provided.
62770
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules
Section 226.32—Requirements fo r Certain
Closed-End Home Mortgages
32(a) Coverage.
Paragraph 32(a)(l)(i).
1. Application date. An application is
deemed received when it reaches the creditor
in any of the ways applications are normally
transmitted. (See § 226.19(a).) For example, if
a borrower applies for a 10-year loan on
September 30 and the creditor counteroffers
w ith a 7-year loan on October 10, the creditor
m ust measure the annual percentage rate
against the appropriate Treasury security
yield as of August 15. An application
transm itted through an intermediary agent or
broker is received when it reaches the
creditor, rather than when it reaches the
agent or broker.
2. When fifteenth not a business day. If the
15th day of the month immediately
preceding the application date is not a
business day, the creditor must use the yield
as of the business day im mediately preceding
the 15 th.
3. Calculating annual percentage rates for
variable-rate loans and discount loans.
Creditors must use the rules set out in the
commentary to § 226.17(c)(1) in calculating
the annual percentage rate for variable-rate
loans (assume the rate in effect at the time
of disclosure remains unchanged) and for
discount, premium, and stepped-rate
transactions (which must reflect composite
annual percentage rates).
4. Treasury securities. To determine the
yield on a Treasury security for the annual
percentage rate test, creditors may use the
Board’s Selected Interest Rates (statistical
release H-15) or the actual auction results.
Treasury auctions are held at regular
intervals for the different types of securities.
These figures are published by major
financial and metropolitan newspapers, and
are also available from Federal Reserve
Banks. Creditors must use the yield on the
security that has the nearest maturity at
issuance to the loan’s maturity. For example,
if a creditor must compare the annual
percentage rate to Treasury securities with
either seven-year or ten-year maturities, the
annual percentage rate for an eight-year loan
is compared with securities that have a
seven-year maturity; the annual percentage
rate for a nine-year loan is compared with
securities that have a ten-year maturity. If the
loan maturity is exactly halfway between, the
annual percentage rate is compared with the
Treasury security that has the lower yield.
For example, if the loan has a maturity of 20
years and comparable securities have
maturities of 10 years with a yield of 6.501
percent and 30 years with a yield of 6.906
percent, the annual percentage rate is
compared w ith 10 percentage points over the
yield of 6.501 percent, the lower of the two
yields.
Paragraph 32(a)(1)(ii).
1. Total loan am ount. For purposes of the
“points and fees” test, the total loan amount
is calculated by taking the amount financed,
as determined according to § 226.18(b), and
deducting any cost listed in § 226.32(b)(l)(iii)
that is both included as points and fees under
§ 226.32(b)(1) and financed by the creditor.
For example, if a consumer borrows $10,000,
finances a $300 fee for a creditor-conducted
appraisal, and pays $400 in points at closing,
the am ount financed according to § 226.18(b)
is $9,900 ($10,000 plus the $300 appraisal fee
that is financed by the creditor, less $400 in
prepaid finance charges). The $300 appraisal
fee paid to the creditor is added to other
points and fees under § 226.32(b)(l)(iii). It is
deducted from the amount financed under
§ 226.18(b) ($9,900) to derive a total loan
amount of $9,600. If the $300 appraisal fee
is paid in cash at closing, the $300 is
included in the points and fees calculation.
However, because it is not financed by the
creditor, the $300 fee is not part of the
amount financed under § 226.18(b) ($10,000,
in this case). The total loan amount is $9,600
($10,000, less $400 in prepaid finance
charges).
32(b) Definitions.
Paragraph 32(b)(l)(i).
1. General. Items defined as finance
charges under § 226.4(a) and 226.(4)(b) are
included under this paragraph as a
component of the total “points and fees.”
Items excluded from the finance charge
under other provisions of § 226.4 are not
included in the calculation under this
paragraph 32(b)(l)(i), although the fee may be
included in “points and fees” under
paragraphs 32(b)(l)(ii) and 32(b)(l)(iii).
Paragraph 32(b)(l)(ii).
1. Mortgage broker fees. In determining
"points and fees” for purposes of this
section, compensation paid by a consumer to
a mortgage broker (directly or through the
creditor for delivery to the broker) is
included in the calculation whether or not
the amount is disclosed as a finance charge.
Mortgage broker fees that are not paid by the
consumer are not included. Broker fees
already included in the calculation as finance
charges under § 226.32(b)(l)(i) need not be
counted again under § 226.32(b)(l)(ii).
2. Example. Section 226.32(b)(l)(iii)
defines “points and fees” to include all items
listed in § 226.4(c)(7), other than amounts
held for future payment of taxes. An item
listed in § 226.4(c)(7) may be excluded from
the “points and fees” calculation, however,
if the charge is reasonable, the creditor
receives no direct or indirect compensation
from the charge, and the charge is not paid
to an affiliate of the creditor. For example, a
reasonable fee paid by the consumer to an
independent, third-party appraiser may be
excluded from the points and fees calculation
(assuming no compensation is paid to the
creditor). A fee paid by the consumer for an
appraisal performed by the creditor must be
included in the calculation, even though the
fee may be excluded from the finance charge
if it is bona fide and reasonable in amount.
32(c) Disclosures.
1. Format. The disclosures'must be clear
and conspicuous but need not be in any
particular type size or typeface, nor
presented in any particular manner. For
example, the disclosures need not be a part
of the mortgage.
Paragraph 32(c)(3) Regular paym ent.
1. General. The regular payment is the
am ount due from the borrower at regular
intervals, such as monthly, bimonthly,
quarterly, or annually. There must be at least
two payments, and the payments must be in
an am ount and at such intervals that they
fully amortize the amount owed. If the loan
has two payment streams, the regular
payment for each must be disclosed.
2. D iscount and prem ium rates. In
disclosing the regular payment, creditors may
rely on the rules set forth in § 226.18(g). In
discounted or premium variable rate
transactions where the creditor sets the
initial interest rate and later rate adjustments
are detemjined by an index or formula, the
creditor must disclose both the payment
based on the discount or premium and the
payment that will be in effect thereafter.
Additional explanatory material which does
not detract from the required disclosures may
accompany the disclosed amounts. For
example, if a monthly paym ent is $250 for
the first six months and then increases based
on an index and margin, the creditor could
use language such as the following: “Your
regular monthly payment w ill be $250 for six
months. After six months your regular
monthly payment w ill be based on an index
and margin, w hich currently would make
your payment $350. Your actual payment at
that time may be higher or lower.”
Paragraph 32(c)(4) Variable-rate.
1. Calculating "worst-case" paym ent
exam ple. Creditors may rely bn instructions
in § 226.19(b)(2)(x) for calculating the
maximum possible increases in rates in the
shortest possible timeframe, based on the
face amount of the note (not the hypothetical
loan amount of $10,000 required by
§ 226.19(b)(2)(x)). The creditor must provide
a maximum payment for each payment
stream, where a payment schedule provides
for more than one payment stream and more
than one maximum payment amount is
possible.
32(d) Limitations.
Paragraph 32(d)(l)(i) Balloon paym ent.
1. Regular periodic paym ents. The
repayment schedule for a § 226.32 mortgage
loan with a term of less than five years must
fully amortize the outstanding principal
balance through “regular periodic
payments.” A payment is a “regular periodic
paym ent” if it is not more than twice the
amount of other payments. '
Paragraph 32(d)(2) Negative amortization.
1. Negative am ortization. The prohibition
against negative amortization in a mortgage
covered by § 226.32 does not preclude
increases in the principal balance that result
from events unrelated to the payment
schedule, such as when a consumer fails to
obtain property insurance and the creditor
purchases and adds the prem ium to the
consum er’s principal balance.
Paragraph 32(d)(4) Increased interest rate.
1. Variable-rate transactions. The
limitation on interest rate increases does not
apply to rate increases resulting from index
changes in a variable-rate transaction, even if
the increase occurs after default by the
consumer.
Paragraph 32(d)(5) Rebates.
1. Calculation o f refunds. The limitation
applies only to refunds of interest and not to
any other charges that are considered finance
charges under § 226.4 (for example, points
and fees paid at closing). The calculation of
the refund of interest includes odd-days
interest, w hether paid at or after
consummation.
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules
Paragraph 32(d)(6) Prepayment penalties.
1. State law. If using the actuarial method
defined by applicable state law results in a
refund that is greater than the refund
calculated by using the method described in
section 933(d) of the Housing and
Community Development Act of 1992,
creditors m ust use the state law definition in
determining if a refund is a prepayment
penalty under § 226.32(d)(6).
32(d)(7) Prepayment penalty exception.
Paragraph 32(d)(7)(iii).
1. Calculating debt-to-income ratio. “Debt”
does not include amounts paid by the
borrower in cash at closing or amounts from
the loan proceeds that directly repay an
existing debt. Creditors may consider
combined debt-to-income ratios for
transactions involving joint applicants.
2. Verification. Verification of employment
62771
under § 226.32(a)(1), the transaction is
reflect such payments. At its option,
subject to all the requirements of § 226.32,
however, a creditor may put an asterisk,
including the limitations concerning balloon
footnote, or similar type of notation in the
payments and negative amortization.
table next to the applicable total annual loan
Paragraph 33(a)(2).
cost rate, and state in the body of the note,
1. Default. Default is not defined by the
apart from the table, the assumption upon
regulation, but rather by the legalobligation
which the total annual loan cost is made and
between the parties and state or other law.
any different rate that w ould apply if the
2. Definite term or m aturity date. To meet
contingent benefit were paid.
the definition of a reverse mortgage
Paragraph 33(c)(3) A dditional creditor
transaction, a creditor cannot require any
com pensation.
principal, interest, or shared appreciation or
1. Shared appreciation or equity. Any
equity to be due and payable (other than in
shared appreciation or equity that the
the case of default) until after the consum er’s creditor is entitled to receive pursuant to the
death, transfer of the dwelling, or the
legal obligation must be included in the total
consumer ceases to occupy the dwelling as
cost of a reverse mortgage loan. For example,
a principal dwelling. Some state laws require if a creditor agrees to a reduced interest rate
legal obligations secured by a'mortgage to
on the transaction in exchange for a portion
specify a definite maturity date or term of
of the appreciation or equity that may be
repayment in the instrument. Such a
realized when the dwelling is sold, that
satisfies the requirement for payment records provision in an obligation does not violate
portion is included in the projected total cost
for employment income.
the definition of a reverse mortgage
of credit.
32(e) Prohibited acts and practices.
transaction if the maturity date or term or
Paragraph 33(c)(4) Lim itations on
Paragraph 32(e)(1) Repaym ent ability.
repayment required by state law would in no consum er liability.
1. Determining repaym ent ability. The
case operate to cause maturity prior to the
1. In general. Creditors m ust include any
information provided to the creditor in
occurrence of any of the events recognized in limitation on the consumer’s liability (such
connection w ith § 226.32(d)(7) may be used
as a nonrecourse limit or an equity
the regulation. For example, a provision that
to show that the creditor considered the
allows a reverse mortgage loan to become due conservation agreement) in the projected
consum er’s income and obligations before
total cost of credit. These limits and
and payable only after the consum er’s death,
extending the credit. Any expected income
agreements protect a portion of the equity in
transfer, or cessation of occupancy, or after
can be considered by the creditor, except
the dwelling for the consumer or the
a specified term, but which automatically
equity income that the consumer would
consumer's estate. For example, the
extends the term for consecutive periods as
obtain through the foreclosure of a mortgage
long as none of the other events has occurred following contractual provisions are
covered by § 226.32. For example, a creditor
limitations on the consumer’s liability that
would meet the definition of a reverse
may use information about income other than mortgage transaction.
.must be included in the projected total cost
regular salary or wages such as gifts,
of credit:
33(c) Projected total cost o f credit.
expected retirement payments, or income
1. A limit on the consumer’s liability to a
Paragraph 33(c)(1) Costs to consumer.
from housecleaning or childcare. The
1. Costs and charges to consum er—relation certain percentage of the projected value of
creditor also may use unverified income, so
the home.
to finance charge. All costs and charges to
long as the creditor has a reasonable basis for the consumer that are incurred in a reverse
ii. A lim it on the consumer’s liability to the
believing that the income exists.
net proceeds from the sale of the property
mortgage transaction are included in the
Paragraph 32(e)(2) Home-Improvement
subject to the reverse mortgage.
projected total cost of credit, and thus in the
Contracts.
2. Uniform assum ption fo r “net proceeds”
total annual loan cost rates, whether or not
Paragraph 32(e)(2)(i).
recourse lim itations. If the legal obligation
the cost or charge is a finance charge under
1- Joint payees. If a creditor pays a
between the parties does not specify a
§ 226.4 of the regulation.
contractor with an instrument jointly payable
percentage for the “net proceeds” liability of
2. A n n u ity costs. As part of the credit
to the contractor and the consumer, the
the consumer, for purposes of the disclosures
transaction, some creditors require or perm it
instrum ent m ust name as payee each
required by § 226.33, a creditor must assume
a consumer to purchase an annuity that
consumer who is primarily obligated on the
that the costs associated with selling the
immediately—o r at some future time—
note.
property w ill equal 7 percent of the projected
supplements or replaces the creditor’s
Paragraph 32(e)(3) Notice to Assignee.
payments. The amount paid by the consumer sale price (see the definition of the Val„
1. Subsequent sellers or assignors. Any
symbol under appendix K(b)(6)).-^
for the annuity is a cost to the consumer
person, w hether or not the original creditor,
*
*
*
*
*
under this section, regardless of w hether the
that sells or assigns a mortgage subject to this
annuity
is
purchased
through
the
creditor
or
10.
In
Supplement
Ito Part 226, a new
section m ust furnish the notice of potential
a third party, or whether the purchase is
Appendix K— Total Annual Loan Cost
liability to the purchaser or assignee.
mandatory or voluntary.
Rate Computations for Reverse Mortgage
2. Format. While the notice of
3. Disposition costs excluded. Disposition
Transactions and a new Appendix L—
potential liability need not be in any
costs incurred in connection w ith the sale or
Assumed
Loan Periods for
particular format, the notice must be
transfer of the property subject to the reverse
Computations of Total Annual Loan
prominent. Placing it on the face of the
mortgage are not included in the costs to the
Cost Rates would be added to read as
note, such as with a stamp, is one means consumer under this paragraph. (However,
follows:
see the definition of Valn in appendix K to
of satisfying the prominence
*
*
*
*
*
the regulation to determine the effect certain
requirement.
disposition costs may have on the total
►A p p e n d ix K—Total Annual Loan Cost
Section 226.33—Requirements fo r Reverse
annual loan cost rates.)
Rate Computations for Reverse Mortgage
Mortgages
Paragraph 33(d)(2) Payments to consumer.
Transactions
33(a) Definition.
1. Paym ents upon a specified event. The
1. General. The calculation of total annual
1. Nonrecourse transaction. A nonrecourse projected total cost of credit should not
reflect contingent payments in w hich a credit loan cost rates under appendix K is based on
reverse mortgage transaction lim its the
to the outstanding loan balance or a payment the principles set and die estimation or
homeowner’s liability to the proceeds of the
sale of the home {or any lesser amount
“iteration” procedure used to compute
to the consum er’s estate is made upon the
specified in the credit obligation). If a
occurrence of an event (for example, a "death annual percentage rates under ap pendix).
transaction structured as a closed-end reverse benefit” payable if the consum er’s death
Rather than restate this iteration process in
mortgage transaction allows recourse against
occurs w ithin a certain period of time). Thus, full, the regulation cross-references the
procedures found in appendix). In other
the consumer, and the annual percentage rate the table of total annual loan cost rates
or the points and fees exceed those specified
required under § 226.33(b)(2) w ould not
aspects the appendix reflects the special
62772
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules
nature of reverse mortgage transactions.
Special definitions and instructions are
included where appropriate.
(b) Instructions and equations for the total
annual loan cost rate.
(b)(5) Number of unit-periods between two
given dates.
1. A ssum ption as to when transaction
begins. The computation of the total annual
loan cost rate is based on the assumption that
the reverse mortgage transaction begins on
the first day of the month in w hich
consummation is estimated to occur.
Therefore, fractional unit-periods (as used
under appendix J for calculating annual
percentage rates) are not used.
(b)(9) Assumption for discretionary cash
advances.
1. A m ount o f credit. Creditors should
compute the total annual loan cost rates for
transactions involving discretionary cash
advances by assuming that 50 percent of the
initial amount of the credit available under
the transaction is advanced at closing or, in
an open-end transaction, when the consumer
becomes obligated under the plan. (For the
purposes of this assumption, the initial
amount of the credit is the principle loan
amount less any costs to the consumer under
section 226.33(c)(1).)
(b)(10) A ssum ption fo r variable-rate
reverse mortgage transactions.
1. Initial discount or prem ium rate. Where
a variable-rate reverse mortgage transaction
includes an initial discount or prem ium rate,
the creditor should apply the same rules for
calculating the total annual loan cost rate as
are applied when calculating the annual
percentage rate for a loan with an initial
discount or premium rate (see the
commentary to § 226.17(c)).
(d) Reverse mortgage model form and
sample form.
(d)(2) Sample form.
1. General. The “clear and conspicuous”
standard for reverse mortgage disclosures
does not require disclosures to be printed in
any particular type size. Disclosures may be
made on more than one page, and use both
the front and the reverse sides, so long as the
pages constitute an integrated document.
Appendix L—Assumed Loan Periods for
Computations of Total Annual Loan Cost
Rates
1. General. The life expectancy figures
used in this appendix are those found in the
U.S. Decennial I^ife Tables for women, as
rounded to the nearest whole year and as
published by the U. S. Department of Health
and Human Services. The figures contained
in this appendix must be used by creditors
for all consumers (men and women). This
appendix will be revised periodically by the
Board to incorporate revisions to the figures
made in the Decennial Tables.-^
By order of the Board of Governors of the
Federal Reserve System, acting through the
Secretary of the Board under delegated
authority, December 1,1995.
Jennifer J. Johnson,.
D eputy Secretary o f the Board.
(FR Doc. 95-29711 Filed 12-6-95; 8:45 am]
BILUNQ CODE 6210-01-P
@FedFRASER