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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 . PRESIDENT DALLAS, TEXAS 75265-5906 AND CH IE F E X EC U TIV E O F F IC E R April 25,1997 Notice 97-41 TO: The Chief Executive Officer of each financial institution in the Eleventh Federal Reserve District SUBJECT Revised Pamphlets for Regulations L, M, and the Official Staff Commentary on Regulation B; Slip-sheet Amendments to Regulations K and Z DETAILS The Board of Governors of the Federal Reserve System has published revised pamphlets for Regulation L, effective October 1, 1996; Regulation M, effective October 31, 1996; and the Official Staff Commentary on Regulation B, effective September 30,1996. In addition, the Board has published slip-sheet amend ments to Regulation K, effective August 28,1996, and Regulation Z, effective October 21,1996. For 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; H ouston 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) ENCLOSURES The revised pamphlets and slip-sheet amendments are enclosed. Please insert them in your Regulations binders. MORE INFORMATION For more information regarding Regulation L, please contact Dean Pankonien at (214) 922-6154. For more information regarding Regulation M, Regulation Z, or the Official Staff Com mentary on Regulation B, please contact Eugene Coy at (214) 922-6201. For more information regarding Regulation K, please contact Susan Tetley at (214) 922-6060. For additional copies of this Bank’s notice, the revised pamphlets, or the amendment slip sheets, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, Board of Governors of the Federal Reserve System Regulation L Management Official Interlocks 12 CFR 212; as amended effective October 1, 1996 Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank of the District in which the inquiry arises. September 1996 Contents Page Section 212.1—Authority, purpose, and scope........................................................ 1 Section 212.2—Definitions.......................... 1 Section 212.3—Prohibitions ....................... 3 (a) Community........................................ 3 (b) RMSA . . .......................................... 3 (c) Major assets........................................ 3 Section 212.4—Interlocking relationships permitted by statute................................. 3 Section 212.5—Regulatory-standards exemption................................................. 4 (a) C riteria............................................... 4 (b) Presumptions..................................... 4 (c) Duration of interlock.......................... 4 Section 212.6—Managementconsignment exemption............................ 4 Page (a) C riteria............................................... 4 (b) Presumptions..................................... 5 (c) Duration of interlock.......................... 5 Section 212.7—Change incircumstances . . 5 (a) Termination........................................ 5 (b) Transition period................................. 5 Section 212.8—Enforcement....................... 5 Section 212.9—Effect of Interlocks Act on Clayton A c t....................................... 5 DEPOSITORY INSTITUTION MANAGEMENT INTERLOCKS A C T ........................................................ 7 Regulation L Management Official Interlocks 12 CFR 212; as amended effective October 1, 1996 SECTION 212.1— Authority, Purpose, and Scope (a) Authority. This part is issued under the provisions of the Depository Institution Man agement Interlocks Act (Interlocks Act) (12 USC 3201 et seq.), as amended. (b) Purpose. The purpose of the Interlocks Act and this part is to foster competition by generally prohibiting a management official from serving two nonaffiliated depository or ganizations in situations where the manage ment interlock likely would have an anticom petitive effect. (c) Scope. This part applies to management officials of state member banks, bank holding companies, and their affiliates. SECTION 212.2— Definitions For purposes of this part, the following defini tions apply: (a) Affiliate. (1) The term “affiliate” has the meaning given in section 202 of the Interlocks Act (12 USC 3201). For purposes of that sec tion 202, shares held by an individual in clude shares held by members of his or her immediate family. “ Immediate family” means spouse, mother, father, child, grandchild, sister, brother, or any of their spouses, whether or not any of their shares are held in trust. (2) For purposes of section 202(3)(B) of the Interlocks Act (12 USC 3201(3)(B)), an affiliate relationship based on common ownership does not exist if the Board deter mines, after giving the affected persons the opportunity to respond, that the asserted af filiation was established in order to avoid the prohibitions of the Interlocks Act and does not represent a true commonality of interest between the depository organiza tions. In making this determination, the Board considers, among other things, whether a person, including members of his or her immediate family, whose shares are necessary to constitute the group owns a nominal percentage of the shares of one of the organizations and the percentage is sub stantially disproportionate to that person’s ownership of shares in the other organization. (b) Anticompetitive effect means a monopoly or substantial lessening of competition. (c) Area median income means— (1) the median family income for the met ropolitan statistical area (MSA), if a deposi tory organization is located in an MSA; or (2) the statewide nonmetropolitan median family income, if a depository organization is located outside an MSA. (d) Community means a city, town, or village, and contiguous and adjacent cities, towns, or villages. (e) Contiguous or adjacent cities, towns, or villages means cities, towns, or villages whose borders touch each other or whose borders are within 10 road miles of each other at their closest points. The property line of an office located in an unincorporated city, town, or vil lage is the boundary line of that city, town, or village for the purpose of this definition. (f) Critical, as used in section 212.5, means important to restoring or maintaining a deposi tory organization’s safe and sound operations. (g) Depository holding company means a bank holding company or a savings and loan holding company (as more fully defined in section 202 of the Interlocks Act (12 USC 3201)) having its principal office located in the United States. (h) Depository institution means a commercial bank (including a private bank), a savings bank, a trust company, a savings and loan as sociation, a building and loan association, a homestead association, a cooperative bank, an industrial bank, or a credit union, chartered under the laws of the United States and hav ing a principal office located in the United 1 § 212.2 States. Additionally, a United States office, in cluding a branch or agency, of a foreign com mercial bank is a depository institution. (i) Depository institution affiliate means a de pository institution that is an affiliate of a de pository organization. (j) Depository organization means a deposi tory institution or a depository holding company. (k) Low- and moderate-income areas means census tracts (or, if an area is not in a census tract, block-numbering areas delineated by the United States Bureau of the Census) where the median family income is less than 100 percent of the area median income. (/) Management official. (1) The term “ management official” means— (i) a director; (ii) an advisory or honorary director of a depository institution with total assets of $100 million or more; (iii) a senior executive officer as that term is defined in 12 CFR 225.71(a); (iv) a branch manager; (v) a trustee of a depository organization under the control of trustees; and (vi) any person who has a representative or nominee, as defined in paragraph (p) of this section, serving in any of the above capacities in this paragraph (0(1). (2) The term “management official” does not include— (i) a person whose management func tions relate exclusively to the business of retail merchandising or manufacturing; (ii) a person whose management func tions relate principally to a foreign com mercial bank’s business outside the United States; or (iii) a person described in the provisos of section 202(4) of the Interlocks Act (re ferring to an officer of a state-chartered savings bank, cooperative bank, or trust company that neither makes real estate mortgage loans nor accepts savings). (m) Office means a principal or branch office of a depository institution located in the United States. “Office” does not include a 2 Regulation L representative office of a foreign commercial bank, an electronic terminal, a loan production office, or any office of a depository holding company. (n) Person means a natural person, corpora tion, or other business entity. (o) Relevant metropolitan statistical area (RMSA) means an MSA, a primary MSA, or a consolidated MSA that is not comprised of designated primary MSAs to the extent that these terms are defined and applied by the Of fice of Management and Budget. (p) Representative or nominee means a natu ral person who serves as a management offi cial and has an obligation to act on behalf of another person with respect to management responsibilities. The Board will find that a person has an obligation to act on behalf of another person only if the first person has an agreement, express or implied, to act on be half of the second person with respect to man agement responsibilities. The Board will deter mine, after giving the affected persons an opportunity to respond, whether a person is a representative or nominee. (q) Total assets. (1) The term “total assets” means assets measured on a consolidated basis and re ported in the most recent fiscal year-end Consolidated Report of Condition and Income. (2) The term “ total assets” does not include— (i) assets of a diversified savings and loan holding company as defined by sec tion 10(a)(1)(F) of the Home Owners’ Loan Act (12 USC 1467a(a)(l)(F)) other than the assets of its depository institu tion affiliate; (ii) assets of a bank holding company that is exempt from the prohibitions of section 4 of the Bank Holding Company Act of 1956 pursuant to an order issued under section 4(d) of that act (12 USC 1843(d)) other than the assets of its de pository institution affiliate; or (iii) assets of offices of a foreign com mercial bank other than the assets of its United States branch or agency. Regulation L (r) United States means the United States of America, any state or territory of the United States of America, the District of Columbia, Puerto Rico, Guam, American Samoa, and the Virgin Islands. SECTION 212.3— Prohibitions (a) Community. A management official of a depository organization may not serve at the same time as a management official of an un affiliated depository organization if the deposi tory organizations in question (or a depository institution affiliate thereof) have offices in the same community. (b) RMSA. A management official of a depos itory organization may not serve at the same time as a management official of an unaffili ated depository organization if the depository organizations in question (or a depository in stitution affiliate thereof) have offices in the same RMSA and each depository organization has total assets of $20 million or more. (c) Major assets. A management official of a depository organization with total assets ex ceeding $1 billion (or any affiliate thereof) may not serve at the same time as a manage ment official of an unaffiliated depository or ganization with total assets exceeding $500 million (or any affiliate thereof), regardless of the location of the two depository organizations. SECTION 212.4— Interlocking Relationships Permitted by Statute The prohibitions of section 212.3 do not apply in the case of any one or more of the follow ing organizations or to a subsidiary thereof; (a) a depository organization that has been placed formally in liquidation, or which is in the hands of a receiver, conservator, or other official exercising a similar function; (b) a corporation operating under section 25 or section 25A of the Federal Reserve Act (12 USC 601 et seq. and 12 USC 611 et seq., respectively) (Edge corporations and agree ment corporations); § 212.4 (c) a credit union being served by a manage ment official of another credit union; (d) a depository organization that does not do business within the United States except as an incident to its activities outside the United States; (e) a state-chartered savings and loan guar anty corporation; (f) a Federal Home Loan Bank or any other bank organized solely to serve depository in stitutions (a bankers’ bank) or solely for the purpose of providing securities clearing ser vices and services related thereto for deposi tory institutions and securities companies; (g) a depository organization that is closed or is in danger of closing as determined by the appropriate federal depository institutions reg ulatory agency and is acquired by another de pository organization. This exemption lasts for five years, beginning on the date the deposi tory organization is acquired; and (h)(1) a diversified savings and loan holding company (as defined in section 10(a)(1)(F) of the Home Owners’ Loan Act (12 USC 1467a(a)(l)(F)) with respect to the service of a director of such company who also is a director of an unaffiliated depository organi zation if— (i) both the diversified savings and loan holding company and the unaffiliated de positor organization notify their appro priate federal depository institutions regu latory agency at least 60 days before the dual service is proposed to begin; and (ii) the appropriate regulatory agency does not disapprove the dual service before the end of the 60-day period. (2) The Board may disapprove a notice of proposed service if it finds that— (i) the service cannot be structured or limited so as to preclude an anticompeti tive effect in financial services in any part of the United States; (ii) the service would lead to substantia] conflicts of interest or unsafe or unsound practices; or (iii) the notificant failed to furnish all the information required by the Board. (3) The Board may require that any inter ■ 3 § 212.4 lock permitted under this paragraph (h) be terminated if a change in circumstances oc curs with respect to one of the interlocked depository organizations that would have provided a basis for disapproval of the in terlock during the notice period. SECTION 212.5— Regulatory-Standards Exemption (a) Criteria. The Board may permit an inter lock that otherwise would be prohibited by the Interlocks Act and section 212.3 if— (1) the board of directors of the depository organization (or the organizers of a deposi tory organization being formed) that seeks the exemption provides a resolution to the Board certifying that the organization, after the exercise of reasonable efforts, is unable to locate any other candidate from the com munity or RMSA, as appropriate, who— (i) possesses the level of expertise re quired by the depository organization and who is not prohibited from service by the Interlocks Act; and (ii) is willing to serve as a management official; and (2) the Board, after reviewing an applica tion submitted by the depository organiza tion seeking the exemption, determines that— (i) the management official is critical to the safe and sound operations of the af fected depository organization; and (ii) service by the management official will not produce an anticompetitive effect with respect to the depository organization. (b) Presumptions. The Board applies the fol lowing presumptions when reviewing any ap plication for a regulatory-standards exemption: (1) An interlock will not have an anticom petitive effect if it involves depository orga nizations that, if merged, would not cause the post-merger Herfindahl-Hirschman In dex (HHI) to exceed 1800 and would not cause the HHI to increase by more than 200 points. This presumption does not ap ply to depository organizations subject to the major-assets prohibition of section 212.3(c). Regulation L (2) A proposed management official is crit ical to the safe and sound operations of a depository institution if— (i) that official is approved by the Board to serve as a director or senior executive officer of that institution pursuant to 12 CFR 225.71; and (ii) the institution had operated for less than two years, was not in compliance with minimum capital requirements, or otherwise was in a “troubled condition” as defined in 12 CFR 225.71 at the time the service under that section was approved. (c) Duration o f interlock. An interlock permit ted under this section may continue until the Board notifies the affected depository organi zations otherwise. The Board may require ter mination of any interlock permitted under this section if the Board concludes, after giving the affected persons the opportunity to re spond, that the determinations under paragraph (a)(2) of this section no longer may be made. A management official may continue serving the depository organization involved in the in terlock for a period of 15 months following the date of the order to terminate the inter lock. The Board may shorten this period under appropriate circumstances. SECTION 212.6— ManagementConsignment Exemption (a) Criteria. The Board may permit an inter lock that otherwise would be prohibited by the Interlocks Act and section 212.3 if the Board, after reviewing an application submit ted by the depository organization seeking an exemption, determines that the interlock would— (1) improve the provision of credit to lowand moderate-income areas; (2) increase the competitive position of a minority- or women-owned depository organization; (3) strengthen the management of a deposi tory institution that has been chartered for less than two years at the time an applica tion is filed under this part; or (4) strengthen the management of a deposi tory institution that is in an unsafe or un § 212.9 Regulation L sound condition as determined by the Board on a case-by-case basis. (b) Presumptions. The Board applies the fol lowing presumptions in reviewing any appli cation for a management-consignment exemption: (1) A proposed management official is ca pable of strengthening the management of a depository institution described in paragraph (a)(3) of this section if that official is ap proved by the Board to serve as a director or senior executive officer of that institution pursuant to 12 CFR 225.71 and the institu tion had operated for less than two years at the time the service was approved; and (2) A proposed management official is ca pable of strengthening the management of a depository institution described in paragraph (a)(4) of this section if the official is ap proved by the Board to serve as a director or senior executive officer of the institution pursuant to 12 CFR 225.71 and the institu tion was not in compliance with minimum capital requirements or otherwise was in a “troubled condition” as defined under 12 CFR 225.71 at the time service was approved. (c) D uration o f interlock. An interlock granted under this section may continue for a period of two years from the date of approval. The Board may extend this period for one ad ditional two-year period if the depository or ganization applies for an extension at least 30 days before the current exemption expires and satisfies one of the criteria specified in para graph (a) of this section. The provisions set forth in paragraph (b) of this section also ap ply to applications for extensions. SECTION 212.7— Change in Circumstances (a) Termination. A management official shall terminate his or her service or apply for an exemption to the Interlocks Act if a change in circumstances causes the service to become prohibited under that act. A change in circum stances may include, but is not limited to, an increase in asset size of an organization, a change in the delineation of the RMSA or community, the establishment of an office, an acquisition, a merger, a consolidation, or any reorganization of the ownership structure of a depository organization that causes a previ ously perm issible interlock to become prohibited. (b) Transition period. A management official described in paragraph (a) of this section may continue to serve the state member bank or bank holding company involved in the inter lock for 15 months following the date of the change in circumstances. The Board may shorten this period under appropriate circumstances. SECTION 212.8— Enforcement Except as provided in this section, the Board administers and enforces the Interlocks Act with respect to state member banks, bank holding companies, and affiliates of either, and may refer any case of a prohibited inter locking relationship involving these entities to the attorney general of the United States to enforce compliance with the Interlocks Act and this part. If an affiliate of a state member bank or a bank holding company is subject to the primary regulation of another federal de pository organization supervisory agency, then the Board does not administer and enforce the Interlocks Act with respect to that affiliate. SECTION 212.9— Effect o f Interlocks Act on Clayton Act The Board regards the provisions of the first three paragraphs of section 8 of the Clayton Act (15 USC 19) to have been supplanted by the revised and more comprehensive prohibi tions on management official interlocks be tween depository organizations in the Inter locks Act. Depository Institution Management Interlocks Act 12 USC 3201 et seq.; 92 Stat. 3672; Pub. L. 95-630, Financial Institutions Regulatory and Interest Rate Control Act, Title II (November 10, 1978) FIRA, TITLE II— Interlocking Directors SECTION 201— Short Title This title may be cited as the “Depository In stitution Management Interlocks Act” . [12 USC 3201 note.] SECTION 202— Definitions As used in this title— (1) the term “depository institution" means a commercial bank, a savings bank, a trust company, a savings and loan association, a building and loan association, a homestead association, a cooperative bank, an indus trial bank, or a credit union; (2) the term “depository holding company” means a bank holding company as defined in section 2(a) of the Bank Holding Com pany Act of 1956, a company which would be a bank holding company as defined in section 2(a) of the Bank Holding Company Act of 1956 but for the exemption con tained in section 2(a)(5)(F) thereof, or a savings and loan holding company as de fined in section 408(a)(1)(d) of the National Housing Act; (3) the characterization of any corporation (including depository institutions and depos itory holding companies), as an “affiliate of,” or as “affiliated” with any other cor poration means that— (A) one of the corporations is a deposi tory holding company and the other is a subsidiary thereof, or both corporations are subsidiaries of the same depository holding company, as the term “subsidi ary” is defined in either section 2(d) of the Bank Holding Company Act of 1956 in the case of a bank holding company or section 408(a)(1)(H) of the National Housing Act in the case of a savings and loan holding company; or (B) more than 25 percent of the voting stock of one corporation is beneficially owned in the aggregate by one or more persons who also beneficially own in the aggregate more than 25 percent of the voting stock of the other corporation; or (C) one of the corporations is a trust company all of the stock of which, ex cept for directors qualifying shares, was owned by one or more mutual savings bank on the date of enactment of this Act, and the other corporation is a mu tual savings bank; or (D) one of the corporations is a bank, in sured by the Federal Deposit Insurance Corporation and chartered under State law, and is a bankers’ bank, described in Paragraph Seventh of section 5136 of the Revised Statutes; or (E) one of the corporations is a bank, chartered under State law and insured by the Federal Deposit Insurance Corpora tion, the voting securities of which are held only by persons who are officers of other banks, as permitted by State law, and which bank is primarily engaged in providing banking services for other banks and not the public: Provided, how ever, That in no case shall the voting se curities of such corporation be held by such officers of the other banks in excess of 6 per centum of the paid-in capital and 6 per centum of the surplus of such a bank. (4) the term “management official” means an employee or officer with management functions, a director (including an advisory or honorary director except in the case of a depository institution with total assets of less than $100,000,000), a trustee of a busi ness organization under the control of trust ees, or any person who has a representative or nominee serving in any such capacity: Provided, That if a corporator, trustee, di rector, or other officer of a State-chartered savings bank or cooperative bank is specifi cally authorized under the laws of the State in which said institution is located to serve as a trustee, director, or other officer of a State-chartered trust company which does 7 § 202 Depository Institution Management Interlocks Act not make real estate mortgage loans and does not accept savings deposits from natu ral persons, then, for the purposes of this title, such corporator, trustee, director, or other officer shall not be deemed to be a management official of such trust company: And provided further, That if a management official of a State-chartered trust company which does not make real estate mortgage loans and does not accept savings deposits from natural persons is specifically author ized under the laws of the State in which said institution is located to serve as a cor porator, trustee, director, or other officer of a State-chartered savings bank or coopera tive bank, then, for the purposes of this ti tle, such management official shall not be deemed to be a management official of any such savings bank or cooperative bank; (5) the term “office” used with reference to a depository institution means either a prin cipal office or a branch; and (6) the term “appropriate Federal deposi tory institutions regulatory agency” means, with respect to any depository institution or depository holding company, the agency re ferred to in section 209 in connection with such institution or company. [12 USC 3201. As amended by acts of Nov. 10, 1988 (102 Stat 3819, 3820) and Sept. 23, 1994 (108 Stat. 2227).] SECTION 203— Management Official of Unafifiliated Institution or Company in Same Area A management official of a depository institu tion or a depository holding company may not serve as a management official of any other depository institution or depository holding company not affiliated therewith if an office of one of the institutions or any depository institution that is an affiliate of such institu tions is located within either— (1) the same primary metropolitan statisti cal area, the same metropolitan statistical area, or the same consolidated metropolitan statistical area that is not comprised of des ignated primary metropolitan statistical ar eas as defined by the Office of Management and Budget, except in the case of deposi tory institutions with less than $20,000,000 8 in assets in which case the provision of paragraph (2) shall apply, as that in which an office of the other institution or any de pository institution that is an affiliate of such other institution is located, or (2) the same city, town, or village as that in which an office of the other institution or any depository institution that is an affiliate of such other institution is located, or in any city, town, or village contiguous or ad jacent thereto. [12 USC 3202. As amended by act of Nov. 30, 1983 (97 Stat. 1267).] SECTION 204— Management Official of $1 Billion Institution or Company as Management Official o f Unaffiliated Institution or Company If a depository institution or a depository holding company has total assets exceeding $1,000,000,000, a management official of such institution or any affiliate thereof may not serve as a management official of any other nonaffiliated depository institution or deposi tory holding company having total assets ex ceeding $500,000,000 or as a management of ficial of any affiliate of such other institution. [12 USC 3203.] SECTION 205— Exceptions The prohibitions contained in sections 203 and 204 shall not apply in the case of any one or more of the following or subsidiary thereof: (1) A depository institution or depository holding company which has been placed formally in liquidation, or which is in the hands of a receiver, conservator, or other official exercising a similar function. (2) A corporation operating under section 25 or 25(a) of the Federal Reserve Act. (3) A credit union being served by a man agement official of another credit union. (4) A depository institution or depository holding company which does not do busi ness within any State of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, American Samoa, or the Virgin Islands ex Depository Institution Management Interlocks Act cept as an incident to its activities outside the United States. (5) A State-chartered savings and loan guaranty corporation. (6) A Federal Home Loan Bank or any other bank organized specifically to serve depository institutions. (7) A depository institution or a depository holding company which— (A) is closed or is in danger of closing, as determined by the appropriate Federal depository institutions regulatory agency in accordance with regulations prescribed by such agency; and (B) is acquired by another depository in stitution or depository holding company, during the 5-year period beginning on the date of the acquisition of the depository in stitution or depository holding company de scribed in subparagraph (A). (8) (A) A diversified savings and loan hold ing company (as defined in section 408(a)(1)(F) of the National Housing Act) with respect to the service of a di rector of such company who is also a di rector of any nonaffiliated depository in stitution or depository holding company (including a savings and loan holding company) if— (i) notice of the proposed dual service is given by such diversified savings and loan holding company to— (I) the appropriate Federal deposi tory institutions regulatory agency for such company; and (II) the appropriate Federal deposi tory institutions regulatory agency for the nonaffiliated depository insti tution or depository holding com pany of which such person is also a director, not less than 60 days before such dual service is proposed to begin; and (ii) the proposed dual service is not disapproved by any such appropriate Federal depository institutions regula tory agency before the end of such 60day period. (B) Any appropriate Federal depository institutions regulatory agency may disap prove, under subparagraph (A)(ii), a no § 205 tice of proposed dual service by any indi vidual if such agency finds that— (i) the dual service cannot be struc tured or limited so as to preclude the dual service’s resulting in a monopoly or substantial lessening of competition in financial services in any part of the United States; (ii) the dual service would lead to sub stantial conflicts of interest or unsafe or unsound practices; or (iii) the diversified savings and loan holding company has neglected, failed, or refused to furnish all the informa tion required by such agency. (C) Any appropriate Federal depository institutions regulatory agency may, at any time after the end of the 60-day period referred to in subparagraph (A), require that any dual service by any individual which was not disapproved by such agency during such period be terminated if a change in circumstances occurs with respect to any depository institution or depository holding company of which such individual is a director that would have provided a basis for disapproval of the dual service during such period. (9) Any savings association (as defined in section 10(a)(1)(A) of the Home Owners’ Loan Act or any savings and loan holding company (as defined in section 10(a)(1)(D) of such Act) which has issued stock in con nection with a qualified stock issuance pur suant to section 10(q) of such Act, except that this paragraph shall apply only with re spect to service as a single management of ficial of such savings association or holding company, or any subsidiary of such savings association or holding company, by a single management official of the savings and loan holding company which purchased the stock issued in connection with such qualified stock issuance, and shall apply only when the Director of the Office of Thrift Supervi sion has determined that such service is consistent with the purposes of this Act and the Home Owners’ Loan Act. [12 USC 3204. As amended by acts of Oct. 15, 1982 (96 Stat. 1524); Nov. 10, 1988 (102 S tat 3819); and Aug. 9, 1989 (103 Stat. 410).] 9 § 206 Depository Institution Management Interlocks Act SECTION 206— Management Official in Position Prior to November 10, 1978 (a) A person whose service in a position as a management official began prior to the date of enactment of this title and who was not im mediately prior to the date of enactment of this title in violation of section 8 of the Clay ton Act is not prohibited by section 203 or section 204 of this title from continuing to serve in that position for a period of, subject to the requirements of subsection (c), 20 years after the date of enactment of this title. The appropriate Federal depository institutions reg ulatory agency may provide a reasonable pe riod of time for compliance with this title, not exceeding fifteen months, after any change in circumstances which makes service described in the preceding sentence prohibited by this title, except that a merger, acquisition, in crease in total assets, establishment of one or more offices, or change in management re sponsibilities shall not constitute changes in circumstances which would make such service prohibited by section 203 or section 204 of this title. (b) Effective on the date of enactment of this title, a person who serves as a management official of a company which is not a deposi tory institution or a depository holding com pany and as a management official of a depos itory institution or a depository holding company is not prohibited from continuing to serve as a management official of that deposi tory institution or depository holding company as a result of that company which is not a depository institution or depository holding company becoming a diversified savings and loan holding company as that term is defined in section 408(a) of the National Housing Act. This subsection shall expire, subject to the re quirements of subsection (c), 20 years after the date of enactment of this title. (c) Review o f existing management interlocks. Upon the timely filing of a submission by a person petitioning to serve as a management official in more than 1 position pursuant to subsection (a) or (b), each appropriate Federal depository institutions regulatory agency shall, not later than 6 months after the date of en actment of this Act— 10 (1) review, on a case-by-case basis, the cir cumstances under which such person has served as a management official under the provisions of subsection (a) or (b); and (2) permit the management official to con-1 tinue to serve in such position only if— (A) such person has provided a resolu tion from the boards of directors of each affected depository institution, depository holding company, or company described in subsection (b), certifying to the appro priate Federal depository institutions reg ulatory agency for each of the institutions involved that there is no other qualified candidate from the community described in paragraph (1) or (2) of section 203 who— (i) possesses the level of expertise necessary for such service with respect to the affected depository institution, depository holding company, or com pany described in subsection (b); and (ii) is willing to serve as a manage ment official at the affected depository institution, depository holding com pany, or company described in subsec tion (b); and (B) the appropriate Federal depository institutions regulatory agency determines that continuation of service by the man agement official does not produce an anti-competitive effect with respect to each affected depository institution, de pository holding company, or company described in subsection (b). [12 USC 3205. As amended by acts of Dec. 26, 1981 (95 Stat. 1515); Nov. 10, 1988 (102 Stat. 3820, 3821); and Sept. 23, 1994 (108 Stat. 2235).] SECTION 207— Administration and Enforcement This title shall be administered and enforced by— (1) the Comptroller of the Currency with respect to national banks and banks located in the District of Columbia, (2) the Board of Governors of the Federal Reserve System with respect to State banks which are members of the Federal Reserve System, and bank holding companies, Depository Institution Management Interlocks Act (3) the Board of Directors of the Federal Deposit Insurance Corporation with respect to State banks which are not members of the Federal Reserve System but the deposits of which are insured by the Federal Deposit Insurance Corporation, (4) the Director of the Office of Thrift Su pervision with respect to a savings associa tion (the deposits of which are insured by the Federal Deposit Insurance Corporation) and savings and loan holding companies, (5) the National Credit Union Administra tion with respect to credit unions the ac counts of which are insured by the National Credit Union Administration, and (6) upon referral by the agencies named in the foregoing paragraphs (1) through (5), the Attorney General shall have the author ity to enforce compliance by any person with this title. [12 USC 3206. As amended by act of Aug. 9, 1989 (103 Stat. 440).] * * * * * SECTION 209— Rules and Regulations (a) Rules and regulations to carry out this ti tle may be prescribed by— (1) the Comptroller of the Currency with respect to national banks and banks located in the District of Columbia. (2) the Board of Governors of the Federal Reserve System with respect to State banks which are members of the Federal Reserve System, and bank holding companies. (3) the Board of Directors of the Federal Deposit Insurance Corporation with respect to State banks which are not members of the Federal Reserve System but the deposits of which are insured by the Federal Deposit Insurance Corporation. (4) the Federal Home Loan Bank Board with respect to institutions the accounts of which are insured by the Federal Savings and Loan Insurance Corporation, and sav ings and loan holding companies, and (5) the National Credit Union Administra tion with respect to credit unions the ac § 209 counts of which are insured by the National Credit Union Administration. (b) Regulatory standards. An appropriate Fed eral depository institution regulatory agency may permit, on a case-by-case basis, service by a management official which would other wise be prohibited by section 203 or 204 only if— (1) the board of directors of the affected depository institution, depository institution holding company, or company described in section 206(b), provides a resolution to the appropriate Federal depository institutions regulatory agency certifying that there is no other candidate from the community de scribed in paragraph (1) or (2) of section 203 who— (A) possesses the level of expertise nec essary for such service with respect to the affected depository institution, deposi tory institution holding company, or com pany described in section 206(b) and is not prohibited from service under section 203 or 204; and (B) is willing to serve as a management official at the affected depository institu tion, depository institution holding com pany, or company described in section 206(b); and (2) the appropriate Federal depository insti tutions regulatory agency determines that— (A) the management official is critical to the safe and sound operations of the af fected depository institution, depository institution holding company, or company described in section 206(b); (B) continuation of service by the man agement official does not produce an an ticompetitive effect with respect to the affected depository institution, depository institution holding company, or company described in section 206(b); and (C) the management official meets such additional requirements as the agency may impose. (c) Limited exception fo r management official consignment program. (1) Notwithstanding the requirements of subsection (b), an appropriate Federal de pository institutions regulatory agency may establish a program to permit, on a case-by11 § 209 Depository Institution Management Interlocks Act case basis, service by a management official which would otherwise be prohibited by section 203 or 204, for a period of not more than 2 years, if the agency determines that such service would— (A) improve the provision of credit to low- and moderate-income areas; (B) increase the competitive position of minority- and woman-owned institutions; or (C) strengthen the management of newly chartered institutions that are in an unsafe or unsound condition. SECTION 210— Functions and Powers o f Attorney General and Assistant Attorney General (a) For the purpose of the exercise by the At torney General of his enforcement functions under section 207(6) of this title, all of the functions and powers of the Attorney General under the Clayton Act are available to the At torney General, irrespective of any jurisdic tional tests in the Clayton Act, including the power to take enforcement actions in the same manner as if the violation has been a violation of the Clayton Act. (2) The appropriate Federal depository in stitutions regulatory agency may extend the 2-year period referred to in paragraph (1) for one additional period of not more than 2 years, subject to making a new determi nation described in subparagraphs (A) through (C) of paragraph (1). (b) All of the functions and powers of the At torney General or the Assistant Attorney Gen eral in charge of the Antitrust Division of the Department of Justice are available to the At torney General or to such Assistant Attorney General to investigate possible violations under section 207(6) of the title in the same manner as if such possible violations were possible violations of the Clayton Act. [12 USC 3207. As amended by act of Sept. 23, 1994 (108 Stat. 2236).] [12 USC 3208. As added by act of Oct. 15, 1982 (96 Stat. 1524).] 12 Board of Governors of the Federal Reserve System Regulation M Consumer Leasing 12 CFR 213, as amended effective October 31, 1996 Any inquiry relating to Regulation M should be addressed to the Federal Reserve Bank of the District in which the inquiry arises. November 1996 Contents Page Section 213.1—Authority, scope, purpose, and enforcement....................... 1 (a) A uthority.......................................... 1 (b) Scope and purpose .......................... 1 (c) Enforcement and liability................ 1 Section 213.2—Definitions.......................... 1 Section 213.3—General disclosure requirements............................................ 2 (a) General requirements...................... 2 (b) Additional information; nonsegregated disclosures................ 2 (c) Multiple lessors or lessees............. 3 (d) Use of estimates............................. 3 (e) Effect of subsequent occurrence . . 3 (f) Minor variations............................. 3 Section 213.4—Content of disclosures . . . . 3 (a) Description of property .................. 3 (b) Amount due at lease sig n in g ........ 3 (c) Payment schedule and total amount of periodic paym ents.......... 3 (d) Other charges.................................. 3 (e) Total of payments........................... 3 (f) Payment calculation......................... 3 (g) Early termination............................. 4 (h) Maintenance responsibilities........... 4 (i) Purchase option................................ 4 (j) Statement referencing nonsegregated disclosures................ 4 (k) Liability between residual and realized values ................................. 5 (0 Right of appraisal........................... 5 (m) Liability at end of lease term based on residual v a lu e ................... 5 (n) Fees and ta x e s ................................ 5 (o) Insurance......................................... 5 (p) Warranties or guarantees.................. 5 (q) Penalties and other chargesfor delinquency........................................ 5 (r) Security interest................................ 5 Page (s) Limitations on rate information . . . . 5 Section 213.5—Renegotiations, extensions, and assumptions ................... 5 (a) Renegotiation................................... 5 (b) Extension......................................... 6 (c) Assumption....................................... 6 (d) Exceptions....................................... 6 Section 213.6 [Reserved] Section 213.7—Advertising.......................... 6 (a) General ru le ..................................... 6 (b) Clear-and-conspicuous standard . . . . 6 (c) Catalogs and multipage advertisements................................... 6 (d) Advertisement of terms that require additional disclosure............ 6 (e) Alternative disclosures— merchandise tag s.............................. 7 (f) Alternative disclosures— television or radio advertisements . . 7 Section 213.8—Record retention................ 7 Section 213.9—Relation to state laws . . . . 7 (a) Inconsistent state law ....................... 7 (b) Exemptions....................................... 7 Appendix A—Model forms ....................... 9 Appendix B—Federal enforcement agencies.............................................. 15 Appendix C—Issuance of staff interpretations..................................... 15 Truth in Lending Act ............................ 17 Section 181—Definitions..................... 17 Section 182—Consumer lease disclosures....................................... 17 Section 183—Lessee’s liability on expiration or termination of lease . . . 18 Section 184—Consumer lease advertising....................................... 18 Section 185—Civil liability................ 19 Section 186—Relation to state laws . . . 20 Regulation M Consumer Leasing 12 CFR 213; as amended effective October 31, 1996* | SECTION 213.1— Authority, Scope, Purpose, and Enforcement (a) Authority. The regulation in this part, known as Regulation M, is issued by the Board of Governors of the Federal Reserve System to implement the consumer leasing provisions of the Truth in Lending Act, which is tide I of the Consumer Credit Protection Act, as amended (15 USC 1601 et seq.). (b) Scope and purpose. This part applies to all persons that are lessors of personal prop erty under consumer leases as those terms are defined in section 213.2(e)(1) and (h). The purpose of this part is— (1) to ensure that lessees of personal prop erty receive meaningful disclosures that en able them to compare lease terms with other leases and, where appropriate, with credit transactions; (2) to limit the amount of balloon payments in consumer lease transactions; and (3) to provide for the accurate disclosure of lease terms in advertising. (c) Enforcement and liability. Section 108 of the act contains the administrative enforce ment provisions. Sections 112, 130, 131, and 185 of the act contain the liability provisions for failing to comply with the requirements of the act and this part. SECTION 213.2— Definitions For the purposes of this part the following definitions apply: (a) Act means the Truth in Lending Act (15 USC 1601 et seq.) and the Consumer Leasing Act is chapter 5 of the Truth In Lending Act. (b) Advertisement means a commercial mes sage in any medium that directly or indirectly promotes a consumer lease transaction. (c) Board refers to the Board of Governors of the Federal Reserve System. * Compliance with the revised version is optional until October 1, 1997. (d) Closed-end lease means a consumer lease other than an open-end lease as defined in this section. (e) (1) Consumer lease means a contract in the form of a bailment or lease for the use of personal property by a natural person primarily for personal, family, or household purposes, for a period exceeding four months and for a total contractual obliga tion not exceeding $25,000, whether or not the lessee has the option to purchase or oth erwise become the owner of the property at the expiration of the lease. Unless the con text indicates otherwise, in this part “lease” means “consumer lease.” (2) The term does not include a lease that meets the definition of a credit sale in Reg ulation Z (12 CFR 226.2(a)). It also does not include a lease for agricultural, busi ness, or commercial purposes or a lease made to an organization. (3) This part does not apply to a lease transaction of personal property which is in cident to the lease of real property and which provides that— (i) the lessee has no liability for the value of the personal property at the end of the lease term except for abnormal wear and tear, and (ii) the lessee has no option to purchase the leased property. (f) Gross capitalized cost means the amount agreed upon by the lessor and lessee as the value of the leased property and any items that are capitalized or amortized during the lease term, including but not limited to taxes, insurance, service agreements, and any out standing balance from a prior loan or lease. Capitalized cost reduction means the total amount of any rebate, cash payment, net trade-in allowance, and noncash credit that reduces the gross capitalized cost. The ad justed capitalized cost equals the gross capi talized cost less the capitalized cost reduction, and is the amount used by the lessor in calcu lating the base periodic payment. 1 § 213.2 (g) Lessee means a natural person who enters into or is offered a consumer lease. (h) Lessor means a person who regularly leases, offers to lease, or arranges for the lease of personal property under a consumer lease. A person who has leased, offered, or arranged to lease personal property more than five times in the preceding calendar year or more than five times in the current calendar year is subject to the act and this part. (i) Open-end lease means a consumer lease in which the lessee’s liability at the end of the lease term is based on the difference between the residual value of the leased property and its realized value. (j) Organization means a corporation, trust, estate, partnership, cooperative, association, or government entity or instrumentality. (k) Person means a natural person or an organization. (0 Personal property means any property that is not real property under the law of the state where the property is located at the time it is offered or made available for lease. (m) Realized value means— (1) the price received by the lessor for the leased property at disposition; (2) the highest offer for disposition of the leased property; or (3) the fair market value of the leased property at the end of the lease term. (n) Residual value means the value of the leased property at the end of the lease term, as estimated or assigned at consummation by the lessor, used in calculating the base peri odic payment. (o) Security interest and security mean any in terest in property that secures the payment or performance of an obligation. (p) State means any state, the District of Co lumbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States. 2 Regulation M SECTION 213.3— General Disclosure Requirements (a) General requirements. A lessor shall make the disclosures required by section 213.4, as applicable. The disclosures shall be made clearly and conspicuously in writing in a form the consumer may keep, in accordance with this section. (1) Form o f disclosures. The disclosures re quired by section 213.4 shall be given to the lessee together in a dated statement that identifies the lessor and the lessee; the dis closures may be made either in a separate statement that identifies the consumer lease transaction or in the contract or other docu ment evidencing the lease. Alternatively, the disclosures required to be segregated from other information under paragraph (a)(2) of this section may be provided in a separate dated statement that identifies the lease, and the other required disclosures may be provided in the lease contract or other document evidencing the lease. In a lease of m ultiple items, the property description required by section 213.4(a) may be given in a separate statement that is incorporated by reference in the disclosure statement required by this paragraph. (2) Segregation o f certain disclosures. The following disclosures shall be segregated from other information and shall contain only directly related information: section I 213.4(b) through (f), (g)(2), (h)(3), (i)(l), (j), and (m)(l). The headings, content, and format for the disclosures referred to in this paragraph (a)(2) shall be provided in a manner substantially similar to the applica ble model form in appendix A of this part. (3) Timing o f disclosures. A lessor shall provide the disclosures to the lessee prior to the consummation of a consumer lease. (4) Language o f disclosures. The disclo sures required by section 213.4 may be made in a language other than English pro vided that they are made available in En glish upon the lessee’s request. (b) Additional information; nonsegregated disclosures. Additional information may be provided with any disclosure not listed in paragraph (a)(2) of this section, but it shall not be stated, used, or placed so as to mislead Regulation M or confuse the lessee or contradict, obscure, or detract attention from any disclosure required by this part. (c) Multiple lessors or lessees. When a trans action involves more than one lessor, the dis closures required by this part may be made by one lessor on behalf of all the lessors. When a lease involves more than one lessee, the lessor may provide the disclosures to any lessee who is primarily liable on the lease. (d) Use o f estimates. If an amount or other item needed to comply with a required disclo sure is unknown or unavailable after reasona ble efforts have been made to ascertain the information, the lessor may use a reasonable estimate that is based on the best information available to the lessor, is clearly identified as an estimate, and is not used to circumvent or evade any disclosures required by this part. (e) Effect o f subsequent occurrence. If a re quired disclosure becomes inaccurate because of an event occurring after consummation, the inaccuracy is not a violation of this part. (f) Minor variations. A lessor may disregard the effects of the following in making disclosures: (1) that payments must be collected in whole cents; (2) that dates of scheduled payments may be different because a scheduled date is not a business day; (3) that months have different numbers of days; and (4) that February 29 occurs in a leap year. SECTION 213.4— Content of Disclosures For any consumer lease subject to this part, the lessor shall disclose the following infor mation, as applicable: (a) Description o f property. A brief descrip tion of the leased property sufficient to iden tify the property to the lessee and lessor. (b) Amount due at lease signing. The total amount to be paid prior to or at consumma tion, using the term “amount due at lease signing.” The lessor shall itemize each com § 213.4 ponent by type and amount, including any re fundable security deposit, advance monthly or other periodic payment, and capitalized cost reduction; and in motor vehicle leases, shall itemize how the amount due will be paid, by type and amount, including any net trade-in allowance, rebates, noncash credits, and cash payments in a format substantially similar to the model forms in appendix A of this part. (c) Payment schedule and total amount o f pe riodic payments. The number, amount, and due dates or periods of payments scheduled under the lease, and the total amount of the periodic payments. (d) Other charges. The total amount of other charges payable to the lessor, itemized by type and amount, that are not included in the periodic payments. Such charges include the amount of any liability the lease imposes upon the lessee at the end of the lease term; the potential difference between the residual and realized values referred to in paragraph (k) of this section is excluded. (e) Total o f payments. The total of payments, with a description such as “the amount you will have paid by the end of the lease.” This amount is the sum of the amount due at lease signing (less any refundable amounts), the to tal amount of periodic payments (less any por tion of the periodic payment paid at lease signing), and other charges under paragraphs (b), (c), and (d) of this section. In an openend lease, a description such as “you will owe an additional amount if the actual value of the vehicle is less than the residual value” shall accompany the disclosure. (f) Payment calculation. In a motor-vehicle lease, a mathematical progression of how the scheduled periodic payment is derived, in a format substantially similar to the applicable model form in appendix A of this part, which shall contain the following: (1) Gross capitalized cost. The gross capi talized cost, including a disclosure of the agreed-upon value of the vehicle, a descrip tion such as “the agreed-upon value of the vehicle [state the amount] and any items you pay for over the lease term (such as service contracts, insurance, and any out standing prior loan or lease balance),” and 3 § 213.4 a statement of the lessee’s option to receive a separate written itemization of the gross capitalized cost. If requested by the lessee, the itemization shall be provided before consummation. (2) Capitalized cost reduction. The capital ized cost reduction, with a description such as “the amount of any net trade-in allow ance, rebate, noncash credit, or cash you pay that reduces the gross capitalized cost.” (3) Adjusted capitalized cost. The adjusted capitalized cost, with a description such as “the amount used in calculating your base [periodic] payment.” (4) Residual value. The residual value, with a description such as “the value of the ve hicle at the end of the lease used in calcu lating your base [periodic] payment.” (5) D epreciation and any am ortized amounts. The depreciation and any amor tized amounts, which is the difference be tween the adjusted capitalized cost and the residual value, with a description such as “the amount charged for the vehicle’s de cline in value through normal use and for any other items paid over the lease term.” (6) Rent charge. The rent charge, with a description such as “the amount charged in addition to the depreciation and any amor tized amounts.” This amount is the differ ence between the total of the base periodic payments over the lease term minus the de preciation and any amortized amounts. (7) Total o f base periodic payments. The total of base periodic payments with a description such as “depreciation and any amortized amounts plus the rent charge.” (8) Lease term. The lease term with a description such as “the number of [periods of repayment] in your lease.” (9) Base periodic payment. The total of the base periodic payments divided by the num ber of payment periods in the lease. (10) Item ization o f other charges. An itemization of any other charges that are part of the periodic payment. (11) Total periodic payment. The sum of the base periodic payment and any other charges that are part of the periodic payment. (g) Early termination. 4 Regulation M (1) Conditions and disclosure o f charges. A statement of the conditions under which the lessee or lessor may terminate the lease prior to the end of the lease term; and the amount or a description of the method for determining the amount of any penalty or other charge for early termination, which must be reasonable. (2) Early-termination notice. In a motorvehicle lease, a notice substantially similar to the following: “Early Termination. You may have to pay a substantial charge if you end this lease early. The charge may be up to several thousand dollars. The actual charge will depend on when the lease is terminated. The earlier you end the lease, the greater this charge is likely to be.” (h) Maintenance responsibilities. The follow ing provisions are required: (1) Statement o f responsibilities. A state ment specifying whether the lessor or the lessee is responsible for maintaining or ser vicing the leased property, together with a brief description of the responsibility; (2) Wear-and-use standard A statement of the lessor’s standards for wear and use (if any), which must be reasonable; and (3) Notice o f wear-and-use standard. In a motor vehicle lease, a notice regarding wear and use substantially similar to the follow ing: “Excessive Wear and Use. You may be charged for excessive wear based on our standards for normal use.” The notice shall also specify the amount or method for de termining any charge for excess mileage. (i) Purchase option. A statement of whether or not the lessee has the option to purchase the leased property, and: (1) End o f lease term. If at the end of the lease term, the purchase price; and (2) During lease term. If prior to the end of the lease term, the purchase price or the method for determining the price and when the lessee may exercise this option. (j) Statement referencing nonsegregated dis closures. A statement that the lessee should refer to the lease documents for additional in formation on early termination, purchase op tions and maintenance responsibilities, warran Regulation M ties, late and default charges, insurance, and any security interests, if applicable. (k) Liability between residual and realized values. A statement of the lessee’s liability, if any, at early termination or at the end of the lease term for the difference between the residual value of the leased property and its realized value. (J) Right o f appraisal. If the lessee’s liability at early termination or at the end of the lease term is based on the realized value of the leased property, a statement that the lessee may obtain, at the lessee’s expense, a profes sional appraisal by an independent third party (agreed to by the lessee and the lessor) of the value that could be realized at sale of the leased property. The appraisal shall be final and binding on the parties. (m) Liability at end o f lease term based on residual value. If the lessee is liable at the end of the lease term for the difference be tween the residual value of the leased property and its realized value: (1) Rent and other charges. The rent and other charges, paid by the lessee and re quired by the lessor as an incident to the lease transaction, with a description such as “the total amount of rent and other charges imposed in connection with your lease [state the amount].” (2) Excess liability. A statement about a re buttable presumption that, at the end of the lease term, the residual value of the leased property is unreasonable and not in good faith to the extent that the residual value exceeds the realized value by more than three times the base monthly payment (or more than three times the average payment allocable to a monthly period, if the lease calls for periodic payments other than monthly); and that the lessor cannot collect the excess amount unless the lessor brings a successful court action and pays the lessee’s reasonable attorney’s fees, or unless the ex cess of the residual value over the realized value is due to unreasonable or excessive wear or use of the leased property (in which case the rebuttable presumption does not apply). (3) Mutually agreeable final adjustment. A § 213.5 statement that the lessee and lessor are per mitted, after termination of the lease, to make any mutually agreeable final adjust ment regarding excess liability. (n) Fees and taxes. The total dollar amount for all official and license fees, registration, title, or taxes required to be paid to the lessor in connection with the lease. (o) Insurance. A brief identification of insur ance in connection with the lease including: (1) Voluntary insurance. If the insurance is provided by or paid through the lessor, the types and amounts of coverage and the cost to the lessee; or (2) Required insurance. If the lessee must obtain the insurance, the types and amounts of coverage required of the lessee. (p) Warranties or guarantees. A statement identifying all express warranties and guaran tees from the manufacturer or lessor with re spect to the leased property that apply to the lessee. (q) Penalties and other charges fo r delin quency. The amount or the method of deter mining the amount of any penalty or other charge for delinquency, default, or late pay ments, which must be reasonable. (r) Security interest. A description of any se curity interest, other than a security deposit disclosed under paragraph (b) of this section, held or to be retained by the lessor; and a clear identification of the property to which the security interest relates. (s) Limitations on rate information. If a lessor provides a percentage rate in an advertisement or in documents evidencing the lease transac tion, a notice stating that “this percentage may not measure the overall cost of financing this lease” shall accompany the rate disclo sure. The lessor shall not use the term “an nual percentage rate,” “annual lease rate,” or any equivalent term. SECTION 213.5— Renegotiations, Extensions, and Assumptions (a) Renegotiation. A renegotiation occurs when a consumer lease subject to this part is 5 § 213.5 satisfied and replaced by a new lease under taken by the same consumer. A renegotiation requires new disclosures, except as provided in paragraph (d) of this section. (b) Extension. An extension is a continuation, agreed to by the lessor and the lessee, of an existing consumer lease beyond the originally scheduled end of the lease term, except when the continuation is the result of a renegoti ation. An extension that exceeds six months requires new disclosures, except as provided in paragraph (d) of this section. (c) Assumption. New disclosures are not re quired when a consumer lease is assumed by another person, whether or not the lessor charges an assumption fee. (d) Exceptions. New disclosures are not re quired for the following, even if they meet the definition of a renegotiation or an extension: (1) a reduction in the lease charge; (2) the deferment of one or more payments, whether or not a fee is charged; (3) the extension of a lease for not more than six months on a month-to-month basis or otherwise; (4) a substitution of leased property with property that has a substantially equivalent or greater economic value, provided no other lease terms are changed; (5) the addition, deletion, or substitution of leased property in a multiple-item lease, provided the average periodic payment does not change by more than 25 percent; or (6) an agreement resulting from a court proceeding. SECTION 213.6 [Reserved] SECTION 213.7— Advertising (a) General rule. An advertisement for a con sumer lease may state that a specific lease of property at specific amounts or terms is avail able only if the lessor usually and customarily leases or will lease the property at those amounts or terms. (b) Clear-and-conspicuous standard. Disclo6 Regulation M sures required by this section shall be made clearly and conspicuously. (1) Amount due at lease signing. Except for the statement of a periodic payment, any affirmative or negative reference to a charge that is a part of the total amount due at lease signing under paragraph (d)(2Xii) of this section, such as the amount of any cap italized cost reduction (or no capitalized cost reduction is required), shall not be more prominent than the disclosure of the total amount due at lease signing. (2) Advertisement o f a lease rate. If a les sor provides a percentage rate in an adver tisement, the rate shall not be more promi nent than any of the disclosures in section 213.4, with the exception of the notice in section 213.4(s) required to accompany the rate; and lessor shall not use the term “an nual percentage rate,” “annual lease rate,” or equivalent term. (c) Catalogs and multipage advertisements. A catalog or other multipage advertisement that provides a table or schedule of the required disclosures shall be considered a single adver tisement if, for lease terms that appear without all the required disclosures, the advertisement refers to the page or pages on which the table or schedule appears. (d) Advertisement o f terms that require addi tional disclosure. (1) Triggering terms. An advertisement that states any of the following items shall con tain the disclosures required by paragraph (d)(2) of this section, except as provided in paragraphs (e) and (f) of this section: (i) the amount of any payment; (ii) the number of required payments; or (iii) a statement of any capitalized cost reduction or other payment required prior to or at consummation, or that no pay ment is required. (2) Additional terms. An advertisement stat ing any item listed in paragraph (d)(1) of this section shall also state the following items: (i) that the transaction advertised is a lease; (ii) the total amount due at lease signing, or that no payment is required; (iii) the number, amounts, due dates or Regulation M periods of scheduled payments, and total of such payments under the lease; (iv) a statement of whether or not the lessee has the option to purchase the leased property, and where the lessee has the option to purchase at the end of the lease term, the purchase-option price. The method of determining the purchaseoption price may be substituted in dis closing the lessee’s option to purchase the leased property prior to the end of the lease term; (v) a statement of the amount, or the method for determining the amount, of the lessee’s liability (if any) at the end of the lease term; and (vi) a statement of the lessee’s liability (if any) for the difference between the residual value of the leased property and its realized value at the end of the lease term. (e) Alternative disclosures—merchandise tags. A merchandise tag stating any item listed in paragraph (d)(1) of this section may comply with paragraph (d)(2) of this section by refer ring to a sign or display prominently posted in the lessor’s place of business that contains a table or schedule of the required disclosures. (f) Alternative disclosures—television or radio advertisements. (1) Toll-free number or print advertisement. An advertisement made through television or radio stating any item listed in paragraph (d)(1) of this section complies with para graph (d)(2) of this section if the advertise ment states the items listed in paragraphs (d)(2)(i) through (iii) of this section, and— (i) lists a toll-free telephone number along with a reference that such number may be used by consumers to obtain the information required by paragraph (d)(2) of this section; or (ii) directs the consumer to a written ad vertisement in a publication of general circulation in the community served by the media station, including the name and the date of the publication, with a state ment that information required by para graph (d)(2) of this section is included in the advertisement. The written advertise ment shall be published beginning at § 213.9 least three days before and ending at least ten days after the broadcast. (2) Establishment o f toll-free number. (i) The toll-free telephone number shall be available for no fewer than ten days, beginning on the date of the broadcast. (ii) The lessor shall provide the informa tion required by paragraph (d)(2) of this section orally, or in writing upon request. SECTION 213.8— Record Retention A lessor shall retain evidence of compliance with the requirements imposed by this part, other than the advertising requirements under section 213.7, for a period of not less than two years after the date the disclosures are required to be made or an action is required to be taken. SECTION 213.9— Relation to State Laws (a) Inconsistent state law. A state law that is inconsistent with the requirements of the act and this part is preempted to the extent of the inconsistency. If a lessor cannot comply with a state law without violating a provision of this part, the state law is inconsistent within the meaning of section 186(a) of the act and is preempted, unless the state law gives greater protection and benefit to the consumer. A state, through an official having primary en forcement or interpretative responsibilities for the state consumer leasing law, may apply to the Board for a preemption determination. (b) Exemptions. (1) Application. A state may apply to the Board for an exemption from the require ments of the act and this part for any class of lease transactions within the state. The Board will grant such an exemption if the Board determines that — (i) the class of leasing transactions is subject to state-law requirements substan tially similar to the act and this part or that lessees are afforded greater protec tion under state law; and (ii) there is adequate provision for state enforcement. 7 § 213.9 (2) Enforcement and liability. After an ex emption has been granted, the requirements of the applicable state law (except for addi tional requirements not imposed by federal 8 Regulation M law) will constitute the requirements of the act and this part. No exemption will extend to the civil liability provisions of sections 130, 131, and 185 of the act. Regulation M Appendix A-l APPENDIX A— Model Forms A -l— Model Open-End or Finance Vehicle Lease Disclosures Appendix A-l Model Open-End or Finance Vehicle Lease Disclosures Federal Consumer Leasing Act Disclosures Date Leaaee<s) Amount Due at Leaae Signing Monthly Payments (Itemized below)* Your first monthly payment o f $ Other Charges (n o t p a rt o f y o u r m oodily is due on , followed by payments o f $ the $ due oo Total of Payments paym ent) (T h e a m ou nt y o u w ill have p aid by th e e n d o f th e lease) Disposition fee (if you do imt purchase the vehicle) S [Annual tax] o f each month. The total o f your monthly payments is $ Total S * I Due At Lease Signing: amount if the actual value of die vehicle is less than the residual value. a t Amount Dne at Leaae Signing How the Amount Dne at Lease Signing wffl be paid: Capitalized cost reduction First monthly payment Refundable security deposit Title fees Registration fees Net trade-in allowance Rebates and noncash credits Amount to be paid in cash Total $ . Your monthly p n y ent is ilitim fcm l as shown below: Groas rapitaMaed coat. The agreed upon value of the vehicle ($_______________ ) and any items you pay over the lease term (such as service contracts, insurance, and any outstanding prior loan or lease balance)......................................................................................................................................................................... $_ If you want an itemization of this amount, please check this box. C D i. The amount of any net trade-in allowance, rebate, noncash credit, or cash you pay that reduces the gross capitalized cost.......................................................................................................................... The amount used in calculating your base monthly payment......................................... The value of the vehicle at the end of the lease used in calculating your base monthly payment.. id any amorttud amounts. The amount charged for the vehicle's decline in value through normal use and for other items paid over die lease term............................................................................... Rent charge. The amount charged in addition to the depreciation and any amortized amounts.............................. Total of baae monthly payments. The depreciation and any amortized amounts plus the rent charge................... Leaae term. The number of months in your lease...................................................................................................... Baae monthly payment................................................................................................................................................ Rent and other charges. The total amount of rent and other charges imposed in connection with your lease $ _ a . Yon may have to pay a subeti ittal charae if yon end this lease early. The chnrae may be ap to . The actual charge will depend c i when the leaae is terminated. The earier yon end the leaae, the this charge la Hedy to be. Wear and Use. You may be charged for excessive wear based on our standards for normal use [and for mileage in excess ____miles per year at die rate o f ________ per mile]. Purchase Option at End o f Lease Term. [You have an option to purchase the vehicle at the end of die lease term for $ ___________ [and a purchase option fee of $ ________________ J.] [You do not have an option to purchase the vehicle at die end of the lease term.) Other Important Terms. See your lease documents for additional information on early termination, purchase options and maintenance responsibilities, warranties, late and default charges, insurance, and any security interest, if applicable. 9 Appendix A-l Regulation M Appendix A-l Model Open-End or Finance Vehicle Lease Disclosures Page 2 of 2 (The following protM w i are the noraegregated disclosures required under Regulation M.] Official Fees and T a x e s. The total amount you will pay for official and license fees, registration, title, and taxes over the term o f your lease, whether inchided w ith your monthly payments or assessed otherwise: S __________________ Insurance. The following types and amounts o f insurance w ill be acquired in connection w ith this lease: -------------- We (lessor) will provide the insurance coverage quoted above for a total premium cost o f $ ------------------------------------------ You (lessee) agree to provide insurance coverage in the amount and types indicated above. End of Term Liability, (a) The residual value ( $ ______________ ) o f the vehicle is based on a reasonable, good faith estimate o f the value o f the vehicle at die end o f the lease term. If the actual value o f die vehicle at that time is greater than die residual value, you will have no further liability under this lease, except for other charges already incurred [and are entitled to a credit o r refund o f any surplus.] If the actual value o f the vehicle is lessthan the residual value, you will be if: liable for any difference up to $ _________________ (3 tim es the monthly payment). For any difference in excessof that am ount, you will be liable only 1. Excessive use or damage [as described in paragraph____ ] [representing more than normal w ear and use] resulted in an unusually low value a t the end o f the term. 2. The m atter is not otherwise resolved and we win a lawsuit against you seeking a higher payment. 3. You voluntarily agree with us after the end o f the lease term to make a higher payment. Should we bring a lawsuit against you, we must prove that our original estimate o f die value o f the leased property at the end o f the lease term was reasonable and was made in good faith. For example, we might prove that the actual was less than die original estimated value, although the original estimate was reasonable, because o f an unanticipated decline in value for that type o f vehicle. We must also pay your attorney’s fees. (b) If you disagree with the value we assign to the vehicle, you may obtain, at your own expense, from an independent third party agreeable to both o f us, a professional appraisal of th e ____________ value o f the leased vehicle which could be realized at sale. The appraised value shall then be used as the actual value. Standards for Wear and Use. The following standards are applicable for determining unreasonable or excess w ear and use o f the leased vehicle: Maintenance. [You are responsible for the following maintenance and servicing o f the leased vehicle: --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ]. [We are responsible for the following maintenance and servicing of the leased vehicle: _________________________________________________________ ]• Warranties. The leased vehicle is subject to the following express warranties: Early Termination and Default, (a) You may terminate this lease before the end o f the lease term under the following conditions: The charge for such early termination is: (b) We may terminate this lease before the end o f the lease term under the following conditions: Upon such termination we shall be entitled to the following charge(s) for: (c) To the extent these charges take into account the value o f the vehicle at term ination, if you disagree with the value we assign to the vehicle, you may obtain, a t your own expense, from an independent third party agreeable to both o f us, a professional appraisal o f th e ____________________value o f the leased vehicle which could be realized at sale. The appraised value shall then be used as the actual value. Security Interest. We reserve a security interest o f the following type in the property listed below to secure performance of your obligations under this lease: Late Payments. The charge for late payments is: ______________________________________________________________________________________________ Option to Purchase Leased Property Prior to the End of the Lease. [You have an option to purchase the leased vehicle prior to the end o f die term. [S ________________________ /[the method o f determining the price].] [You do not have an option to purchase the leased vehicle.] The price will be 10 Regulation M Appendix A-2 A-2— Model Closed-End or Net Vehicle Lease Disclosures Appendix A-2 Model Closed-End or Net Vehicle Lease Disclosures Federal Consumer Leasing Act Disclosures D ate______________________ Monthly Payments (Itemized below)* Other Charges (not part of your monthly payment) Your first mootfciy payment of $ is due on payments of S . followed by due on Disposition fee (if you do not purchase the vehicle) ( A nnual tax] Total At Lease Signing- Total of Payments (The amount you will have paid by the end of the lease) S S Bow the Aasoaat Due at Lenee Signing wM be paid; t (eduction First monthly payment Refundable security deposit Tide fees Registration fees $ _______________ _______________ _______________ _______________ '__________ Total Net trade-in allowance Rebates and noncash credits Amount to be paid in cadi $ _ S ________ ________ ________ Total $ _________ Gross caphaMxrd cost. The agreed upon value of the vehicle ($_______________ ) and any items you pay over the lease term (such as service contracts, insurance, and any outstanding prior loan or lease balance)......................................................................................................................................................................... $_ If you want an itemization of this amount, please check this box.D Capitattwd cost redaction. The amount of any net trade-in allowance, rebate, noncash credit, or cash you pay that reduces die gross capitalized cost.................................................................................................................................. . ” - Adjusted capitalized cost. The amount used in calculating your base monthly payment...................................................... The value of the vehicle at the end of the lease used in calculating your base monthly payment............... d any amortized amounts. The amount charged for the vehicle's decline in value through normal use and for other items paid over the lease term............................................................................................ Rent charge. The amount charged in addition to the depreciation and any amortized amounts............................................ Total o f base monthly payments. The depreciation and any amortized amounts plus the rent charge................................ Lease term. The number of months in your lease.................................................................................................................... Base monthly payment..............................................................................................................................................................“ - Monthly sales/nse ta x .................................................................................................................................................................. + - + Total monthly paym ent............................................................................................................................................................ Early Tet . You may have to pay a • e lf you end this lease early. The charae a g be ap to thousand doBars. The actual charge will depend on when the lease is terminated. The earlier you end the lease, the L this charge is likely to be. Wear and Use. You may be charged for excessive wear based on our standards for normal use [and for mileage in e ____miles per year at the rate o f ________ per mile]. Purchase Optloa at End of Lease Term. [You have an option to purchase the vehicle at the end of the lease term for $ ___________ [and a purchase option fee of $ ________________ J.] [You do not have an option to purchase the vehicle at the end of die lease term.] Other Important Terms. See your lease documents for additional information on early termination, purchase options and maintenance responsibilities, warranties, late and default charges, insurance, and any security interest, if applicable. 11 Appendix A-2 Regulation M A ppendix A -2 M od el C lo sed-E n d o r N e t V eh icle L ease D isclo su res Page 2 of 2 [The following provisions a re die nonsegregated disclosures req uired under Regulation M .] Official Fees and Taxes. The total amount you w ill pay for official and license fees, registration, title, and taxes over die term o f your lease, whether included with your monthly payments or assessed otherwise: $ __________________ Insurance. The following types and amounts o f insurance w ill be acquired in connection with this lease: -------------- We (lessor) w ill provide the insurance coverage quoted above for a total premium cost o f $ ___________________ -------------- You (lessee) agree to provide insurance coverage in the amount and type* indicated above. Standards for Wear and Use. The following standards are applicable for determining unreasonable o r excess w ear and use o f the leased vehicle: Maintenance. [You are responsible for the following maintenance and servicing o f die leased vehicle: ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- J. [We are responsible for the following maintenance and servicing o f the leased vehicle: _________________________________________________________ ]. Warranties. The leased vehicle is subject to the following express warranties: Early Termination and Default, (a) You may terminate this lease before die end o f the lease term under die following conditions: The charge for such early termination is: (b) We may terminate this lease before the end o f the lease term under the following conditions: Upon such termination we shall be entitled to the following charge(s) for: (c) To the extent these charges take into account die value o f the vehicle at term ination, if you disagree w ith the value we assign to the vehicle, you may obtain, at your own expense, from an independent third party agreeable to both o f us, a professional appraisal o f th e ____________________value o f the leased vehicle which could be realized at sale. The appraised value shall then be used as the actual value. Security Interest. We reserve a security interest of the following type in the property listed below to secure performance o f your obligations under this lease: Late Payments. The charge for late payments is: ______________________________________________________________________________________________ Option to Purchase Leased Property Prior to the End of the Lease. [You have an option to purchase the leased vehicle prior to the end of the term. The price w ill be [$ ________________________ /[the method o f determining die price].] [You do not have an option to purchase the leased vehicle.] 12 Regulation M Appendix A-3 A-3— Model Furniture Lease Disclosures Appendix A-3 Model Furniture Lease Disclosures Federal Consumer Leasing Act Disclosures D ale_____________________ Lewor(s) _________________________________________________ Lessees) teacriptfcn o f Leased Prop*sfty Item C o lo r Stock# Amount Due at Lease Signing M o n th ly P a y m e n ts First monthly payment Your first monthly payment o f $ $ Refundable security deposit $ Delivery/Installation fee Total is due on $ $ $ O th e r C h a rg e s (n o t p a rt o f y o u r m onthly paym ent) , followed tr payments o f $ the Q uantity M fe. due on f each moiuh. The total o f you: Pick-up fee $ S Total $ Total o f P a y m e n ts (T h e am o u n t you w ill h av e p aid by th e en d o f d ie lease) $ monthly paymenits is S Purchase Option at End o f Lease Term. [Y ou h av e a n o p tio n to p u rch ase th e leased p ro p erty a t th e en d o f th e lease term fo r $ [an d a p u rch ase o p tio n fee o f $ 1.1 (Y ou d o n o t h av e a n o p tio n to p u rch ase the leased p ro p erty a t th e en d o f d ie le a se te rm .l Other Important Terms. S ee y o u r lease docum ents fo r ad d itio n al in fo rm atio n o n ea rly term in atio n , p u rch ase o p tio n s an d m aintenance resp o n sib ilities, w arran ties, la te an d d efau lt ch arg es, in su ran ce, an d an y secu rity in terest, if applicable. [Tbe following pro visions are the nonsegregated disclosures required w ider R egulation M .] Official Fees and Taxes. The total amount you will pay for official fees, and taxes over the term o f your lease, whether included with your monthly payments or assessed otherwise: S ______________ . Insurance. The following types and amounts o f insurance will be acquired in connection w ith this le a se :________________________________________________ ______ W e (lessor) will provide the insurance coverage quoted above for a total premium cost o f $ ___________________ . ______ You (lessee) agree to provide insurance coverage in the amount and types indicated above. Standards for Wear and Use. The following standards are applicable for determining unreasonable or excess w ear and use o f the leased property: Maintenance. (You are responsible for the following maintenance and servicing of the leased property: 1 (We are responsible for die following m aintenance and servicing o f die leased property: . 1 Warranties. H ie leased property is subject to the following express warranties: Early Termination and Default, (a) You may terminate this lease before the end o f the lease term under the following conditions: T he charge for such early termination is : ____________________________________________________________________________________________________ . (b) We may term inate this lease before the end o f tbe lease term under the following conditions:_________________________________________________ . Upon such termination we shallbe entitled to the following charge(s) f o r :_______________________________________________________________________ . 13 Appendix A-3 Regulation M A ppendix A -3 M od el F u rn itu re L ease D isclosu res Page 2 o f 2 Early Termination and Default, (continued) (c) To tbe extent these charges take into account the value o f the leased property at term ination, if you disagree with the value we assign to the property, you may obtain, at your own expense, from an independent third party agreeable to both o f us, a professional appraisal of the value o f the property which could be realized at sale. The appraised value shall then be used as the actual value. Security Interest. We reserve a security interest o f the following type in the property listed below to secure performance o f your obligations under this lease: Late Payments. The charge for late payments i s : _________________________________________________________________________________ ___________ . Purchase Option Prior to the End of the Lease Term. [You have an option to purchase the leased property prior to the end o f the term . The price will be [ $ _________ J/the method o f determining the price].] (You do not have an option to purchase the leased property.] 14 Regulation M Appendix C APPENDIX B— Federal Enforcement Agencies • Administration serving the area in which the federal credit union is located. The following list indicates which federal agency enforces Regulation M (12 CFR 213) for particular classes of business. Any ques tions concerning compliance by a particular business should be directed to the appropriate enforcement agency. Terms that are not de fined in the Federal Deposit Insurance Act (12 USC 1813(s)) shall have the meaning given to them in the International Banking Act of 1978 (12 USC 3101). 6. Air carriers Assistant General Counsel for Aviation Enforcement and Proceedings Department of Transportation 400 Seventh Street, S.W. Washington, D.C. 20590 1. National banks and federal branches and federal agencies o f foreign banks District office of the Office of the Comptroller of the Currency for the district in which the institution is located. 2. State member banks, branches and agen cies o f foreign banks (other than federal branches, federal agencies, and insured state branches o f foreign banks), commercial lend ing companies owned or controlled by foreign banks, and organizations operating under sec tion 25 or 25A o f the Federal Reserve Act Federal Reserve Bank serving the District in which the institution is located. • 3. Nonmember insured banks and insured state branches o f foreign banks Federal Deposit Insurance Corporation Regional Director for the region in which the institution is located. 4. Savings institutions insured under the Sav ings Association Insurance Fund o f the FDIC and federally chartered savings banks insured under the Bank Insurance Fund o f the FDIC (but not including state-chartered savings banks insured under the Bank Insurance Fund) Office of Thrift Supervision regional director for the region in which the institution is located. 5. Federal credit unions Regional office of the National Credit Union 7. Those subject to Packers and Stockyards Act Nearest Packers and Stockyards Administra tion area supervisor. 8. Federal Land Banks, Federal Land Bank Associations, Federal Intermediate Credit Banks, and Production Credit Associations Farm Credit Administration 490 L’Enfant Plaza, S.W. Washington, D.C. 20578 9. All other lessors (lessors operating on a local or regional basis should use the address o f the FTC regional office in which they oper ate) Division of Credit Practices Bureau of Consumer Protection Federal Trade Commission Washington, D.C. 20580 APPENDIX C— Issuance o f Staff Interpretations Officials in the Board’s Division of Consumer and Community Affairs are authorized to is sue official staff interpretations of this Regula tion M (12 CFR 213). These interpretations provide the formal protection afforded under section 130(f) of the act. Except in unusual circumstances, interpretations will not be is sued separately but will be incorporated in an official commentary to Regulation M (supple ment I of this part), which will be amended periodically. No staff interpretations will be issued approving lessor’s forms, statements, or calculation tools or methods. 15 Truth in Lending Act 15 USC 1601 et seq.; 82 Stat. 146; Pub. L. 90-321 (May 29, 1968) Public Law 90-321 (as amended), Title I (Chapters 1, 2, and 5) secures payment or performance of an obligation. [15 USC 1667. As added by act of March 23, 1976 (90 Stat. 257). ] CHAPTER 5— CONSUMER LEASES Section 181 Definitions 182 Consumer lease disclosures 183 Lessee’s liability on expiration or termination of lease 184 Consumer lease advertising 185 Civil liability 186 Relation to State laws SECTION 181— Definitions For purposes of this chapter— (1) The term “consumer lease" means a contract in the form of a lease or bailment for the use of personal property by a natu ral person for a period of time exceeding four months, and for a total contractual ob ligation not exceeding $25,000, primarily for personal, family, or household purposes, whether or not the lessee has the option to purchase or otherwise become the owner of the property at the expiration of the lease, except that such term shall not include any credit sale as defined in section 103(g). Such term does not include a lease for agri cultural, business, or commercial purposes, or to a government or governmental agency or instrumentality, or to an organization. (2) The term "lessee" means a natural per son who leases or is offered a consumer lease. (3) The term “lessor” means a person who is regularly engaged in leasing, offering to lease, or arranging to lease under a con sumer lease. (4) The term “ personal property" means any property which is not real property under the laws of the State where situated at the time offered or otherwise made avail able for lease. (5) The terms “security ” and “security in terest" mean any interest in property which SECTION 182— Consumer Lease Disclosures Each lessor shall give a lessee prior to the consummation of the lease a dated written statement on which the lessor and lessee are identified setting out accurately and in a clear and conspicuous manner the following infor mation with respect to that lease, as applicable; (1) A brief description or identification of the leased property; (2) The amount of any payment by the lessee required at the inception of the lease; (3) The amount paid or payable by the lessee for official fees, registration, certifi cate of title, or license fees or taxes; (4) The amount of other charges payable by the lessee not included in the periodic payments, a description of the charges and that the lessee shall be liable for the differ ential, if any, between the anticipated fair market value of the leased property and its appraised actual value at the termination of the lease, if the lessee has such liability; (5) A statement of the amount or method of determining the amount of any liabilities the lease imposes upon the lessee at the end of the term and whether or not the lessee has the option to purchase the leased prop erty and at what price and time; (6) A statement identifying all express war ranties and guarantees made by the manu facturer or lessor with respect to the leased property, and identifying the party responsi ble for maintaining or servicing the leased property together with a description of the responsibility; (7) A brief description of insurance pro vided or paid for by the lessor or required of the lessee, including the types and amounts of the coverages and costs; 17 § 182 (8) A description of any security interest held or to be retained by the lessor in con nection with the lease and a clear identifica tion of the property to which the security interest relates; (9) The number, amount, and due dates or periods of payments under the lease and the total amount of such periodic payments; (10) Where the lease provides that the lessee shall be liable for the anticipated fair market value of the property on expiration of the lease, the fair market value of the property at the inception of the lease, the aggregate cost of the lease on expiration, and the differential between them; and (11) A statement of the conditions under which the lessee or lessor may terminate the lease prior to the end of the term and the amount or method of determining any penalty or other charge for delinquency, de fault, late payments, or early termination. The disclosures required under this section may be made in the lease contract to be signed by the lessee. The Board may provide by regulation that any portion of the informa tion required to be disclosed under this sec tion may be given in the form of estimates where the lessor is not in a position to know exact information. [15 USC 1667a. As added by act of March 23, 1976 (90 Stat. 258). ] SECTION 183— Lessee’s Liability on Expiration or Termination of Lease (a) Where the lessee’s liability on expiration of a consumer lease is based on the estimated residual value of the property such estimated residual value shall be a reasonable approxi mation of the anticipated actual fair market value of the property on lease expiration. There shall be a rebuttable presumption that the estimated residual value is unreasonable to the extent that the estimated residual value ex ceeds the actual residual value by more than three times the average payment allocable to a monthly period under the lease. In addition, where the lessee has such liability on expira tion of a consumer lease there shall be a re buttable presumption that the lessor’s esti mated residual value is not in good faith to 18 Truth in Lending Act the extent that the estimated residual value ex ceeds the actual residual value by more than three times the average payment allocable to a monthly period under the lease and such les sor shall not collect from the lessee the amount of such excess liability on expiration of a consumer lease unless the lessor brings a successful action with respect to such excess liability. In all actions, the lessor shall pay the lessee’s reasonable attorney’s fees. The pre sumptions stated in this section shall not ap ply to the extent the excess of estimated over actual residual value is due to physical dam age to the property beyond reasonable wear and use, or to excessive use, and the lease may set standards for such wear and use if such standards are not unreasonable. Nothing in this subsection shall preclude the right of a willing lessee to make any mutually agreeable final adjustment with respect to such excess residual liability, provided such an agreement is reached after termination of the lease. (b) Penalties or other charges for delinquency, default, or early termination may be specified in the lease but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the delinquency, de fault, or early termination, the difficulties of proof of loss, and the inconvenience or non feasibility of otherwise obtaining an adequate remedy. (c) If a lease has a residual value provision at the termination of the lease, the lessee may obtain at his expense, a professional appraisal of the leased property by an independent third party agreed to by both parties. Such appraisal shall be final and binding on the parties. [15 USC 1667b. As added by act of March 23, 1976 (90 Stat. 259). ] SECTION 184— Consumer Lease Advertising (a) No advertisement to aid, promote, or as sist directly or indirectly any consumer lease shall state the amount of any payment, the number of required payments, or that any or no downpayment or other payment is required at inception of the lease unless the advertise ment also states clearly and conspicuously and Truth in Lending Act in accordance with regulations issued by the Board each of the following items of informa tion which is applicable: (1) That the transaction advertised is a lease. (2) The amount of any payment required at the inception of the lease or that no such payment is required if that is the case. (3) The number, amounts, due dates or pe riods of scheduled payments, and the total of payments under the lease. (4) That the lessee shall be liable for the differential, if any, between the anticipated fair market value of the leased property and its appraised actual value at the termination of the lease, if the lessee has such liability. (5) A statement of the amount or method of determining the amount of any liabilities the lease imposes upon the lessee at the end of the term and whether or not the lessee has the option to purchase the leased prop erty and at what price and time. (b) Radio advertisements. (1) An advertisement by radio broadcast to aid, promote, or assist, directly or indi rectly, any consumer lease shall be deemed to be in compliance with the requirements of subsection (a) if such advertisement clearly and conspicuously— (A) states the information required by paragraphs (1) and (2) of subsection (a); (B) states the number, amounts, due dates or periods of scheduled payments, and the total of such payments under the lease; (C) includes— (i) a referral to— (I) a toll-free telephone number es tablished in accordance with para graph (2) that may be used by con sumers to obtain the information required under subsection (a); or (II) a written advertisement that— (aa) appears in a publication in general circulation in the commu nity served by the radio station on which such advertisem ent is broadcast during the period begin ning 3 days before any such broadcast and ending 10 days af ter such broadcast; and § 185 (bb) includes the information re quired to be disclosed under sub section (a); and (ii) the name and dates of any publica tion referred to in clause (i)(II); and (D) includes any other information which the Board determines necessary to carry out this chapter. (2) (A) In the case of a radio broadcast ad vertisement described in paragraph (1) that includes a referral to a toll-free tele phone number, the lessor who offers the consumer lease shall— (i) establish such a toll-free telephone number not later than the date on which the advertisement including the referral is broadcast; (ii) maintain such telephone number for a period of not less than 10 days, beginning on the date of any such broadcast; and (iii) provide the information required under subsection (a) with respect to the lease to any person who calls such number. (B) The information required to be pro vided under subparagraph (A)(iii) shall be provided verbally or, if requested by the consumer, in written form. (3) Nothing in this subsection shall affect the requirements of Federal law as such re quirements apply to advertisement by any medium other than radio broadcast. (c) There is no liability under this section on the part of any owner or personnel, as such, of any medium in which an advertisement ap pears or through which it is disseminated. [15 USC 1667c. As added by act of March 23, 1976 (90 Stat 259) and amended by act of Sept. 23, 1994 (108 Stat. 2234).] SECTION 185— Civil Liability (a) Any lessor who fails to comply with any requirement imposed under section 182 or 183 of this chapter with respect to any person is liable to such person as provided in section 130. (b) Any lessor who fails to comply with any requirement imposed under section 184 of this 19 § 185 chapter with respect to any person who suffers actual damage from the violation is liable to such person as provided in section 130. For the purposes of this section, the term “credi tor” as used in sections 130 and 131 shall include a lessor as defined in this chapter. (c) Notwithstanding section 130(e), any action under this section may be brought in any United States district court or in any other court of competent jurisdiction. Such actions alleging a failure to disclose or otherwise comply with the requirements of this chapter shall be brought within one year of the termi nation of the lease agreement. [15 USC 1667d. As added by act of March 23, 1976 (90 Stat. 260). 1 SECTION 186— Relation to State Laws (a) This chapter does not annul, alter, or af fect, or exempt any person subject to the pro visions of this chapter from complying with, the laws of any State with respect to con Truth in Lending Act sumer leases, except to the extent that those laws are inconsistent with any provision of this chapter, and then only to the extent of the inconsistency. The Board is authorized to de termine whether such inconsistencies exist. The Board may not determine that any State law is inconsistent with any provision of this chapter if the Board determines that such law gives greater protection and benefit to the consumer. (b) The Board shall by regulation exempt from the requirements of this chapter any class of lease transactions within any State if it determines that under the law of that State that class of transactions is subject to require ments substantially similar to those imposed under this chapter or that such law gives greater protection and benefit to the consumer, and that there is adequate provision for enforcement. [15 USC 1667e. As added by act of March 23, 1976 (90 Stat. 260). ] Board of Governors of the Federal Reserve System Official Staff Commentary on Regulation B Equal Credit Opportunity As amended effective September 30, 1996 Any inquiry relating to Regulation B should be addressed to the Federal Reserve Bank of the District in which the inquiry arises. November 1996 Contents Introduction................................................. Section 202.1—Authority, scope, and purpose...................................................... Section 202.2—Definitions.......................... Section 202.3—Limited exceptions for certain classes of transactions................ Section 202.4—General rule prohibiting discrimination.......................................... Section 202.5—Rules concerning taking of applications.......................................... Section 202.5a—Rules on providing appraisal reports........................................ Section 202.6—Rules concerning evaluation of applications........................ Section 202.7—Rules concerning extensions of c re d it.............................. 1 1 1 5 5 6 7 8 Page Section 202.8—Special-purpose credit programs.................................................. 14 Section 202.9—Notifications...................... 16 Section 202.10—Furnishing of credit information............................................. 19 Section 202.11—Relation to state law . . . 19 Section 202.12—Record retention............ 20 Section 202.13—Information for monitoring purposes............................... 21 Section 202.14—Enforcement, penalties, and liabilities........................................... 22 Appendix B—Model application forms. .. Appendix C—Sample notification forms . 22 23 11 r . i Official Staff Commentary on Regulation B As amended effective September 30, 1996 • Following is an official staff interpretation of Regulation B issued under authority delegated by the Federal Reserve Board to officials in the Division of Consumer and Community Af fairs. References are to sections of the regula tion or the Equal Credit Opportunity Act (15 USC 1601 et seq.). INTRODUCTION 1. Official status. Section 706(e) of the Equal Credit Opportunity Act protects a creditor from civil liability for any act done or omitted in good faith in conformity with an interpreta tion issued by a duly authorized official of the Federal Reserve Board. This commentary is the means by which the Division of Consumer and Community Affairs of the Federal Re serve Board issues official staff interpretations of Regulation B. Good faith compliance with this commentary affords a creditor protection under section 706(e) of the act. • 2. Issuance o f interpretations. Under appendix D to the regulation, any person may request an official staff interpretation. Interpretations will be issued at the discretion of designated officials and incorporated in this commentary following publication for comment in the Federal Register. Except in unusual circum stances, official staff interpretations will be is sued only by means of this commentary. 3. Status o f previous interpretations. Interpre tations of Regulation B previously issued by the Federal Reserve Board and its staff have been incorporated into this commentary as ap propriate. All other previous Board and staff interpretations, official and unofficial, are su perseded by this commentary. 4. Footnotes. Footnotes in the regulation have the same legal effect as the text of the regula tion, whether they are explanatory or illustra tive in nature. 5. Comment designations. The comments are designated with as much specificity as possi ble according to the particular regulatory pro vision addressed. Each comment in the com mentary is identified by a number and the regulatory section or paragraph that it inter prets. For example, comments to section 202.2(c) are further divided by subparagraph, such as comment 2(c)(l)(ii)-l and comment 2(c)(2)(ii)-l. SECTION 202.1— Authority, Scope, and Purpose 1(a) Authority and Scope 1. Scope. The Equal Credit Opportunity Act and Regulation B apply to all credit— commercial as well as personal—without re gard to the nature or type of the credit or the creditor. If a transaction provides for the deferral of the payment of a debt, it is credit covered by Regulation B even though it may not be a credit transaction covered by Regula tion Z (Truth in Lending). Further, the defini tion of creditor is not restricted to the party or person to whom the obligation is initially pay able, as is the case under Regulation Z. More over, the act and regulation apply to all meth ods of credit evaluation, whether performed judgmentally or by use of a credit scoring system. 2. Foreign applicability. Regulation B gener ally does not apply to lending activities that occur outside the United States. The regula tion does apply to lending activities that take place within the United States (as well as the Commonwealth of Puerto Rico and any terri tory or possession of the United States), whether or not the applicant is a citizen. 3. Board. The term “Board,” as used in this regulation, means the Board of Governors of the Federal Reserve System. SECTION 202.2— Definitions 2(c) Adverse Action Paragraph 2(c)(l)(i) 1. Application fo r credit. A refusal to refi1 Regulation B Commentary § 202.2 nance or extend the term of a business or other loan is adverse action if the applicant applied in accordance with the creditor’s procedures. Paragraph 2(c)(l)(ii) 1. Move from service area. If a credit card issuer terminates the open-end account of a customer because the customer has moved out of the card issuer’s service area, the termina tion is “adverse action” for purposes of the regulation unless termination on this ground was explicitly provided for in the credit agree ment between the parties. In cases where ter mination is adverse action, notification is re quired under section 202.9. 2. Termination based on credit limit. If a creditor terminates credit accounts that have low credit limits (for example, under $400) but keeps open accounts with higher credit limits, the termination is adverse action and notification is required under section 202.9. ulation. For example, denial at point of sale is not adverse action in the following situations: • A credit cardholder presents an expired card or a card that has been reported to the, card issuer as lost or stolen. • The amount of a transaction exceeds a cash advance or credit limit. • The circumstances (such as excessive use of a credit card in a short period of time) suggest that fraud is involved. • The authorization facilities are not func tioning. • Billing statements have been returned to the creditor for lack of a forwarding address. 2. Application fo r increase in available credit. A refusal or failure to authorize an account transaction at the point of sale or loan is not adverse action, except when the refusal is a denial of an application, submitted in accor dance with the creditor’s procedures, for an increase in the amount of credit. Paragraph 2(c)(2)(v) Paragraph 2(c)(2)(ii) 1. Default—exercise o f due-on-sale clause. If a mortgagor sells or transfers mortgaged prop erty without the consent of the mortgagee, and the mortgagee exercises its contractual right to accelerate the mortgage loan, the mortgagee may treat the mortgagor as being in default. An adverse-action notice need not be given to the mortgagor or the transferee. (See comment 2(e)-1 for treatment of a purchaser who re quests to assume the loan.) 2. Current delinquency or default. The term “adverse action” does not include a creditor’s termination of an account when the accountholder is currently in default or delinquent on that account. Notification in accordance with section 202.9 of the regulation generally is re quired, however, if the creditor’s action is based on a past delinquency or default on the account. Paragraph 2(c)(2)(iii) 1. Point-of-sale transactions. Denial of credit at point of sale is not adverse action except under those circumstances specified in the reg2 1. Terms o f credit versus type o f credit of fered. When an applicant applies for credit and the creditor does not offer the credit terms requested by the applicant (for example, the interest rate, length of maturity, collateral, or amount of downpayment), a denial of the ap plication for that reason is adverse action (un less the creditor makes a counteroffer that is accepted by the applicant) and the applicant is entitled to notification under section 202.9. 2(e) Applicant 1. Request to assume loan. If a mortgagor sells or transfers the mortgaged property and the buyer makes an application to the creditor to assume the mortgage loan, the mortgagee must treat the buyer as an applicant unless its policy is not to permit assumptions. 2(f) Application 1. General. A creditor has the latitude under the regulation to establish its own application process and to decide the type and amount of information it will require from credit applicants. Regulation B Commentary 2. “Procedures established.” The term refers to the actual practices followed by a creditor for milking credit decisions as well as its stated application procedures. For example, if a creditor’s stated policy is to require all ap plications to be in writing on the creditor’s application form, but the creditor also makes credit decisions based on oral requests, the creditor’s established procedures are to accept both oral and written applications. 3. When an inquiry becomes an application. A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the applicant, decides to decline the request, and communicates this to the applicant, the credi tor has: treated the inquiry as an application and must then comply with the notification re quirements under section 202.9. Whether the inquiry becomes an application depends on how the creditor responds to the applicant, not on what the applicant says or asks. 4. Examples o f inquiries that are not applica tions. The following examples illustrate situa tions in which only an inquiry has taken place: • When a consumer calls to ask about loan terms and an employee explains the credi tor’s basic loan terms, such as interest rates, loan-to-value ratio, and debt-toincome ratio. • When a consumer calls to ask about inter est rates for car loans, and, in order to quote the appropriate rate, the loan officer asks for the make and sales price of the car and the amount of the downpayment, then gives the consumer the rate. • When a consumer asks about terms for a loan to purchase a home and tells the loan officer her income and intended downpay ment, but the loan officer only explains the creditor’s loan-to-value ratio policy and other basic lending policies, without telling the consumer whether she qualifies for the loan. • When a consumer calls to ask about terms for a loan to purchase vacant land and states his income and the sale price of the property to be financed, and asks whether § 202.2 he qualifies for a loan, and the employee responds by describing the general lending policies, explaining that he would need to look at all of the applicant’s qualifications before making a decision, and offering to send an application form to the consumer. 5. Completed application—diligence require ment. The regulation defines a completed ap plication in terms that give a creditor the lati tude to establish its own information requirements. Nevertheless, the creditor must act with reasonable diligence to collect infor mation needed to complete the application. For example, the creditor should request infor mation from third parties, such as a credit re port, promptly after receiving the application. If additional information is needed from the applicant, such as an address or telephone number needed to verify employment, the creditor should contact the applicant promptly. (But see comment 9(a)(l)-3, which discusses the creditor’s option to deny an application on the basis of incompleteness.) 2(g) Business Credit 1. Definition. The test for deciding whether a transaction qualifies as business credit is one of primary purpose. For example, an open-end credit account used for both personal and bus iness purposes is not business credit unless the primary purpose of the account is busi ness-related. A creditor may rely on an appli cant’s statement of the purpose for the credit requested. 2(j) Credit 1. General. Regulation B covers a wider range of credit transactions than Regulation Z (Truth in Lending). For purposes of Regula tion B, a transaction is credit if there is a right to defer payment of a debt—regardless of whether the credit is for personal or com mercial purposes, the number of installments required for repayment, or whether the trans action is subject to a finance charge. 2 ( 1) Creditor 1. Assignees. The term “creditor” includes all persons participating in the credit decision. This may include an assignee or a potential 3 I 202.2 purchaser of the obligation who influences the credit decision by indicating whether or not it will purchase the obligation if the transaction is consummated. 2. Referrals to creditors. For certain purposes, the term “creditor” includes persons such as real estate brokers who do not participate in credit decisions but who regularly refer appli cants to creditors or who select or offer to select creditors to whom credit requests can be made. These persons must comply with section 202.4, the general rule prohibiting dis crimination, and with section 202.5(a), on dis couraging applications. 2(p) Empirically Derived and Other Credit Scoring Systems 1. Purpose o f definition. The definition under section 202.2(p)(l)(i) through (iv) sets the cri teria that a credit system must meet in order for the system to use age as a predictive fac tor. Credit systems that do not meet these cri teria are judgmental systems and may consider age only for the purpose of determining a “pertinent element of creditworthiness.” (Both types of systems may favor an elderly appli cant. See section 202.6(b)(2).) 2. Periodic revalidation. The regulation does not specify how often credit scoring systems must be revalidated. To meet the requirements for statistical soundness, the credit scoring system must be revalidated frequently enough to ensure that it continues to meet recognized professional statistical standards. To ensure that predictive ability is being maintained, creditors must periodically review the per formance of the system. This could be done, for example, by analyzing the loan portfolio to determine the delinquency rate for each score interval, or by analyzing population sta bility over time to detect deviations of recent applications from the applicant population used to validate the system. If this analysis indicates that the system no longer predicts risk with statistical soundness, the system must be adjusted as necessary to reestablish its predictive ability. A creditor is responsible for ensuring its system is validated and revali dated based on the creditor’s own data when it becomes available. 4 Regulation B Commentary 3. Pooled-data scoring systems. A scoring system or the data from which to develop such a system may be obtained from either a single credit grantor or multiple credit grant ors. The resulting system will qualify as an empirically derived, demonstrably and statisti cally sound, credit scoring system provided the criteria set forth in paragraph (p)(l)(i) through (iv) of this section are met. 4. Effects test and disparate treatment. An empirically derived, demonstrably and statisti cally sound, credit scoring system may in clude age as a predictive factor (provided that the age of an elderly applicant is not assigned a negative factor or value). Besides age, no other prohibited basis may be used as a varia ble. Generally, credit scoring systems treat all applicants objectively and thus avoid problems of disparate treatment. In cases where a credit scoring system is used in conjunction with in dividual discretion, disparate treatment could conceivably occur in the evaluation process. In addition, neutral factors used in credit scor ing systems could nonetheless be subject to challenge under the effects test. (See comment 6(a)-2 for a discussion of the effects test). 2(w) Open-End Credit 1. Open-end real estate mortgages. The term “open-end credit” does not include negotiated advances under an open-end real estate mort gage or a letter of credit. 2(z) Prohibited Basis 1. Persons associated with applicant. “Pro hibited basis” as used in this regulation refers not only to characteristics—the race, color, re ligion, national origin, sex, marital status, or age—of an applicant (or officers of an appli cant in the case of a corporation) but also to the characteristics of individuals with whom an applicant is affiliated or with whom the applicant associates. This means, for example, that under the general rule stated in section 202.4, a creditor may not discriminate against an applicant because of that person’s personal or business dealings with members of a cer tain religion, because of the national origin of any persons associated with the extension of credit (such as the tenants in the apartment Regulation B Commentary • complex being financed), or because of the race of other residents in the neighborhood where the property offered as collateral is located. 2. National origin. A creditor may not refuse to grant credit because an applicant comes from a particular country but may take the applicant’s immigration status into account. A creditor may also take into account any appli cable law, regulation, or executive order re stricting dealings with citizens (or the govern ment) of a particular country or imposing limitations regarding credit extended for their use. 3. Public assistance program. Any federal, state, or local governmental assistance pro gram that provides a continuing, periodic in come supplement, whether premised on enti tlement or need, is “public assistance” for purposes of the regulation. The term includes (but is not limited to) Aid to Families with Dependent Children, food stamps, rent and mortgage supplement or assistance programs, Social Security and Supplemental Security In come, and unemployment compensation. Only physicians, hospitals, and others to whom the benefits are payable need consider Medicare and Medicaid as public assistance. • SECTION 202.3— Limited Exceptions for Certain Classes o f Transactions 1. Scope. This section relieves burdens with regard to certain types of credit for which full application of the procedural requirements of the regulation is not needed. All classes of transactions remain subject to the general rule given in section 202.4, barring discrimination on a prohibited basis, and to any other provi sion not specifically excepted. 3(a) Public-Utilities Credit 1. Definition. This definition applies only to credit for the purchase of a utility service, such as electricity, gas, or telephone service. Credit provided or offered by a public utility for some other purpose—such as for financing the purchase of a gas dryer, telephone equip ment, or other durable goods, or for insulation or other home improvements—is not excepted. § 202.4 2. Security deposits. A utility company is a creditor when it supplies utility service and bills the user after the service has been pro vided. Thus, any credit term (such as a re quirement for a security deposit) is subject to the regulation. 3. Telephone companies. A telephone com pany’s credit transactions qualify for the ex ceptions provided in section 202.3(a)(2) only if the company is regulated by a government unit or files the charges for service, delayed payment, or any discount for prompt payment with a government unit. 3(c) Incidental Credit 1. Examples. If a service provider (such as a hospital, doctor, lawyer or retailer) allows the client or customer to defer the payment of a bill, this deferral of a debt is credit for pur poses of the regulation, even though there is no finance charge and no agreement for pay ment in installments. Because of the excep tions provided by this section, however, these particular credit extensions are excepted from compliance with certain procedural require ments as specified in the regulation. 3(d) Government Credit 1. Credit to governments. The exception re lates to credit extended to (not by) govern mental entities. For example, credit extended to a local government by a creditor in the pri vate sector is covered by this exception, but credit extended to consumers by a federal or state housing agency does not qualify for spe cial treatment under this category. SECTION 202.4— General Rule Prohibiting Discrimination 1. Scope o f section. The general rule stated in section 202.4 covers all dealings, without ex ception, between an applicant and a creditor, whether or not addressed by other provisions of the regulation. Other sections of the regula tion identify specific practices that the Board has decided are impermissible because they could result in credit discrimination on a basis prohibited by the act. The general rule covers, for example, application procedures, criteria 5 § 202.4 used to evaluate creditworthiness, administra tion of accounts, and treatment of delinquent or slow accounts. Thus, whether or not specif ically prohibited elsewhere in the regulation, a credit practice that treats applicants differently on a prohibited basis violates the law because it violates the general rule. Disparate treat ment on a prohibited basis is illegal whether or not it results from a conscious intent to discriminate. Disparate treatment would be found, for example, where a creditor requires a minority applicant to provide greater docu mentation to obtain a loan than a similarly situated nonminority applicant. Disparate treat ment also would be found where a creditor waives or relaxes credit standards for a nonminority applicant but not for a similarly situated minority applicant. Treating applicants differently on a prohibited basis is unlawful if the creditor lacks a legitimate nondiscriminatory reason for its action, or if the asserted reason is found to be a pretext for discrimination. SECTION 202.5— Rules Concerning Taking o f Applications 5(a) Discouraging Applications 1. Potential applicants. Generally, the regula tion’s protections apply only to persons who have requested or received an extension of credit. In keeping with the purpose of the act—to promote the availability of credit on a nondiscriminatory basis—section 202.5(a) covers acts or practices directed at potential applicants. Practices prohibited by this section include— • a statement that the applicant should not bother to apply, after the applicant states that he is retired • use of words, symbols, models or other forms of communication in advertising that express, imply, or suggest a discriminatory preference or a policy of exclusion in vio lation of the act • use of interview scripts that discourage ap plications on a prohibited basis. 2. Affirmative advertising. A creditor may af firmatively solicit or encourage members of 6 Regulation B Commentary traditionally disadvantaged groups to apply for credit, especially groups that might not nor mally seek credit from that creditor. 5(b) General Rules Concerning Requests for Information 1. Requests fo r information. This section gov erns the types of information that a creditor may gather. Section 202.6 governs how infor mation may be used. Paragraph 5(b)(2) 1. Local laws. Information that a creditor is allowed to collect pursuant to a “state” stat ute or regulation includes information required by a local statute, regulation, or ordinance. 2. Information required by Regulation C. Reg ulation C generally requires creditors covered by the Home Mortgage Disclosure Act (HMDA) to collect and report information about the race or national origin and sex of applicants for home-improvement loans and home-purchase loans, including some types of loans not covered by section 202.13. Certain creditors with assets under $30 million, though covered by HMDA, are not required to collect and report these data; but they may do so at their option under HMDA, without vio lating the ECOA or Regulation B. 3. Collecting information on behalf o f credi tors. Loan brokers, correspondents, or other persons do not violate the ECOA or Regula tion B if they collect information that they are otherwise prohibited from collecting, where the purpose of collecting the information is to provide it to a creditor that is subject to the Home Mortgage Disclosure Act or another federal or state statute or regulation requiring data collection. 5(d) Other Limitations on Information Requests Paragraph 5(d)(1) 1. Indirect disclosure o f prohibited informa tion. The fact that certain credit-related infor mation may indirectly disclose marital status does not bar a creditor from seeking such in Regulation B Commentary formation. For example, the creditor may ask about— • the applicant’s obligation to pay alimony, child support, or separate maintenance • the source of income to be used as the ba sis for repaying the credit requested, which could disclose that it is the income of a spouse • whether any obligation disclosed by the ap plicant has a co-obligor, which could dis close that the co-obligor is a spouse or former spouse • the ownership of assets, which could dis close the interest of a spouse Paragraph 5(d)(2) 1. Disclosure about income. The sample ap plication forms in appendix B to the regula tion illustrate how a creditor may inform an applicant of the right not to disclose alimony, child support, or separate maintenance income. 2. General inquiry about source o f income. Since a general inquiry about the source of income may lead an applicant to disclose ali mony, child support, or separate maintenance, a creditor may not make such an inquiry on an application form without prefacing the re quest with the disclosure required by this paragraph. 3. Specific inquiry about sources o f income. A creditor need not give the disclosure if the in quiry about income is specific and worded in a way that is unlikely to lead the applicant to disclose the fact that income is derived from alimony, child support, or separate mainte nance payments. For example, an application form that asks about specific types of income such as salary, wages, or investment income need not include the disclosure. 5(e) Written Applications 1. Requirement for written applications. The requirement of written applications for certain types of dwelling-related loans is intended to assist the federal supervisory agencies in mon itoring compliance with the ECOA and the Fair Housing Act. Model application forms § 202.5a are provided in appendix B to the regulation, although use of a printed form of any kind is not required. A creditor will satisfy the re quirement by writing down the information that it normally considers in making a credit decision. The creditor may complete the appli cation on behalf of an applicant and need not require the applicant to sign the application. 2. Telephone applications. A creditor that ac cepts applications by telephone for dwellingrelated credit covered by section 202.13 can meet the requirements for written applications by writing down pertinent information that is provided by the applicant(s). 3. Computerized entry. Information entered directly into and retained by a computerized system qualifies as a written application under this paragraph. (See the commentary to sec tion 202.13(b), Applications through electronic media and Applications through video.) SECTION 202.5a— Rules on Providing Appraisal Reports 5a(a) Providing Appraisals 1. Coverage. This section covers applications for credit to be secured by a lien on a dwell ing, as that term is defined in section 202.5a(c), whether the credit is for a business purpose (for example, a loan to start a busi ness) or a consumer purpose (for example, a loan to finance a child’s education). 2. Renewals. If an applicant requests that a creditor renew an existing extension of credit, and the creditor obtains a new appraisal report to evaluate the request, this section applies. This section does not apply to a renewal re quest if the creditor uses the appraisal report previously obtained in connection with the de cision to grant credit. Paragraph 5a(a)(2)(i) Notice 1. Multiple applicants. When an application that is subject to this section involves more than one applicant, the notice about the ap praisal report need only be given to one appli7 § 202.5a Regulation B Commentary cant, but it must be given to the primary ap plicant where one is readily apparent. SECTION 202.6— Rules Concerning Evaluation o f Applications Paragraph 5a(a)(2)(ii) Delivery 6(a) General Rule Concerning Use of Information 1. Reimbursement. Creditors may charge for photocopy and postage costs incurred in pro viding a copy of the appraisal report, unless prohibited by state or other law. If the con sumer has already paid for the report—for ex ample, as part of an application fee—the cred itor may not require additional fees for the appraisal (other than photocopy and postage costs). 5a(c) Definitions 1. Appraisal reports. Examples of appraisal reports are— 1. a report prepared by an appraiser (wheth er or not licensed or certified), including written comments and other documents submitted to the creditor in support of the appraiser’s estimate or opinion of value ii. a document prepared by the creditor’s staff which assigns value to the property, if a third-party appraisal report has not been used iii. an internal review document reflecting that the creditor’s valuation is different from a valuation in a third party’s ap praisal report (or different from valua tions that are publicly available or valuations such as manufacturers’ in voices for mobile homes) 2. Other reports. The term “appraisal report” does not cover all documents relating to the value of the applicant’s property. Examples of reports not covered are— i. internal documents, if a third-party ap praisal report was used to establish the value of the property ii. govemmental-agency statements of ap praised value iii. valuations lists that are publicly available (such as published sales prices or mort gage amounts, tax assessments, and retail price ranges) and valuations such as man ufacturers’ invoices for mobile homes 8 1. General. When evaluating an application for credit, a creditor generally may consider any information obtained. However, a creditor may not consider in its evaluation of creditworthiness any information that it is barred by section 202.5 from obtaining. 2. Effects test. The effects test is a judicial doctrine that was developed in a series of em ployment cases decided by the Supreme Court under title VII of the Civil Rights Act of 1964 (42 USC 2000e et seq.), and the burdens of proof for such employment cases were codi fied by Congress in the Civil Rights Act of 1991 (42 USC 2000e-2). Congressional intent that this doctrine apply to the credit area is documented in the Senate Report that accom panied H.R. 6516, No. 94-589, pp. 4-5; and in the House Report that accompanied H.R. 6516, No. 94-210, p. 5. The act and regulation may prohibit a creditor practice that is dis criminatory in effect because it has a dispro portionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neu tral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. For exam ple, requiring that applicants have incomes in excess of a certain amount to qualify for an overdraft line of credit could mean that wo men and minority applicants will be rejected at a higher rate than men and nonminority ap plicants. If there is a demonstrable relation ship between the income requirement and creditworthiness for the level of credit in volved, however, use of the income standard would likely be permissible. 6(b) Specific Rules Concerning Use of Information Paragraph 6(b)(1) 1. Prohibited basis—marital status. A creditor may not use marital status as a basis for de- Regulation B Commentary • termining the applicant’s creditworthiness. However, a creditor may consider an appli cant’s marital status for the purpose of ascertaining the creditor’s rights and remedies ap plicable to the particular extension of credit. For example, in a secured transaction involv ing real property, a creditor could take into account whether state law gives the appli cant’s spouse an interest in the property being offered as collateral. Except to the extent nec essary to determine rights and remedies for a specific credit transaction, a creditor that of fers joint credit may not take the applicants’ marital status into account in credit evalua tions. Because it is unlawful for creditors to take marital status into account, creditors are barred from applying different standards in evaluating married and unmarried applicants. In making credit decisions, creditors may not treat joint applicants differently based on the existence, the absence, or the likelihood of a marital relationship between the parties. 2. Prohibited basis—special-purpose credit. In a special-purpose credit program, a creditor may consider a prohibited basis to determine whether the applicant possesses a characteris tic needed for eligibility. (See section 202.8.) • Paragraph 6(b)(2) 1. Favoring the elderly. Any system of evalu ating creditworthiness may favor a credit ap plicant who is age 62 or older. A credit pro gram that offers more favorable credit terms to applicants age 62 or older is also permissi ble; a program that offers more favorable credit terms to applicants at an age lower than 62 is permissible only if it meets the specialpurpose credit requirements of section 202.8. 2. Consideration o f age in a credit scoring system. Age may be taken directly into ac count in a credit scoring system that is “de monstrably and statistically sound,” as defined in section 202.2(p), with one limitation: appli cants 62 years old or older must be treated at least as favorably as applicants who are under age 62. If age is scored by assigning points to an applicant’s age category, elderly applicants must receive the same or a greater number of points as the most favored class of nonelderly applicants. § 202.6 i. Age-split scorecards. A creditor may seg ment the population into scorecards based on the age of an applicant. In such a system, one card covers a narrow age range (for example, applicants in their twenties or younger) who are evaluated under attributes predictive for that age group. A second card covers all other applicants who are evaluated under the attrib utes predictive for that broad class. When a system uses a card covering a wide age range that encompasses elderly applicants, the credit scoring system does not score age. Thus, the system does not raise the issue of assigning a negative factor or value to the age of elderly applicants. But if a system segments the popu lation by age into multiple scorecards, and in cludes elderly applicants in a narrower age range, the credit scoring system does score age. To comply with the act and regulation in such a case, the creditor must ensure that the system does not assign a negative factor or value to the age of elderly applicants as a class. 3. Consideration o f age in a judgmental sys tem. In a judgmental system, defined in sec tion 202.2(t), a creditor may not take age di rectly into account in any aspect of the credit transaction. For example, the creditor may not reject an application or terminate an account because the applicant is 60 years old. But a creditor that uses a judgmental system 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 oc cupation 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 any 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 appli cant’s equity. (An elderly applicant might not qualify for a 5 percent down, 30-year mortgage loan but might qualify with a larger downpayment or a shorter loan maturity.) • A creditor may consider the applicant’s age to assess the significance of the length of 9 § 202.6 the applicant’s employment (a young appli cant 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 examples above illustrate, the evalua tion must be made in an individualized, caseby-case manner; and it is impermissible for a creditor, in deciding whether to extend credit or in setting the terms and conditions, to base its decision on age or information related ex clusively to age. Age or age-related informa tion may be considered only in evaluating other “pertinent elements of creditworthiness” that are drawn from the particular facts and circumstances concerning the applicant. 4. Consideration o f age in a reverse mort gage. A reverse mortgage is a home-secured loan in which the borrower receives payments from the creditor and does not become obli gated to repay these amounts (other than in the case of default) until the borrower dies, moves permanently from the home, or trans fers title to the home, or upon a specified ma turity date. Disbursements to the borrower under a reverse mortgage typically are deter mined by considering the value of the bor rower’s home, the current interest rate, and the borrower’s life expectancy. A reverse mortgage program that requires borrowers to be age 62 or older is permissible under sec tion 202.6(b)(2)(iv). In addition, under section 202.6(b)(2)(iii), a creditor may consider a bor rower’s age to evaluate a pertinent element of creditworthiness, such as the amount of the credit or monthly payments that the borrower will receive, or the estimated repayment date. 5. Consideration o f age in a combined sys tem. A creditor using a credit scoring system that qualifies as “empirically derived” under section 202.2(p) may consider other factors (such as a credit report or the applicant’s cash flow) on a judgmental basis. Doing so will not negate the classification of the credit scoring component of the combined system as “de monstrably and statistically sound.” While age could be used in the credit scoring portion, however, in the judgmental portion age may not be considered directly. It may be used only for the purpose of determining a “perti10 Regulation B Commentary nent element of creditworthiness.” (See com ment 6(b)(2)-3.) 6. Consideration o f public assistance. When considering income derived from a public as- i sistance program, a creditor may take into ac count, for example— • the length of time an applicant will likely remain eligible to receive such income • whether the applicant will continue to qual ify for benefits based on the status of the applicant’s dependents (such as Aid to Families with Dependent Children or So cial Security payments to a minor) • whether the creditor can attach or garnish the income to assure payment of the debt in the event of default Paragraph 6(b)(5) 1. Consideration o f an individual applicant. A creditor must evaluate income derived from part-time employment, alimony, child support, separate maintenance, retirement benefits, or public assistance (all referred to as “protected income”) on an individual basis, not on the basis of aggregate statistics, and must assess its reliability or unreliability by analyzing the applicant’s actual circumstances, not by ana lyzing statistical measures derived from a group. 2. Payments consistently made. In determin ing the likelihood of consistent payments of alimony, child support, or separate mainte nance, a creditor may consider factors such as whether payments are received pursuant to a written agreement or court decree; the length of time that the payments have been received; whether the payments are regularly received by the applicant; the availability of court or other procedures to compel payment; and the creditworthiness of the payor, including the credit history of the payor when it is available to the creditor. 3. Consideration o f income. A creditor need not consider income at all in evaluating creditworthiness. If a creditor does consider income, there are several acceptable methods, whether in a credit scoring or a judgmental system: • A creditor may score or take into account § 202.7 Regulation B Commentary • the total sum of all income stated by the applicant without taking steps to evaluate the income. • A creditor may evaluate each component of the applicant’s income, and then score or take into account reliable income separately from income that is not reliable, or the creditor may disregard that portion of in come that is not reliable before aggregating it with reliable income. • A creditor that does not evaluate all in come components for reliability must treat as reliable any component of protected in come that is not evaluated. In considering the separate components of an applicant’s income, the creditor may not auto matically discount or exclude from considera tion any protected income. Any discounting or exclusion must be based on the applicant’s ac tual circumstances. • 4. Part-time employment, sources o f income. A creditor may score or take into account the fact that an individual applicant has more than one source of earned income—a full-time and a part-time job or two part-time jobs. A credi tor may also score or treat earned income from a secondary source differently than earned income from a primary source. How ever, the creditor may not score or otherwise take into account the number of sources for protected income—for example, retirement in come, Social Security, alimony. Nor may the creditor treat negatively the fact that an appli cant’s only earned income is derived from a part-time job. Paragraph 6(b)(6) 1. Types o f credit references. A creditor may restrict the types of credit history and credit references that it will consider, provided that the restrictions are applied to all credit appli cants without regard to sex, marital status, or any other prohibited basis. However, on the applicant’s request, a creditor must consider credit information not reported through a credit bureau when the information relates to the same types of credit references and history that the creditor would consider if reported through a credit bureau. Paragraph 6(b)(7) 1. National origin—immigration status. The applicant’s immigration status and ties to the community (such as employment and contin ued residence in the area) could have a bear ing on a creditor’s ability to obtain repayment. Accordingly, the creditor may consider and differentiate, for example, between a nonciti zen who is a long-time resident with perma nent resident status and a noncitizen who is temporarily in this country on a student visa. 2. National origin—citizenship. Under the regulation, a denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin. SECTION 202.7— Rules Concerning Extensions o f Credit 7(a) Individual Accounts 1. Open-end credit—authorized user. A credi tor may not require a creditworthy applicant seeking an individual credit account to pro vide additional signatures. However, the credi tor may condition the designation of an au thorized user by the account holder on the authorized user’s becoming contractually lia ble for the account, as long as the creditor does not differentiate on any prohibited basis in imposing this requirement. 2. Open-end credit—choice o f authorized user. A creditor that permits an account holder to designate an authorized user may not restrict this designation on a prohibited basis. For example, if the creditor allows the designation of spouses as authorized users, the creditor may not refuse to accept a nonspouse as an authorized user. 3. Overdraft authority on transaction ac counts. If a transaction account (such as a checking account or NOW account) includes an overdraft line of credit, the creditor may require that all persons authorized to draw on the transaction account assume liability for any overdraft. 11 § 202.7 7(b) Designation of Name 1. Single name on account. A creditor may require that joint applicants on an account designate a single name for purposes of ad ministering the account and that a single name be embossed on any credit card(s) issued on the account. But the creditor may not require that the name be the husband’s name. (See section 202.10 for rules governing the furnish ing of credit history on accounts held by spouses.) 7(c) Action Concerning Existing OpenEnd Accounts Paragraph 7(c)(1) 1. Termination coincidental with marital sta tus change. When an account holder’s marital status changes, a creditor generally may not terminate the account unless it has evidence that the account holder is unable or unwilling to repay. But the creditor may terminate an account on which both spouses are jointly lia ble, even if the action coincides with a change in marital status, when one or both spouses— • repudiate responsibility for future charges on the joint account • request separate accounts in their own names • request that the joint account be closed 2. Updating information. A creditor may peri odically request updated information from ap plicants but may not use events related to a prohibited basis—such as an applicant’s retire ment, reaching a particular age, or change in name or marital status—to trigger such a request. Paragraph 7(c)(2) 1. Procedure pending reapplication. A credi tor may require a reapplication from a con tractually liable party, even when there is no evidence of unwillingness or inability to re pay, if (1) the credit was based on the qualifi cations of a person who is no longer available to support the credit and (2) the creditor has information indicating that the account holder’s income by itself may be insufficient to support the credit. While a reapplication is 12 Regulation B Commentary pending, the creditor must allow the account holder full access to the account under the ex isting contract terms. The creditor may specify a reasonable time period within which the ac count holder must submit the requiredi information. 7(d) Signature of Spouse or Other Person 1. Qualified applicant. The signature rules en sure that qualified applicants are able to obtain credit in their own names. Thus, when an ap plicant requests individual credit, a creditor generally may not require the signature of an other person unless the creditor has first deter mined that the applicant alone does not qual ify for the credit requested. 2. Unqualified applicant. When an applicant applies for individual credit but does not alone meet a creditor’s standards, the creditor may require a cosigner, guarantor or the like—but cannot require that it be the spouse. (See commentary to section 202.7(d)(5) and (6 ).) Paragraph 7(d)(1) 1. Joint applicant. The term “joint applicant” refers to someone who applies contemporane ously with the applicant for shared or joint credit. It does not refer to someone whose sig nature is required by the creditor as a condi tion for granting the credit requested. Paragraph 7(d)(2) 1. Jointly owned property. If an applicant re quests unsecured credit, does not own suffi cient separate property, and relies on joint property to establish creditworthiness, the creditor must value the applicant’s interest in the jointly owned property. A creditor may not request that a nonapplicant joint owner sign any instrument as a condition of the credit extension unless the applicant’s interest does not support the amount and terms of the credit sought. i. Valuation o f applicant’s interest. In deter mining the value of an applicant’s interest in joindy owned property, a creditor may con sider factors such as the form of ownership § 202.7 Regulation B Commentary • • and the property’s susceptibility to attachment, execution, severance, or partition; the value of the applicant’s interest after such action; and the cost associated with the action. This deter mination must be based on the form of own ership prior to or at consummation, and not on the possibility of a subsequent change. For example, in determining whether a married applicant’s interest in jointly owned property is sufficient to satisfy the creditor’s standards of creditworthiness for individual credit, a creditor may not consider that the applicant’s separate property may be transferred into ten ancy by the entirety after consummation. Sim ilarly, a creditor may not consider the possi bility that the couple may divorce. Accordingly, a creditor may not require the signature of the nonapplicant spouse in these or similar circumstances. Paragraph 7(d)(3) 1. Residency. In assessing the creditworthi ness of a person who applies for credit in a community property state, a creditor may as sume that the applicant is a resident of the state unless the applicant indicates otherwise. Paragraph 7(d)(4) 1. Creation o f enforceable lien. Some state laws require that both spouses join in execut ing any instrument by which real property is encumbered. If an applicant offers such prop erty as security for credit, a creditor may re quire the applicant’s spouse to sign the instru ments necessary to create a valid security interest in the property. The creditor may not require the spouse to sign the note evidencing the credit obligation if signing only the mort gage or other security agreement is sufficient ii. Other options to support credit. If the to make the property available to satisfy the applicant’s interest in jointly owned property debt in the event of default. However, if does not support the amount and terms of under state law both spouses must sign the credit sought, the creditor may offer the appli note to create an enforceable lien, the creditor cant other options to provide additional sup may require them to do so. port for the extension of credit. For 2. Need fo r signature—reasonable belief. example— Generally, a signature to make the secured property available will only be needed on a A. requesting an additional party (see section security agreement. A creditor’s reasonable 202.7(d)(5)); belief that, to ensure access to the property, B. offering to grant the applicant’s request the spouse’s signature is needed on an instru on a secured basis (see section ment that imposes personal liability should be 202.7(d)(4)); or supported by a thorough review of pertinent C. asking for the signature of the joint owner statutory and decisional law or an opinion of on an instrument that ensures access to the state attorney general. the property in the event of the appli cant’s death or default, but does not im 3. Integrated instruments. When a creditor pose personal liability unless necessary uses an integrated instrument that combines under state law (e.g., a limited guarantee). the note and the security agreement, the A creditor may not routinely require, spouse cannot be required to sign the inte however, that a joint owner sign an in grated instrument if the signature is only strument (such as a quitclaim deed) that needed to grant a security interest. But the would result in the forfeiture of the joint spouse could be asked to sign an integrated instrument that makes clear—for example, by owner’s interest in the property. a legend placed next to the spouse’s signa 2. Need fo r signature—reasonable belief. A ture—that the spouse’s signature is only to creditor’s reasonable belief as to what instru grant a security interest and that signing the ments need to be signed by a person other instrument does not impose personal liability. than the applicant should be supported by a thorough review of pertinent statutory and de Paragraph 7(d)(5) cisional law or an opinion of the state attor 1. Qualifications o f additional parties. In esney general. 13 § 202.7 tablishing guidelines for eligibility of guaran tors, cosigners, or similar additional parties, a creditor may restrict the applicant’s choice of additional parties buy may not discriminate on the basis of sex, marital status or any other prohibited basis. For example, the creditor could require that the additional party live in the creditor’s market area. 2. Reliance on income o f another per son—individual credit. An applicant who re quests individual credit relying on the income of another person (including a spouse in a non-community property state) may be re quired to provide the signature of the other person to make the income available to pay the debt. In community property states, the signature of a spouse may be required if the applicant relies on the spouse’s separate in come. If the applicant relies on the spouse’s future earnings that as a matter of state law cannot be characterized as community prop erty until earned, the creditor may require the spouse’s signature, but need not do so—even if it is the creditor’s practice to require the signature when an applicant relies on the fu ture earnings of a person other than a spouse. (See section 202.6(c) on consideration of state property laws.) Regulation B Commentary the married officers of a business or married shareholders of a closely held corporation. 2. Spousal guarantees. The rules in section 202.7(d) bar a creditor from requiring a signa-i ture of a guarantor’s spouse just as they bar' the creditor from requiring the signature of an applicant’s spouse. For example, although a creditor may require all officers of a closely held corporation to personally guarantee a cor porate loan, the creditor may not automati cally require that spouses of married officers also sign the guarantee. If an evaluation of the financial circumstances of an officer indicates that an additional signature is necessary, how ever, the creditor may require the signature of a spouse in appropriate circumstances in ac cordance with section 202.7(d)(2). 7(e) Insurance 1. Differences in terms. Differences in the availability, rates, and other terms on which credit-related casualty insurance or credit life, health, accident, or disability insurance is of fered or provided to an applicant does not vi olate Regulation B. 3. Renewals. If the borrower’s creditworthi ness is reevaluated when a credit obligation is renewed, the creditor must determine whether an additional party is still warranted and, if not, release the additional party. 2. Insurance information. A creditor may ob tain information about an applicant’s age, sex, or marital status for insurance purposes. The information may only be used, however, for determining eligibility and premium rates for insurance, and not in making the credit decision. Paragraph 7(d)(6) SECTION 202.8— Special-Purpose Credit Programs 1. Guarantees. A guarantee on an extension of credit is part of a credit transaction and therefore subject to the regulation. A creditor may require the personal guarantee of the partners, directors, or officers of a business, and the shareholders of a closely held corpo ration, even if the business or corporation is creditworthy. The requirement must be based on the guarantor’s relationship with the busi ness or corporation, however, and not on a prohibited basis. For example, a creditor may not require guarantees only for women-owned or minority-owned businesses. Similarly, a creditor may not require guarantees only from 14 8(a) Standards for Programs 1. Determining qualified programs. The Board does not determine whether individual pro grams qualify for special-purpose credit status, or whether a particular program benefits an “ economically disadvantaged class of per sons.” The agency or creditor administering or offering the loan program must make these decisions regarding the status of its program. 2. Compliance with a program authorized by federal or state law. A creditor does not vio late Regulation B when it complies in good § 202.8 Regulation B Commentary • faith with a regulation promulgated by a gov ernment agency implementing a special-pur pose credit program under section 202.8(a)(1). It is the agency’s responsibility to promulgate a regulation that is consistent with federal and state law. 3. Expressly authorized. Credit programs au thorized by federal or state law include pro grams offered pursuant to federal, state, or lo cal statute, regulation or ordinance, or by judicial or administrative order. 4. Creditor liability. A refusal to grant credit to an applicant is not a violation of the act or regulation if the applicant does not meet the eligibility requirements under a special-pur pose credit program. • 5. Determining need. In designing a specialpurpose program under section 202.8(a), a forprofit organization must determine that the program will benefit a class of people who would otherwise be denied credit or would re ceive it on less favorable terms. This determi nation can be based on a broad analysis using the organization’s own research or data from outside sources, including governmental re ports and studies. For example, a bank could review Home Mortgage Disclosure Act data along with demographic data for its assess ment area and conclude that there is a need for a special-purpose credit program for lowincome minority borrowers. 6. Elements o f the program. The written plan must contain information that supports the need for the particular program. The plan also must either state a specific period of time for which the program will last, or contain a statement regarding when the program will be reevaluated to determine if there is a continu ing need for it. 8(b) Rules in Other Sections 1. Applicability o f rules. A creditor that re jects an application because the applicant does not meet the eligibility requirements (common characteristic or financial need, for example) must nevertheless notify the applicant of ac tion taken as required by section 202.9. 8(c) Special Rule Concerning Requests and Use of Information 1. Request o f prohibited information. This section permits a creditor to request and con sider certain information that would otherwise be prohibited by sections 202.5 and 202.6 to determine an applicant’s eligibility for a par ticular program. 2. Examples. Examples of programs under which the creditor can ask for and consider information related to a prohibited basis are— • energy conservation programs to assist the elderly, for which the creditor must consid er the applicant’s age • programs under a Minority Enterprise Small Business Investment Corporation, for which a creditor must consider the appli cant’s minority status 8(d) Special Rule in the Case of Financial Need 1. Request o f prohibited information. This section permits a creditor to request and con sider certain information that would otherwise be prohibited by sections 202.5 and 202.6, and to require signatures that would otherwise be prohibited by section 202.7(d). 2. Examples. Examples of programs in which financial need is a criterion are— • subsidized housing programs for low- to moderate-income households, for which a creditor may have to consider the appli cant’s receipt of alimony or child support, the spouse’s or parents’ income, etc. • student loan programs based on the fami ly’s financial need, for which a creditor may have to consider the spouse’s or par ents’ financial resources 3. Student loans. In a guaranteed student loan program, a creditor may obtain the signature of a parent as a guarantor when required by federal or state law or agency regulation, or when the student does not meet the creditor’s standards of creditworthiness. (See sections 202.7(d)(1) and (5).) The creditor may not re quire an additional signature when a student has a work or credit history that satisfies the creditor’s standards. 15 Regulation B Commentary § 202.9 SECTION 202.9— Notifications 1. Use o f the term "adverse action." The reg ulation does not require that a creditor use the term “adverse action” in communicating to an applicant that a request for an extension of credit has not been approved. In notifying an applicant of adverse action as defined by sec tion 202.2(c)(1), a creditor may use any words or phrases that describe the action taken on the application. 2. Expressly withdrawn applications. When an applicant expressly withdraws a credit applica tion, the creditor is not required to comply with the notification requirements under sec tion 202.9. (The creditor must, however, com ply with the record-retention requirements of the regulation. See section 202.12(b)(3).) 3. When notification occurs. Notification oc curs when a creditor delivers or mails a notice to the applicant’s last known address or, in the case of an oral notification, when the cred itor communicates the credit decision to the applicant. 4. Location o f notice. The notifications re quired under section 202.9 may appear on ei ther or both sides of a form or letter. 5. Prequalification and preapproval programs. Whether a creditor must provide a notice of action taken for a prequalification or preap proval request depends on the creditor’s re sponse to the request, as discussed in the commentary to section 202.2(f). For instance, a creditor may treat the request as an inquiry if the creditor provides general information such as loan terms and the maximum amount a consumer could borrow under various loan programs, explaining the process the consumer must follow to submit a mortgage application and the information the creditor will analyze in reaching a credit decision. On the other hand, a creditor has treated a request as an application, and is subject to the adverseaction notice requirements of section 202.9 if, after evaluating information, the creditor de cides that it will not approve the request and communicates that decision to the consumer. For example, if in reviewing a request for prequalification, a creditor tells the consumer that it would not approve an application for a 16 mortgage because of a bankruptcy in the con sumer’s record, the creditor has denied an ap plication for credit. 9(a) Notification o f Action Taken, I ECOA Notice, and Statement of Specific Reasons Paragraph 9(a)(1) 1. Timing o f notice—when an application is complete. Once a creditor has obtained all the information it normally considers in making a credit decision, the application is complete and the creditor has 30 days in which to no tify the applicant of the credit decision. (See also comment 2(f)-5.) 2. Notification o f approval. Notification of ap proval may be express or by implication. For example, the creditor will satisfy the notifica tion requirement when it gives the applicant the credit card, money, property, or services requested. 3. Incompletion application—denial fo r in completeness. When an application is incom plete regarding matters that the applicant can complete and the creditor lacks sufficient data for a credit decision, the creditor may deny the application giving as the reason for denial that the application is incomplete. The creditor has the option, alternatively, of providing a notice of incompleteness under section 202.9(c). 4. Incomplete application—denial fo r reasons other than incompleteness. When an applica tion is missing information but provides suffi cient data for a credit decision, the creditor may evaluate the application and notify the applicant under this section as appropriate. If credit is denied, the applicant must be given the specific reasons for the credit denial (or notice of the right to receive the reasons); in this instance the incompleteness of the appli cation cannot be given as the reason for the denial. 5. Length o f counteroffer. Section 202.9(a) (l)(iv) does not require a creditor to hold a counteroffer open for 90 days or any other particular length of time. 6. Counteroffer combined with adverse-action § 202.9 Regulation B Commentary • notice. A creditor that gives the applicant a combined counteroffer and adverse-action no tice that complies with section 202.9(a)(2) teed not send a second adverse-action notice f the applicant does not accept the counter offer. A sample of a combined notice is con tained in form C-4 of appendix C to the regulation. 7. Denial o f a telephone application. When an application is conveyed by means of tele phone and adverse action is taken, the creditor must request the applicant’s name and address in order to provide written notification under this section. If the applicant declines to pro vide that information, then the creditor has no further notification responsibility. Paragraph 9(a)(3) • 1. Coverage. In determining the rules in this paragraph that apply to a given business-credit application, a creditor may rely on the appli cant’s assertion about the revenue size of the business. (Applications to start a business are governed by the rules in section 202.9(a)(3)(i).) If an applicant applies for credit as a sole proprietor, the revenues of the sole proprietorship will determine which rules in the paragraph govern the application. How ever, if an applicant applies for business-purpose credit as an individual, the rules in para graph 9(a)(3)(i) apply unless the application is for trade or similar credit. 2. Trade credit. The term “trade credit” gen erally is limited to a financing arrangement that involves a buyer and a seller—such as a supplier who finances the sale of equipment, supplies, or inventory; it does not apply to an extension of credit by a bank or other finan cial institution for the financing of such items. 3. Factoring. Factoring refers to a purchase of accounts receivable and thus is not subject to the act or regulation. If there is a credit exten sion incident to the factoring arrangement, the notification rules in section 202.9(a)(3)(ii) ap ply, as do other relevant sections of the act and regulation. 4. Manner o f compliance. In complying with the notice provisions of the act and regulation, creditors offering business credit may follow the rules governing consumer credit. Simi larly, creditors may elect to treat all business credit the same (irrespective of revenue size) by providing notice in accordance with section 202.9(a)(3)(i). 5. Timing o f notification. A creditor subject to section 202.9(a)(3)(ii)(A) is required to notify a business credit applicant, orally or in writ ing, of action taken on an application within a reasonable time of receiving a completed ap plication. Notice provided in accordance with the timing requirements of section 202.9(a)(1) is deemed reasonable in all instances. 9(b) Form o f ECOA Notice and Statement o f Specific Reasons Paragraph 9(b)(1) 1. Substantially similar notice. The ECOA notice sent with a notification of a credit de nial or other adverse action will comply with the regulation if it is “substantially similar” to the notice contained in section 202.9(b)(1). For example, a creditor may add a reference to the fact that the ECOA permits age to be considered in certain credit scoring systems, or add a reference to a similar state statute or regulation and to a state enforcement agency. Paragraph 9(b)(2) 1. Number o f specific reasons. A creditor must disclose the principal reasons for deny ing an application or taking other adverse ac tion. The regulation does not mandate that a specific number of reasons be disclosed, but disclosure of more than four reasons is not likely to be helpful to the applicant. 2. Source o f specific reasons. The specific reasons disclosed under section 202.9(a)(2) and (b)(2) must relate to and accurately de scribe the factors actually considered or scored by a creditor. 3. Description o f reasons. A creditor need not describe how or why a factor adversely af fected an applicant. For example, the notice may say “length of residence” rather than “too short a period of residence.” 4. Credit scoring system. If a creditor bases the denial or other adverse action on a credit 17 § 202.9 scoring system, the reasons disclosed must re late only to those factors actually scored in the system. Moreover, no factor that was a principal reason for adverse action may be ex cluded from disclosure. The creditor must dis close the actual reasons for denial (for exam ple, “ age of automobile” ) even if the relationship of that factor to predicting creditworthiness may not be clear to the applicant. 5. Credit scoring—method for selecting rea sons. The regulation does not require that any one method be used for selecting reasons for a credit denial or other adverse action that is based on a credit scoring system. Various methods will meet the requirements of the regulation. One method is to identify the fac tors for which the applicant’s score fell fur thest below the average score for each of those factors achieved by applicants whose to tal score was at or slightly above the mini mum passing score. Another method is to identify the factors for which the applicant’s score fell furthest below the average score for each of those factors achieved by all appli cants. These average scores could be calcu lated during the development or use of the system. Any other method that produces re sults substantially similar to either of these methods is also acceptable under the regulation. 6. Judgmental system. If a creditor uses a judgmental system, the reasons for the denial or other adverse action must relate to those factors in the applicant’s record actually re viewed by the person making the decision. 7. Combined credit scoring and judgmental system. If a creditor denies an application based on a credit evaluation system that em ploys both credit scoring and judgmental com ponents, the reasons for the denial must come from the component of the system that the applicant failed. For example, if a creditor ini tially credit scores an application and denies the credit request as a result of that scoring, the reasons disclosed to the applicant must re late to the factors scored in the system. If the application passes the credit scoring stage but the creditor then denies the credit request based on a judgmental assessment of the ap18 Regulation B Commentary plicant’s record, the reasons disclosed must relate to the factors reviewed judgmentally, even if the factors were also considered in the credit scoring component. A 8. Automatic denial. Some credit-decisioir methods contain features that call for auto matic denial because of one or more negative factors in the applicant’s record (such as the applicant’s previous bad credit history with that creditor, the applicant’s declaration of bankruptcy, or the fact that the applicant is a minor). When a creditor denies the credit re quest because of an automatic-denial factor, the creditor must disclose that specific factor. 9. Combined ECOA-FCRA disclosures. The ECOA requires disclosure of the principal rea sons for denying or taking other adverse ac tion on an application for an extension of credit. The Fair Credit Reporting Act requires a creditor to disclose when it has based its decision in whole or in part on information from a source other than the applicant or from its own files. Disclosing that a credit report was obtained and used to deny the applica tion, as the FCRA requires, does not satisfy the ECOA requirement to disclose specific reasons. For example, if the applicant’s credit history reveals delinquent credit obligations and the application is denied for that reason, to satisfy section 202.9(b)(2) the creditor must disclose that the application was denied be cause of the applicant’s delinquent credit obli gations. To satisfy the FCRA requirement, the creditor must also disclose that a credit report was obtained and used to deny credit. Sample forms C-l through C-5 of appendix C of the regulation provide for the two disclosures. 9(c) Incomplete Applications Paragraph 9(c)(2) 1. Reapplication. If information requested by a creditor is submitted by an applicant after the expiration of the time period designated by the creditor, the creditor may require the applicant to make a new application. 6- 196.8 Paragraph 9(c)(3) 1. Oral inquiries fo r additional information. § 202.11 Regulation B Commentary • If the applicant fails to provide the informa tion in response to an oral request, a creditor must send a written notice to the applicant within the 30-day period specified in section 202.9(c)(1) and (c)(2). If the applicant does provide the information, the creditor shall take action on the application and notify the appli cant in accordance with section 202.9(a). 9(g) Applications Submitted Through a Third Party 1. Third parties. The notification of adverse action may be given by one of the creditors to whom an application was submitted. Alterna tively, the third party may be a noncreditor. 2. Third-party notice—enforcement agency. If a single adverse action notice is being pro vided to an applicant on behalf of several creditors and they are under the jurisdiction of different federal enforcement agencies, the no tice need not name each agency; disclosure of any one of them will suffice. • 3. Third-party notice—liability. When a notice is to be provided through a third party, a creditor is not liable for an act or omission of the third party that constitutes a violation of the regulation if the creditor accurately and in a timely manner provided the third party with the information necessary for the notification and maintains reasonable procedures adapted to prevent such violations. 3. Designating accounts. In designating ac counts and reporting credit information, a creditor need not distinguish between accounts on which the spouse is an authorized user and accounts on which the spouse is a contractu ally liable party. 4. File and index systems. The regulation does not require the creation or maintenance of separate files in the name of each partici pant on a joint or user account, or require any other particular system of recordkeeping or in dexing. It requires only that a creditor be able to report information in the name of each spouse on accounts covered by section 202.10. Thus, if a creditor receives a credit inquiry about the wife, it should be able to locate her credit file without asking the husband’s name. 10(a) Designation o f Accounts 1. New parties. When new parties who are spouses undertake a legal obligation on an ac count, as in the case of a mortgage-loan as sumption, the creditor should change the des ignation on the account to reflect the new parties and should furnish subsequent credit information on the account in the new names. 2. Request to change designation o f account. A request to change the manner in which in formation concerning an account is furnished does not alter the legal liability of either spouse upon the account and does not require a creditor to change the name in which the account is maintained. SECTION 202.10— Furnishing o f Credit Information 1. Scope. The requirements of section 202.10 for designating and reporting credit informa tion apply only to creditors that furnish credit information to credit bureaus or to other credi tors. There is no requirement that a creditor furnish credit information on its accounts. 2. Reporting on all accounts. The require ments of section 202.10 apply only to ac counts held or used by spouses. However, a creditor has the option to designate all joint accounts (or all accounts with an authorized user) to reflect the participation of both par ties, whether or not the accounts are held by persons married to each other. SECTION 202.11— Relation to State Law 11(a) Inconsistent State Laws 1. Preemption determination—New York. fective November 11, 1988, the Board has termined that the following provisions in state law of New York are preempted by federal law: Ef de the the • Article 15, Section 296a(l)(b)—Unlawful discriminatory practices in relation to credit on the basis of race, creed, color, national 19 § 202.11 origin, age, sex, marital status, or disabili ty. This provision is preempted to the ex tent that it bars taking a prohibited basis into account when establishing eligibility for certain special-purpose credit programs. • Article 15, Section 296a(l)(c)—Unlawful discriminatory practice to make any record or inquiry based on race, creed, color, na tional origin, age, sex, marital status, or disability. This provision is preempted to the extent that it bars a creditor from re questing and considering information re garding the particular characteristics (for example, race, national origin, or sex) re quired for eligibility for special-purpose credit programs. 2. Preemption determination—Ohio. Effective July 23, 1990, the Board has determined that the following provision in the state law of Ohio is preempted by the federal law: • Section 4112.021(B)(1)—Unlawful discrim inatory practices in credit transactions. This provision is preempted to the extent that it bars asking or favorably considering the age of an elderly applicant; prohibits the consideration of age in a credit scoring sys tem; permits without limitation the consid eration of age in real estate transactions; and limits the consideration of age in special-purpose credit programs to certain gov ernment-sponsored programs identified in the state law. Regulation B Commentary credit applications only if permitted to do so by section 202.6. 12(b) Preservation of Records ' 1. Copies. A copy of the original record in cludes carbon copies, photocopies, microfilm or microfiche copies, or copies produced by any other accurate retrieval system, such as documents stored and reproduced by com puter. A creditor that 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 manner for examina tion or other purposes. 2. Computerized decisions. A creditor that en ters information items from a written applica tion into a computerized or mechanized sys tem and makes the credit decision mechanically, based only on the items of in formation entered into the system, may com ply with section 202.12(b) by retaining the in formation actually entered. It is not required to store the complete written application, nor is it required to enter the remaining items of information into the system. If the transaction is subject to section 202.13, however, the creditor is required to enter and retain the data on personal characteristics in order to comply with the requirements of that section. Paragraph 12(b)(3) SECTION 202.12— Record Retention 12(a) Retention o f Prohibited Information 1. Receipt o f prohibited information. Unless the creditor specifically requested such infor mation, a creditor does not violate this section when it receives prohibited information from a consumer reporting agency. 2. Use o f retained information. Although a creditor may keep in its files prohibited infor mation as provided in section 202.12(a), the creditor may use the information in evaluating 20 1. Withdrawn and brokered applications. In most cases, the 25-month retention period for applications runs from the date a notification is sent to the applicant granting or denying the credit requested. In certain transactions, a creditor is not obligated to provide a notice of the action taken. (See, for example, comment 9-2.) In such cases, the 25-month requirement runs from the date of application, as when— • an application is withdrawn by the appli cant • an application is submitted to more than one creditor on behalf of the applicant, and the application is approved by one of the other creditors § 202.13 Regulation B Commentary SECTION 202.13— Information for Monitoring Purposes • 13(a) Information to Be Requested 1. Natural person. Section 202.13 applies only to applications from natural persons. 2. Principal residence. The requirements of section 202.13 apply only if an application re lates to a dwelling that is or will be occupied by the applicant as the principal residence. A credit application related to a vacation home or a rental unit is not covered. In the case of a two- to four-unit dwelling, the application is covered if the applicant intends to occupy one of the units as a principal residence. 3. Temporary financing. An application for temporary financing to construct a dwelling is not subject to section 202.13. But an applica tion for both a temporary loan to finance con struction of a dwelling and a permanent mort gage loan to take effect upon the completion of construction is subject to section 202.13. 4. New principal residence. A person can have only one principal residence at a time. However, if a person buys or builds a new dwelling that will become that person’s princi pal residence within a year or upon comple tion of construction, the new dwelling is con sidered the principal residence for purposes of section 202.13. 5. Transactions not covered. The informationcollection requirements of this section apply to applications for credit primarily for the purchase or refinancing of a dwelling that is or will become the applicant’s principal resi dence. Therefore, applications for credit se cured 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 improve ment and debt consolidation) are not subject to the information-collection requirements. An application for an open-end home equity line of credit is not subject to this section unless it is readily apparent to the creditor when the application is taken that the primary purpose of the line is for the purchase or refinancing of a principal dwelling. 6. Refinancings. A refinancing occurs when an existing obligation is satisfied and replaced by a new obligation undertaken by the same borrower. A creditor that receives an applica tion to refinance an existing extension of credit made by that creditor for the purchase of the applicant’s dwelling may request the monitoring information again but is not re quired to do so if it was obtained in the ear lier transaction. 7. Data collection under Regulation C. See comment 5(b)(2)-2. 13(b) Obtaining o f Information 1. Forms fo r collecting data. A creditor may collect the information specified in section 202.13(a) either on an application form or on a separate form referring to the application. 2. Written applications. The regulation re quires written applications for the types of credit covered by section 202.13. A creditor can satisfy this requirement by recording in writing or by means of computer the informa tion that the applicant provides orally and that the creditor normally considers in a credit decision. 3. Telephone, mail applications. If an appli cant does not apply in person for the credit requested, a creditor does not have to com plete the monitoring information. For example: • When a creditor accepts an application by telephone, it does not have to request the monitoring information. • When a creditor accepts an application by mail, it does not have to make a special request to the applicant if the applicant fails to complete the monitoring informa tion on the application form sent to the creditor. If it is not evident on the face of the applica tion that it was received by mail or telephone, the creditor should indicate on the form or other application record how the application was received. 4. Applications through electronic media. If an applicant applies through an electronic me dium (for example, the Internet or a facsimile) without video capability that allows the credi21 § 202.13 Regulation B Commentary tor to see the applicant, the creditor may treat the application as if it were received by mail or telephone. SECTION 202.14— Enforcement, Penalties, and Liabilities 5. Applications through video. If a creditor takes an application through a medium that allows the creditor to see the applicant, the creditor treats the application as taken in per son and must note the monitoring information on the basis of visual observation or surname, if the applicant chooses not to provide the information. 14(c) Failure o f Compliance 6. Applications through loan-shopping ser vices. When a creditor receives an application through an unaffiliated loan-shopping service, it does not have to request the monitoring in formation for purposes of the ECOA or Regu lation B. Creditors subject to the Home Mort gage Disclosure Act should be aware, however, that data collection may be called for under Regulation C, which generally re quires creditors to report, among other things, the sex and race or national origin of an ap plicant on brokered applications or applica tions received through a correspondent. 7. Inadvertent notation. If a creditor inadver tently obtains the monitoring information in a dwelling-related transaction not covered by section 202.13, the creditor may process and retain the application without violating the regulation. 13(c) Disclosure to Applicant(s) 1. Procedures fo r providing disclosures. The disclosures to an applicant regarding the mon itoring information may be provided in writ ing. Appendix B contains a sample disclosure. A creditor may devise its own disclosure so long as it is substantially similar. The creditor need not orally request the applicant to pro vide the monitoring information if it is re quested in writing. 13(d) Substitute Monitoring Program 1. Substitute program. An enforcement agency may adopt, under its established rulemaking or enforcement procedures, a pro gram requiring creditors under its jurisdiction to collect information in addition to that re quired by this section. 22 1. Inadvertent errors. Inadvertent errors in clude, but are not limited to, clerical mistake, calculation error, computer malfunction, and printing error. An error of legal judgment is not an inadvertent error under the regulation. 2. Correction o f error. For inadvertent errors that occur under sections 202.12 and 202.13, this section requires that they be corrected prospectively only. APPENDIX B— Model Application Forms 1. FHLMC/FNMA form—residential loan ap plication. The uniform residential loan appli cation form (FHLMC 65/FNMA 1003), including supplemental form (FHLMC 65 A/FNMA 1003A), prepared by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association and dated May 1991 may be used by creditors without violating this regulation even though the form’s listing of race or national origin categories in the “Information for Government Monitoring Purposes” section differs from the classifications currently specified in section 202.13(a)(1). The classifications used on the FNMA-FHLMC form are those required by the U.S. Office of Management and Budget for notation of race and ethnicity by federal programs in their administrative reporting and statistical activities. Creditors that are gov erned by the monitoring requirements of Reg ulation B (which limits collection to applica tions primarily for the purchase or refinancing of the applicant’s principal residence) should delete, strike, or modify the data-collection section on the form when using it for transac tions not covered by section 202.13(a) to en sure that they do not collect the information. Creditors that are subject to more extensive collection requirements by a substitute moni toring program under section 202.13(d) or by the Home Mortgage Disclosure Act (HMDA) may use the form as issued, in compliance with that substitute program or HMDA. Appendix C Regulation B Commentary • 2. FHLMC/FNMA form —home-improvement loan application. The home-improvement and energy loan application form (FHLMC 703/ FNMA 1012), prepared by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association and dated Oc tober 1986, complies with the requirements of the regulation for some creditors but not others because of the form’s section “Infor mation for Government Monitoring Pur poses.” Creditors that are governed by section 202.13(a) of the regulation (which limits col lection to applications primarily for the purchase or refinancing of the applicant’s principal residence) should delete, strike, or modify the data-collection section on the form when using it for transactions not covered by section 202.13(a) to ensure that they do not collect the information. Creditors that are sub ject to more extensive collection requirements by a substitute monitoring program under sec tion 202.13(d) may use the form as issued, in compliance with that substitute program. APPENDIX C— Sample Notification Forms Form C-9 Creditors may design their own form, add to, or modify the model form to reflect their indi vidual policies and procedures. For example, a creditor may want to add— i. ii. a telephone number that applicants may call to leave their name and the address to which an appraisal report should be sent a notice of the cost the applicant will be required to pay the creditor for the ap praisal or a copy of the report 23 Board of Governors of the Federal Reserve System Amendments to Regulation K International Banking Operations October 1996* 1. Effective December 21, 1995, section 211.2 is amended by redesignating paragraphs (u) and (v) as paragraphs (v) and (w), respectively, and by adding new paragraphs (u) and (x) to read as follows: (u) Strongly capitalized means— (1) in relation to a parent member bank, that the standards set out in 12 CFR 208.33(b)(1) are satisfied; and (2) in relation to an Edge or agreement corporation or a bank holding company, that it has a total risk-based capital ra tio of 10.0 percent or greater. * * * * * (x) Well managed means that the Edge or agreement corporation, its parent member bank, if any, and the bank holding com pany have each received a composite rat ing of 1 or 2 at its most recent examina tion or review and are not subject to any supervisory enforcement action. ^ ^ 2 . Effective December 21, 1995, section 211.5 is amended by redesignating paragraphs (c)(2) and (c)(3) as paragraphs (c)(3) and (c)(4), respectively. In the third sentence o f newly designated paragraph (c)(3), the word "accepted" is replaced with the word "received. ” A new paragraph (c)(2) is added to read as follows: (2) (i) Expanded general consent for de novo investments. Notwithstanding the amount limitations of paragraph (c)(1) * A complete Regulation K, as amended effective August 28, 1996, consists of— • the regulation pamphlet dated January 1994 (see inside cover) and • this slip sheet. Items 4 and 10 are new. The other items were included in the July 1996 slip sheet. of this section, but subject to the other limitations of this section, the Board grants expanded general consent author ity for investments in an organization by an investor that is strongly capital ized and well managed if— (A) the activities of the organization are limited to activities in which a national bank may engage directly or in which a subsidiary may engage under section 211.5(d); (B) in the case of an investor that is an Edge corporation that is not en gaged in banking or an agreement corporation, the total amount in vested in such organization (in one transaction or a series of transac tions) does not exceed the lesser of 20 percent of the investor’s tier 1 capital or 2 percent of the tier 1 cap ital of the parent member bank; (C) in the case of a bank holding company or member bank investor, the total amount invested in such or ganization (in one transaction or a series of transactions) directly or in directly does not exceed 2 percent of the investor’s tier 1 capital; (D) all investments made, directly or indirectly, by an Edge corporation not engaged in banking or an agree ment corporation during the previous 12-month period under paragraph (c)(2) of this section, when aggre gated with the proposed investment, would not exceed the lesser of 50 percent of the total capital of the Edge or agreement corporation, or 5 percent of the total capital of the par ent member bank; (E) all investments made, directly or indirectly, by a member bank or a bank holding company during the previous 12-month period under paragraph (c)(2) of this section, when 1 Regulation K aggregated with the proposed invest ment. would not exceed 5 percent of its total capital; and (F) both before and immediately af ter the proposed investment the in vestor, its parent member bank, if any. and any parent bank holding company are strongly capitalized and well managed. (ii) Determining aggregate investment limits. For purposes of determining compliance with the aggregate invest ment limits set out in paragraphs (c)(2)(i)(D) and (E) of this section, an investment by an investor in a subsidi ary shall be counted only once notwith standing that such subsidiary may, within 12 months of the date of making the investment, downstream all or any part of such investment to another subsidiary. (iii) Additional investments. An inves tor that makes investments under para graph (c)(2)(i) of this section may also make additional investments in an or ganization under the standards set forth in paragraphs (c)(l)(ii), (c)(l)(iii) and (c)(l)(iv) of this section. (iv) Ineligible investments. The follow ing investments are not eligible for the general consent under paragraph (c)(2)(i) of this section: (A) an investment in a foreign coun try where the investor does not have an affiliate or a branch; (B) the establishment or acquisition of an initial subsidiary bank in a for eign country; (C) investments in general partner ships or unlimited liability compa nies; and (D) an acquisition of shares or assets of an organization that is not an affil iate or joint venture of the investor. (v) Post-investment notice. By the end of the month following the month in which the investment is made, the in vestor shall provide the Board with the following information relating to the investment: (A) if the investment is in a joint venture, the respective responsibili 2 ties of the parties to the joint venture; (B) projections for the organization in which the investment is made for the first year following the in v ^ fl ment; and ^ (C) where the investment is made in an organization that incurred a loss in the last year, a description of the reasons for the loss and the steps taken to address the problem. 3. Effective April 1, 1996, section 211.8 is amended by replacing the words “crimi nal referral form " with the words "suspicious-activity report. ” 4. Effective August 28, 1996, section 211.20(b)( 10) is added to read as follows: * * * * * (10) the management of shell branches (12 USC 3105(k)). 5. Effective January 1, 1995, section 211.21(e) is amended to read as follows: (e) Change the status of an office means convert a representative office into m branch or agency, or an agency into <r branch, but does not include renewal of the license of an existing office. 6. Effective May 9, 1996, section 211.22(a) is amended to read as follows. Section 211.22(c) is deleted, and section 211.22(d) is redesignated as 211.22(c). (a) Determination o f home state. (1) A foreign bank (except a foreign bank to which paragraph (a)(2) of this section applies) that has any combina tion of domestic agencies or subsidiary commercial lending companies that were established before September 29, 1994, in more than one state and have been continuously operated shall select its home state from those states in which such offices or subsidiaries are Regulation K located. A foreign bank shall do so by filing with the Board a declaration of home state by June 30, 1996. In the absence of such selection, the Board shall designate the home state for such foreign banks. (2) A foreign bank that, as of Septem ber 29, 1994, had declared a home state or had a home state determined pursu ant to the law and regulations in effect prior to that date shall have that state as its home state. (3) A foreign bank that has any branches, agencies, subsidiary commer cial lending companies, or subsidiary banks in one state, and has no such of fices or subsidiaries in any other states, shall have as its home state the state in which such offices or subsidiaries are located. (ii) General consent for representative of fices. The Board grants its general consent for a foreign bank that is subject to sec tion 8(a) of the IB A (12 USC 3106(a)) to establish a representative office that solely engages in limited administrative func tions (such as separately maintaining back-office support systems) that are clearly defined, are performed in connec tion with the United States banking activi ties of the foreign bank, and do not in volve contact or liaison with customers or potential customers beyond incidental contact with existing customers relating to administrative matters (such as verifica tion or correction of account information), provided that the foreign bank notifies the Board in writing within 30 days of the establishment of the representative office. 7. Effective January 24, 1996, section 211.24 is amended by revising paragraphs (a)(2)(i) and (ii) to read as follows: 8. Effective January 24, 1996, section 211.24 is amended by redesignating para graph (d)(3) as (d)(4) and adding a new paragraph (d)(3) to read as follows: (i) Prior notice for certain representative offices. After providing 45 days’ prior written notice to the Board, a foreign bank that is subject to the BHC Act, ei ther directly or through section 8(a) of the IBA (12 USC 3106(a)), may establish— (A) a regional administrative office; or (B) a representative office, but only if the Board has previously determined that the foreign bank proposing to es tablish a representative office is subject to comprehensive supervision or regula tion on a consolidated basis by its home-country supervisor, or previously has been approved for a representative office by Board order. The Board may waive the 45-day period if it finds that immediate action is required by the cir cumstances presented. The notice pe riod shall commence at the time the no tice is received by the appropriate Reserve Bank. The Board may suspend the period or require Board approval prior to the establishment of such an office if the notification raises signifi cant policy, prudential, or supervisory concerns. (3) Special-purpose foreign-government banks. A foreign government-owned or ganization engaged in banking activities in its home country that are not commer cial in nature may apply to the Board for determination that the organization is not a foreign bank for purposes of this sec tion. A written request setting forth the basis for such a determination may be submitted to the Reserve Bank of the Dis trict in which the foreign organization’s representative office is located in the United States or to the Board in the case of a proposed establishment of a represen tative office. The Board will review and act upon each such request on a case-bycase basis. 9. Effective April 1, 1996, section 211.24(f) is amended by replacing the words “crim inal referral form " with the words “suspicious-activity report." 10. Effective August 28, 1996, section 211.24(g) is added to read as follows: 3 Regulation K (g) Management o f shell branches. (1) A state-licensed branch or agency shall not manage, through an office of the foreign bank which is located outside the United States and is man aged or controlled by such state-licensed branch or agency, any type of activity that a bank organized under the laws of the United States or any state is not permitted to manage at any branch or subsidiary of such bank which is lo cated outside the United States. (2) For purposes of this subsection, an office of a foreign bank located outside the United States is “managed or con trolled” by a state-licensed branch or agency if a majority of the responsibil ity for business decisions, including but not limited to decisions with regard to lending or asset management or funding or liability management, or the respon sibility for recordkeeping in respect of assets or liabilities for that non-U.S. of fice, resides at the state-licensed branch or agency. (3) The types of activities that a statelicensed branch or agency may manage through an office located outside the United States that it manages or con trols include the types of activities au thorized to a U.S. bank by state or fed eral charters, regulations issued by chartering or regulatory authorities, and other U.S. banking laws, including the Federal Reserve Act, and the imple menting regulations, but U.S. procedu ral or quantitative requirements that may be applicable to the conduct of such activities by U.S. banks shall not apply. 11. Effective January 1, 1995, section 211.29 is added to read as follows: SECTION 211.29— Applications by State-Licensed Branches and Agencies to Conduct Activities Not Permissible for Federal Branches (a) Scope. A state-licensed branch or agency shall file with the Board a prior written application for permission to en gage in or continue to engage in any type of activity that— (1) is not permissible for a federal branch, pursuant to statute, re g u la ti^ official bulletin or circular, or order ^ interpretation issued in writing by the Office of the Comptroller of the Cur rency; or (2) is rendered impermissible due to a subsequent change in statute, regula tion, official bulletin or circular, written order or interpretation, or decision of a court of competent jurisdiction. (b) Exceptions. No application shall be required by a state-licensed branch or agency to conduct any activity that is oth erwise permissible under applicable state and federal law or regulation and that— (1) has been determined by the FDIC pursuant to 12 CFR 362.4(c)(i)— (ii)(A) not to present a significant risk to the affected deposit insurance fund; (2) is permissible for a federally li censed branch but the OCC imposes a quantitative limitation on the conduct of such activity by the federal branch; (3) is conducted as agent rather than as principal, provided that the activity is one that could be conducted by a statechartered bank headquartered in the same state in which the branch or agency is licensed; or I (4) any other activity that the Board has determined may be conducted by any state-licensed branch or agency of a foreign bank without further applica tion to the Board. (c) Contents o f application. An applica tion submitted pursuant to paragraph (a) of this section shall be in letter form and shall contain the following information: (1) a brief description of the activity, including the manner in which it will be conducted and an estimate of the ex pected dollar volume associated with the activity; (2) an analysis of the impact of the proposed activity on the condition of the U.S. operations of the foreign bank in general and of the branch or agency in particular, including a copy, if avail Regulation K able, of any feasibility study, manage ment plan, financial projections, busi ness plan, or similar document concern ing the conduct of the activity; (3) a resolution by the applicant's board of directors or, if a resolution is not required pursuant to the applicant's organizational documents, evidence of approval by senior management, au thorizing the conduct of such activity and the filing of this application; (4) if the activity is to be conducted by a state-licensed insured branch, a state ment by the applicant of whether or not it is in compliance with 12 CFR 346.19 and 346.20, Pledge of Assets, and As set Maintenance, respectively; (5) if the activity is to be conducted by a state-licensed insured branch, state ments by the applicant— (i) that it has complied with all re quirements of the Federal Deposit In surance Corporation concerning an application to conduct the activity and the status of the application, in cluding a copy of the FDIC’s dispo sition of such application, if avail able, and (ii) explaining why the activity will pose no significant risk to the deposit insurance fund; and (6) any other information that the Re serve Bank deems appropriate. (d) Factors considered in determination. (1) The Board shall consider the fol lowing factors in determining whether a proposed activity is consistent with sound banking practice: (A) the types of risks, if any, the ac tivity poses to the U.S. operations of the foreign banking organization in general and the branch or agency in particular; (B) if the activity poses any such risks, the magnitude of each risk; and (C) if a risk is not de minimis, the actual or proposed procedures to con trol and minimize the risk. (2) Each of the factors set forth in paragraph (d)(1) of this section shall be evaluated in light of the financial con dition of the foreign bank in general and the branch or agency in particular and the volume of the activity. (e) Application procedures. Applications pursuant to this section shall be filed with the responsible Reserve Bank for the for eign bank. An application shall not be deemed complete until it contains all the information requested by the Reserve Bank and has been accepted. Approval of such an application may be conditioned on the applicant’s agreement to conduct the activity subject to specific conditions or limitations. (f) Divestiture or cessation. (1) In the event that an applicant’s ap plication for permission to continue to conduct an activity is not approved by the Board or, if applicable, the FDIC, the applicant shall submit a detailed written plan of divestiture or cessation of the activity to the responsible Re serve Bank within 60 days of the disap proval. The divestiture or cessation plan shall describe in detail the manner in which the applicant will divest itself of or cease the activity and shall include a projected timetable describing how long the divestiture or cessation is expected to take. Divestitures or cessation shall be complete within one year from the date of the disapproval, or within such shorter period of time as the Board shall direct. (2) In the event that a foreign bank op erating a state branch or agency chooses not to apply to the Board for permission to continue to conduct an activity that is not permissible for a federal branch or which is rendered im permissible due to a subsequent change in statute, regulation, official bulletin or circular, written order or interpretation, or decision of a court of competent ju risdiction, the foreign bank shall submit a written plan of divestiture or cessa tion, in conformance with section 211.29(0(1), of this part within 60 days of the effective date of this part or of such change or decision. 5 Regulation K 12. Effective March 25, 1996, section 211.30 is added to read as follows: SECTION 211.30— Criteria for Evaluating the U.S. Operations of Foreign Banks Not Subject to Consolidated Supervision (a) General. Pursuant to the Foreign Bank Supervision Enhancement Act, Pub.L. 102-242, 105 Stat. 2286 (1991), the Board shall develop and publish crite ria to be used in evaluating the operations of any foreign bank in the United States that the Board has determined is not sub ject to comprehensive supervision or regu lation on a consolidated basis. (b) Criteria. Following a determination by the Board that, having taken into ac count the standards set forth in section 211.24(c)(1) of this subpart, a foreign bank is not subject to comprehensive, consolidated supervision by its homecountry supervisor, the Board shall con sider the following criteria in determining whether the foreign bank's U.S. opera tions should be permitted to continue and, if so, whether any supervisory constraints should be placed upon the bank in con nection with those operations: (1) the proportion of the foreign bank’s total assets and total liabilities that are located or booked in its home country, as well as the distribution and location of its assets and liabilities that are lo cated or booked elsewhere; (2) the extent to which the operations and assets of the foreign bank and any affiliates are subject to supervision by its home-country supervisor; (3) whether the appropriate authorities in the home country of such foreign bank are actively working to establish arrangements for the comprehensive, consolidated supervision of such bank and whether demonstrable progress is being made; (4) whether the foreign bank has effec tive and reliable systems of internal controls and management information and reporting, which enable its manage ment properly to oversee its worldwide operations; (5) whether the foreign bank’s homecountry supervisor has any objection to the bank continuing to operate in thJ United States; (6) whether the foreign bank’s homecountry supervisor and the homecountry supervisor of any parent of the foreign bank share material information regarding the operations of the foreign bank with other supervisory authorities; (7) the relationship of the U.S. opera tions to the other operations of the for eign bank, including whether the for eign bank maintains funds in its U.S. offices that are in excess of amounts due to its U.S. offices from the foreign bank’s non-U.S. offices; (8) the soundness of the foreign bank’s overall financial condition; (9) the managerial resources of the for eign bank, including the competence, experience, and integrity of the officers and directors and the integrity of its principal shareholders; (10) the scope and frequency of exter nal audits of the foreign bank; (11) the operating record of the foreign bank generally and its role in the bank ing system in its home country; (12) the foreign bank’s record of com pliance with relevant laws, as well as the adequacy of its money-laundering controls and procedures, in respect of its worldwide operations; (13) the operating record of the U.S. offices of the foreign bank; (14) the views and recommendations of the Office of the Comptroller of the Currency or the state banking regulators in those states in which the foreign bank has operations, as appropriate; (15) whether the foreign bank, if re quested, has provided the Board with adequate assurances that such informa tion will be made available on the op erations or activities of the foreign bank and any of its affiliates as the Board deems necessary to determine and enforce compliance with the Inter national Banking Act, the Bank Hold Regulation K ing Company Act, and other applicable federal banking statutes; and (16) any other information relevant to the safety and soundness of the U.S. operations of the foreign bank. (c) Restrictions on U.S. operations. (1) Terms o f agreement. Any foreign bank that the Board determines is not subject to comprehensive supervision or regulation on a consolidated basis by its home-country supervisor may be re quired to enter into an agreement to conduct its U.S. operations subject to such restrictions as the Board, having considered the criteria set forth in para graph (b) of this section, determines to be appropriate in order to ensure the safety and soundness of its U.S. operations. (2) Failure to enter into or comply with agreement. A foreign bank that is required by the Board to enter into an agreement pursuant to paragraph (c)(1) of this section and either fails to do so or fails to comply with the terms of such agreement may be subject to en forcement action in order to ensure safe and sound banking operations under 12 USC 1818, or to termination or a rec ommendation for termination of its U.S. operations under section 211.25(a) and (e) of this subpart and section (7)(e) of the IBA (12 USC 3105(e)). 7 Board of Governors of the Federal Reserve System Amendments to the Official Staff Commentary on Regulation Z Truth in Lending November 1996* 1. Effective October 21, 1996, comment 4(a)-3 is amended by deleting paragraph the other benefits offered (such as a news letter or a member information hotline) are merely incidental to the credit feature, the membership fee would be disclosed as an “other charge.” 2. Effective April I, 1996, comment 4(d)-5 is amended to read as follows: 5. Required credit life insurance. Credit life, accident, health, or loss-of-income in surance must be voluntary in order for the premium or charges to be excluded from the finance charge. Whether the insurance is in fact required or optional is a factual question. If the insurance is required, the premiums must be included in the finance charge, whether the insurance is pur chased from the creditor or from a third party. If the consumer is required to elect one of several options—such as to purchase credit life insurance, or to assign an existing life insurance policy, or to pledge security such as a certificate of de posit—and the consumer purchases the credit life insurance policy, the premium must be included in the finance charge. (If the consumer assigns a preexisting policy or pledges security instead, no premium is included in the finance charge. The secur ity interest would be disclosed under sec tion 226.6(c) or section 226.18(m). See the commentary to section 226.4(b)(7) and (8).) 3. Effective April I, 1996. a sentence is added at the eiul o f comment 6(b)-1, item t'.. to read as follows: * * * For example, if the primary benefit of membership in an organization is the opportunity to apply for a credit card, and • A complete commentary pamphlet, as amentled effec tive October 21. IWft, consists of— • the commentary pamphlet dated July IW5 (see inside front cover) and • this slip sheet. Items I. 8. 10. and 12 are new. The other items »crc included in the June I4 slip sheet *#* 4. Effective April I. 1996, the last sentence o f comment 12(c)(2)-! is amended and comment !2(c)(2)-2 is added to read as follows: • Nothing in this provision prohibits the card issuer from undertaking its normal collection activities for the delinquent and undisputed portion of the account. 2. Settlement o f dispute. A card issuer may not consider a dispute settled and re port an amount disputed as delinquent or begin collection of the disputed amount until it has completed a reasonable inves tigation of the cardholder's claim. A rea sonable investigation requires an indepen dent assessment of the cardholder’s claim based on information obtained from both the cardholder and the merchant, if possi ble. In conducting an investigation, the card issuer may request the cardholder's reasonable cooperation. The card issuer may not automatically consider a dispute settled if the cardholder fails or refuses to comply with a particular request. How ever. if the card issuer otherwise has no means of obtaining information necessary to resolve the dispute, the lack of infor mation resulting from the cardholder's failure or refusal to comply with a partic ular request may lead the card issuer rea sonably to terminate the investigation. 5. Effective April I. 1996. comment 14(c)- It) is added to read as follows: 10. Transactions at end o f hilling cycle. The annual percentage rate reflects trans I Regulation Z Commentary on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been ap plied using the index or formula at the time of consummation. The rate at con-^^fc summation need not be used if a c o n - ^ ^ tract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors may use the index value in effect during the 45 days before consummation in calcu lating a composite annual percentage rate. actions and charges imposed during the billing cycle. However, it may be imprac ticable to post a transaction that occurs at the end of a billing cycle until the follow ing cycle, such as a cash advance that oc curs on the last day of a billing cycle and is posted to the account in the following cycle. A card issuer that uses the date of the transaction to figure finance charges shall calculate the annual percentage rate as follows for the billing cycle in which the transaction and charges are posted: i. ii. The denominator shall be calculated as if the transaction occurred on the first day of the billing cycle; and The numerator shall include the amount of the transaction charge plus all finance charges derived from the application of the periodic rate to the amount of the transaction (including all charges from a prior cycle). 6. Effective April /. 1996, the first and last paragraphs o f comment 17(c)(1)-10 are amended to read as follows: 10. Discounted and premium variahlerate transactions. In some variable-rate transactions, creditors may set an initial interest rate that is not determined by the index or formula used to make later interest-rate adjustments. Typically, this initial rate charged to consumers is lower than the rate would be if it were calculated us ing the index or formula. However, in some cases the initial rate may be higher. In a discounted transaction, for example, a creditor may calculate interest rates ac cording to a formula using the six-month Treasury bill rale plus a 2 percent margin. If the Treasury bill rale ul consummation is 10 percent, the creditor may forgo the 2 percent spread and charge only 10 percent for a limited lime, instead of setting an initial rale of 12 percent. • % When creditors use an initial interest rate that is not calculated using the in dex or formula for later rate adjust ments. the disclosures should rcflcct a composite annual percentage rate based A loan in which 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 consum mation. For example, if a creditor com mits to an initial rate based on the formula on a date prior to consummation, but the index has moved during the pe riod between that time and consummation, a creditor should base its disclosures on the initial rate. 7. Effective April I. 1996, comment 17(c)(1)18 is added to read as follows: 18. Pawn Transactions. When, in connec tion with an extension of credit, a con sumer pledges or sells an item to a pawn broker 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, disclosures arc required. In addition to other disclosure requirements that may be applicable under section 226.18. for pur poses of pawn transactions: i. The amount financed is the initial sum paid to the consumer. The pawn broker creditor need not provide a separate itemi/ation of the amount fi nanced if that entire amount is paid Regulation Z Commentary directly to the consumer and the dis closed description of the amount fi nanced is “the amount of cash given directly to you” or a similar phrase. ii. The finance charge is the difference between the initial sum paid to the consumer and the redemption price plus any other finance charges paid in connection with the transaction. (See section 226.4.) iii. The term of the transaction, for calcu lating the annual percentage rate, is the period of time agreed to by the pawnbroker creditor and the consum er. The term of the transaction does not include a grace period (including any statutory grace period) after the agreed redemption date. 8. Effective October 21, 1996, paragraph 17(c)(2) is redesignated as I7(c)(2)(i). 9. Effective A pril I, 1996, comment I8(c)( I)(iii)-2 is added to read as follows: 2. Charges added to amounts paid to others. A sum is sometimes added to the amount of a fee charged to a consumer for a service provided by a third party (such as for an extended warranty or a service contract) that is payable in the same amount in comparable cash and credit transactions. In the credit transac tion, the amount is retained by the credi tor. Given the flexibility permitted in meeting the requirements of the amount financed itemization (see the commentary to section 226.18(c)). the creditor in such cases may reflect that the creditor has re tained a portion of the amount paid to others. For example, the creditor could add to the category "amount paid to others" language such as "(we may be retaining a portion of this amount)." 10. Effective October 21. 1996. comment IH(tl)-2 is deleted. 11. Effective April 1, 1996, comment 20(a)-3 is amended to read as follows: 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. For example, no new disclosures are required when the varia ble-rate feature is invoked on a renewable balloon-payment mortgage that was previ ously disclosed as a variable-rate transaction. ii. Even if it is not accomplished by the cancellation of the old obligation and substitution of a new one, a new transac tion subject to new disclosures results if the creditor either: A. Increases the rate based on a variablerate feature that was not previously disclosed; or B. Adds a variable-rate feature to the ob ligation. A creditor does not add a variable-rate feature by changing the index of a variable-rate transaction to a comparable index, whether the change replaces the existing index or substitutes an index for one that no longer exists. iii. If either of the events in paragraph 20(a)(iii) ii.A. or ii.B. occurs in a transac tion secured by a principal dwelling with a term longer than one year, the disclo sures required under section 226.19(b) also must be given at that time. 12. Effective October 21. 1996. the first sen tence o f comment 23(b)-3 is amended to reiul as follows: 3. Content. The notice must include all of the information outlined in section 226.23<b)( I Mi) through (v). * * * 13. Effective April I. 1996. comments on subpart E are added to read as follows: 3 Regulation Z Commentary SUBPART E— SPECIAL RULES FOR CERTAIN HOME MORTGAGE TRANSACTIONS SECTION 226.31— General Rules 31(c) Timing o f Disclosure 31(c)(1) Disclosures fo r Certain ClosedEnd Home Mortgages 1. Furnishing disclosures. Disclosures are considered furnished when received by the consumer. 2. Pre-consummation waiting period. A creditor must furnish section 226.32 dis closures at least three business days prior to consummation. Under section 226.32, “business day" has the same meaning as the rescission rule in comment 2(a)(6)2—all calendar days except Sundays and the federal legal holidays listed in 5 USC 6103(a). However, while the disclosure rule under sections 226.15 and 226.23 ex tends to midnight of the third business day, the rule under section 226.32 does not. For example, under section 226.32, if disclosures were provided on a Friday, consummation could occur any time on Tuesday, the third business day following receipt of the disclosures. If the timing of the rescission rule were to be used, con summation could not occur until after midnight on Tuesday. 3l(c)(l)(i) Change in Terms I. Redisdosure required. Creditors must provide new disclosures when a change in terms makes disclosures previously pro vided under section 226.32(c) inaccurate, including disclosure's based on and labeled as an estimaie. A change in terms may result from a formal written agreement or otherwise. 31(c)(1)(H) Telephone Disclosures I. Telephone disclosures. Disclosures by telephone must be furnished at least three business days prior to consummation, cal culated in accord with the liming rules under section 226.31(c)(1). 31(c)(l)(iii) Consumer's Waiver o f Waiting Period before Consummation I. Modification or waiver. A consumer may modify or waive the right to the* three-day waiting period only after receiv ing the disclosures required by section 226.32 and only if the circumstances meet the criteria for establishing a bona fide personal financial emergency under sec tion 226.23(e). Whether these criteria are met is determined by the facts surround ing individual situations. The imminent sale of the consumer’s home at foreclo sure during the three-day period is one example of a bona fide personal financial emergency. Each consumer entitled to the three-day waiting period must sign the handwritten statement for the waiver to be effective. 31(c)(2) Disclosures for Reverse Mortgages 1. Business days. For purposes of provid ing reverse-mortgage disclosures, “busi ness day" has the same meaning as in comment 31 (c)( I )-2—all calendar days except Sundays and the federal legal holi days listed in 5 USC 6103(a). This means if disclosures are provided on a Friday, consummation could occur any time on Tuesday, the third business day following receipt of the disclosures. 2. Open-end plans. Disclosures for openend reverse mortgages must be provided three business days before the first trans action under the plan (see section 226.5(b)(1)). 31(d) Basis o f Disclosures and Use of Estimates I. Redisdosure. Section 226.31(d) al lows the use of estimates when informa tion necessary for an accurate disclosure is unknown to the creditor, provided that the disclosure is clearly identified as an estimate. For purposes of subpart E. the rule in section 226.3l(c)( I )(i) requiring new disclosures when the creditor changes terms also applies to disclosures labeled as estimates. Regulation Z Commentary SECTION 226.32— Requirements for 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 section 226.19(a).) For example, if a borrower ap plies for a 10-year loan on September 30 and the creditor counteroffers with a 7year loan on October 10, the application is deemed received in September and the creditor must measure the annual percent age rate against the appropriate Treasury security yield as of August 15. An appli cation transmitted through an intermediary agent or broker is received when it reaches the creditor, rather than when it reaches the agent or broker. (See com ment l9(b)-3 to determine whether a transaction involves an intermediary 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 immediately preceding the 15th. 3. Calculating annual percentage rates fo r variable-rate loans and discount loans. Creditors must use the rules set out in the commentary lo section 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 siepped-rate transactions (which must reflect composite annual percentage rales). 4. Treasury securities. To determine the yield on a Treasury security for the an nual percentage rate test, creditors may use the Board's "Selected Interest Rates" (statistical release H-15) or the actual auc tion results. Treasury auctions arc held at regular intervals for the different types of securities. These figures are published by major financial and metropolitan newspa pers and arc 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 matur ity. For example, if a creditor must com pare the annual percentage rate to Trea sury securities with either 7-year or 10year maturities, the annual percentage rate for an 8-year loan is compared with se curities that have a 7-year maturity; the annual percentage rate for a 9-year loan is compared with securities that have a 10year maturity. If the loan maturity is ex actly halfway between, the annual per centage rate is compared with the Trea sury security that has the lower yield. For example, if the loan has a maturity of 20 years and comparable securities have ma turities 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 with 10 percentage points over the yield of 6.501 percent, the lower of the two yields. Paragraph 32(a)(1)(H) 1. Total loan amount. For purposes of the “ points and fees” test, the total loan amount is calculated by taking the amount financed, as determined according to sec tion 226.18(b), and deducting any cost listed in section 226.32(b)(l)(iii) that is both included as points and fees under section 226.32(b)(1) and financed by the creditor. Some examples follow, each us ing a $10,000 amount borrowed, a $300 appraisal fee. and $400 in points: i. ii. If the consumer finances a $300 fee for a creditor-conducted appraisal and pays $400 in points at closing, the amount financed under section 226.18(b) is S9.900 < 510.000 plus the $300 appraisal fee that is paid to and 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 section 226.32(b)(l)(iii). It is deduct ed from the amount financed ($9,900) to derive a total loan amount of S9.600. If the consumer pays ihe $300 fee for Regulation Z Commentary the creditor-conducted appraisal in cash at closing, the $300 is included in the points and fees calculation be cause it is paid to the creditor. How ever, because the $300 is not financed by the creditor, the fee is not part of the amount financed under section 226.18(b) ($10,000, in this case). The total loan amount is $9,600 ($10,000, less $400 in prepaid finance charges), iii. If the consumer finances a $300 fee for an appraisal conducted by some one other than the creditor or an affil iate, the $300 fee is not included with other points and fees under section 226.32(b)(lXiii). The amount financed under section 226.18(b) is $9,900 ($10,000 plus the $300 fee for an in dependently conducted appraisal that is financed by the creditor, less the $400 paid in cash and deducted as prepaid finance charges). 2. Annual adjustment o f $400 amount. A mortgage loan is covered by section 226.32 if the total points and fees payable by the consumer at or before loan con summation exceed the greater of $400 or 8 percent of the total loan amount. The $400 figure is adjusted annually by the Board; the adjusted figure becomes effec tive on January I of the following year. The adjusted figure for 1996 is $412, re flecting a 3.00 percent increase in the CPI-U from June 1994 to June 1995, rounded to the nearest whole dollar. The Board will publish adjustments after the June figures become available each year. The adjustment for the upcoming year will be included in any proposed com mentary published in ihe fall, and incor porated into ihe commentary the follow ing spring. charge under other provisions of section 226.4 are not included under paragraph 32(b)(l)(i), although a fee may be in cluded in “ points and fees” u n d e r^ _ paragraphs 32(b)(l)(ii) and 32(b)(l)(iii). Paragraph 32(b)(])(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. Mortgage broker fees already included in the calculation as finance charges under section 2 26 .32(b)(l)(i) need not be counted again under section 226.32(b)(l)(ii). 2. Example. Section 226.32(b)(l)(iii) de fines “ points and fees” to include all items listed in section 226.4(c)(7), other than amounts held for the future payment of taxes. An item listed in section 226.4(c)(7) may be excluded from the “ points and fees” calculation, however, if the charge is reasonable, the creditor re ceives 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 con sumer to an independent, third-party ap praiser may be excluded from the “points and fees" calculation (assuming no com pensation is paid to the creditor). A fee paid by the consumer for an appraisal performed by the creditor must be in cluded in (he calculation, even though the fee may be excluded from ihe finance charge if it is bona fide and reasonable in amount. 32(b) Definitions 32(c) Disclosures Paragraph 32(h)) I Hi) I. General. Items defined as finance charges under section 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 6 I. Format. The disclosures must be clear and conspicuous bui need noi be in any particular type size or typeface, nor pre sented in any particular manner. The dis closures need not be a part of the note or mortgage document. Regulation Z Commentary 32(c)(3) Regular Payment 1. General. The regular payment is the amount 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 amount and at such inter vals that they fully amortize the amount owed. In disclosing the regular payment, creditors may rely on the rules set forth in section 226.18(g); however, the amounts for voluntary items not agreed to by the consumer such as credit life insurance may not be included in the regular payment. i. If the loan has more than one pay ment level, the regular payment for each level must be disclosed. For example: A. In a 30-year graduated payment mort gage where there will be payments of $300 for the first 120 months, $400 for the next 120 months, and $500 for the last 120 months, each pay ment amount must be disclosed, along with the length of time that the pay ment will be in effect. B. If interest and principal are paid at different times, the regular amount for each must be disclosed. C. In discounted or premium variablerate transactions where the creditor sets the initial interest rate and later rate adjustments are determined by an index or formula, the creditor must disclose both the initial payment based on the discount or premium and the payment that will be in effect thereafter. Additional explanatory ma terial which docs not detract from the required disclosures may accompany the disclosed amounts. For example, if a monthly payment is S250 for the (irst six months and then increases based on an index and margin. Ihe creditor could use language such as ihe following: "Your regular monthly payment will be $250 for six months. After six months your regular month ly payment will be based on an index and margin, which currently would make your payment $350. Your actual payment at that time may be higher or lower.” 32(c)(4) Variable Rate I. Calculating “worst-case" payment ex ample. Creditors may rely on instructions in section 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 re quired by section 226.19(b)(2)(x)). The creditor must provide a maximum pay ment for each payment level, where a payment schedule provides for more than one payment level and more than one maximum payment amount is possible. 32(d) Limitations 32(d)(l)(i) Balloon Payment I. Regular periodic payments. The repay ment schedule for a section 226.32 mort gage loan with a term of less than five years must fully amortize the outstanding principal balance through "regular peri odic payments.” A payment is a “regular periodic payment" if it is not more than (wice the amount of other payments. 32(d)(2) Negative Amortization I. Negative amortization. The prohibition against negative amortization in a mort gage covered by section 226.32 does not preclude reasonable increases in the prin cipal balance that result from events per mitted by the legal obligation unrelated to ihe payment schedule. For example, when a consumer fails to obtain property insur ance and the creditor purchases insurance, the creditor may add a reasonable pre mium lo the consumer's principal balance, lo the extent permitted by the legal obligation. 32(d)(4) Increased Interest Rate I. Variable-rate transactions. The limita tion on interest-rate increases does not ap Regulation Z Commentary ply to rate increases resulting from changes in accordance with the legal obli gation in a variable-rate transaction, even if the increase occurs after default by the consumer. 32(d)(5) Rebates 1. Calculation o f refunds. The limitation applies only to refunds of precomputed (such as add-on) interest and not to any other charges that are considered finance charges under section 226.4 (for example, points and fees paid at closing). The cal culation of the refund of interest includes odd-days interest, whether paid at or after consummation. 32(d)(6) Prepayment Penalties 1. State law. For purposes of computing a refund of unearned interest, 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 should use the state law definition in determining if a refund is a prepayment penalty. 32(d)(7) Prepayment-Penalty Exception Paragraph 32(d)(7)(iii) 1. Calculating debt-to-incom e ratio. "Debt" does not include amounts paid by the borrower in cash at closing or amounts from the loan proceeds that di rectly repay an existing debt. Creditors may consider combined debt-to-income ratios for transactions involving joint applicants. used to show that the creditor considered the consumer’s income and obligations before extending the credit. Any expected income can be considered by the creditor, except equity income that the consumer would obtain through the foreclosure of a mortgage covered by section 226.32. For example, a creditor may use information about income other than regular salary or wages such as gifts, expected retirement payments, or income from housecleaning or childcare. The creditor also may use unverified income, as long as the creditor has a reasonable basis for believing that the income exists and will support the loan. 32(e)(2) Home-Improvement Contracts Paragraph 32(e)(2)(i) 1. Joint payees. If a creditor pays a con tractor with an instrument jointly payable to the contractor and the consumer, the instrument must name as payee each con sumer who is primarily obligated on the note. 32(e)(3) Notice to Assignee 1. Subsequent sellers or assignors. Any person, whether or not the original credi tor, that sells or assigns a mortgage sub ject to this section must furnish the notice of potential liability to the purchaser or assignee. 2. Format. While the notice of potential liability need not be in any particular for mat, the notice must be prominent. Plac ing it on the face of the note, such as with a stamp, is one means of satisfying the prominence requirement. 2. Verification. Verification of employ ment satisfies the requirement for payment records for employment income. SECTION 226.33— Requirements for Reverse Mortgages 32(e) Prohibited Acts and Practices 33(a) Definition 32(e)(1) Repayment Ability I. Determining repayment ability. The in formation provided to ihe creditor in con nection with section 226.32(d)(7) may be I. Nonrecourse transaction. A nonre course reverse-mortgage transaction limits the homeowner's liability to the proceeds of the sale of the home (or any lesser amount specified in the credit obligation). Regulation Z Commentary If a transaction structured as a closed-end reverse-mortgage transaction allows re course against the consumer, and the an nual percentage rate or the points and fees exceed those specified under section 226.32(a)(1), the transaction is subject to all the requirements of section 226.32, in cluding the limitations concerning balloon payments and negative amortization. Paragraph 33(a)(2) 1. Default. Default is not defined by the statute or regulation, but rather by the le gal obligation between the parties and state or other law. 2. Definite term or maturity date. To meet the definition of a reverse-mortgage trans action, a creditor cannot require any prin cipal, interest, or shared appreciation or equity to be due and payable (other than in the case of default) until after the con sumer’s death, transfer of the dwelling, or the consumer ceases to occupy the dwell ing as a principal dwelling. Some state laws require legal obligations secured by a mortgage to specify a definite maturity date or term of repayment in the instru ment. Stating a definite maturity date or term of repayment in an obligation does not violate the definition of a reversemortgage transaction if the maturity date or term of repayment used would in no case operate to cause maturity prior to the occurrence of any of the events recog nized in the regulation. For example, a provision that allows a reverse-mortgage loan to become due and payable only af ter the consumer’s death, transfer, or ces sation of occupancy, or after a specified term, but which automatically extends the term Ibr consecutive periods as long as none of the events specified in this sec tion had yet occurred. 33(c) Projected Total Cost o f Credit 33(c)(1) Costs to Consumer I. Costs and charges to con sumer—relation to finance charge. All costs and charges to the consumer that are incurred in a reverse-mortgage transaction are included in the projected total cost of credit, and thus in the total-annual-loancost rates, whether or not the cost or charge is a finance charge under section 226.4. 2. Annuity costs. As part of the credit transaction, some creditors require or per mit a consumer to purchase an annuity that immediately—or at some future time—supplements or replaces the credi tor’s payments. The amount paid by the consumer for the annuity is a cost to the consumer under this section, regardless of whether the annuity is purchased through the creditor or a third party, or whether the purchase is mandatory or voluntary. 3. Disposition costs excluded. Disposition costs incurred in connection with the sale or transfer of the property subject to the reverse mortgage are not included in the costs to the consumer under this para graph. (However, see the definition of Val, in appendix K to the regulation to determine the effect certain disposition costs may have on the total-annual-loancost rates.) 33(c)(2) Payments to Consumer I. Payments upon a specified event. The projected total cost of credit should not reflect contingent payments in which a credit to the outstanding loan balance or a payment to the consumer's estate is made upon the occurrence of an event (for ex ample. a "death benefit" payable if the consumer's death occurs within a certain period of time). Thus, the table of totalannual-loan-cost rates required under sec tion 226.33(b)(2) would not reflect such payments. At its option, however, a credi tor may put an asterisk, footnote, or simi lar type of notation in the table next to the applicable total-annual-loan-cost rate, and state in the body of the note, apart from the table, the assumption upon which the total-annual-loan-cost is made and any different rale that would apply if the contingent benefit were paid. Regulation Z Commentary 33(c)(3) Additional Creditor Compensation 1. Shared appreciation or equity. Any shared appreciation or equity that the creditor is entitled to receive pursuant to the legal obligation must be included in the total cost of a reverse-mortgage loan. For example, if a creditor agrees to a re duced interest rate on the transaction in exchange for a portion of the appreciation or equity that may be realized when the dwelling is sold, that portion is included in the projected total cost of credit. 33(c)(4) Limitations on Consumer Liability I. In general. Creditors must include any limitation on the consumer's liability (such as a nonrecourse limit or an equityconservation agreement) in the projected total cost of credit. These limits and agreements protect a portion of the equity in the dwelling for the consumer or the consumer’s estate. For example, the fol lowing are limitations on the consumer's liability that must be included in the pro jected total cost of credit: 1. A limit on the consumer's liability to a certain percentage of the projected value of the home. ii. A limit on the consumer’s liability to the net proceeds from the sale of the property subject to the reverse mort gage. 2. Uniform assumption fo r "net pro ceeds" recourse limitations. If the legal obligation between the parties does not specify a percentage for the “ net pro ceeds" liability of Ihe consumer, for pur poses of ihe disclosures required by sec tion 226.33. a creditor must assume lhai ihe costs associated with selling the prop erty will equal 7 percent of the projected sale price (see the definition of the Val„ symbol under appendix K(b)(6)). 14. Effective April I. IW6. comments on ap10 pendixes K and L are added to read as follows: APPENDIX K— Total-Annual-LoanCost Rate Computations for ReverseMortgage Transactions 1. General. The calculation of total-annual-loan-cost rates under appendix K is based on the principles set forth and the estimation or “iteration” procedure used to compute annual percentage rates under appendix J. Rather than restate this itera tion process in full, the regulation crossreferences the procedures found in appen dix J. In other aspects the appendix re flects the special nature of reverse-mort gage transactions. Special definitions and instructions are included where appropriate. (b) Instructions and Equations for the Total-Annual-Loan-Cost Rate (b)(5) Number o f Unit Periods between Two Given Dates I. Assumption as to when transaction be gins. The computation of the total-annualloan-cost rate is based on the assumption that the reverse-mortgage transaction be gins on the first day of the month in which consummation is estimated to oc cur. Therefore, fractional unit periods (used under appendix J for calculating an nual percentage rates) are not used. (b)(9) Assumption fo r Discretionary Cash Advances I. Amount o f credit. Creditors should compute the total-annual-loan-cosl rales for transactions involving discretionary cash advances by assuming that 50 per cent of the initial amount of the credit available under the transaction is ad vanced at closing or, in an open-end transaction, when the consumer becomes obligated under the plan. (For the pur poses of this assumption, the initial amount of the credit is the principal loan Regulation Z Commentary amount less any costs to the consumer under section 226.33(c)(1).) (b)(10) Assumption fo r Variable-Rate Reverse-Mortgage Transactions 1. Initial discount or premium rate. Where a variable-rate reverse-mortgage transaction includes an initial discount or premium rate, the credit 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 section 226.17(c)). (d) Reverse Mortgage Model Form and Sample Form (d)(2) Sample Form I. 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, as long as the pages constitute an inte grated document and the table disclosing the total-annual-loan-cost rates is on a single page. APPENDIX L— Assumed Loan Periods for Computations o f TotalAnnual-Loan-Cost Rates I. General. The life expectancy figures used in appendix L are those found in the U.S. Decennial Life 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 appendix L must be used by creditors for all consumers (men and wo men). Appendix L will be revised periodi cally by the Board to incorporate revi sions to the figures made in the decennial tables. 11