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Federal Reserve Bank OF DALLAS ROBERT D. M C T E E R , J R . DALLAS, TEXAS 75265-5906 PRESIDENT AND CHIEF EX ECUTIVE O F F IC E R March 21, 1997 Notice 97-27 TO: The Chief Executive Officer of each financial institution and others concerned in the Eleventh Federal Reserve District SUBJECT Revisions to the Official Staff Commentary to Regulation Z (Truth in Lending) DETAILS The Board of Governors of the Federal Reserve System announced revisions to the Official Staff Commentary to Regulation Z (Truth in Lending). The revisions provide guidance on the treatment of some fees paid in connection with mortgage loans and tolerances for accuracy in disclosing the finance charge and other costs. They also discuss such issues as the treatment of debt cancellation agreements and duties of creditors that provide periodic statements electronically. ATTACHMENT A copy of the Board’s notice as it appears on pages 10193-99, Vol. 62, No. 44, of the Federal Register dated March 6, 1997, is attached. MORE INFORMATION For more information regarding Regulation Z, please contact Eugene Coy at (214) 922-6201. For additional copies of this Bank’s notice, please contact the Public Affairs Depart ment at (214) 922-5254. Sincerely yours, 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) Federal Register / Vol. 62, No. 44 / Thursday, M arch 6, 1997 / Rules and Regulations 10193 FEDERAL RESERVE SYSTEM 12CFR Part 226 [ R e g u la tio n Z; D o c k e t N o. R -0 9 4 2 ] Truth in Lending Board of Governors of the Federal Reserve System. ACTION: Final rule; official staff interpretation. AGENCY: The Board is publishing revisions to the official staff commentary to Regulation Z (Truth in Lending). The commentary applies and interprets the requirements of Regulation Z. The update provides guidance on issues relating to the treatment of certain fees paid in connection with mortgage loans. It addresses new tolerances for accuracy in disclosing the amount of the finance charge and other affected cost disclosures. In addition, the update discusses issues such as the treatment of debt cancellation agreements and a creditor’s duties if providing periodic statements via electronic means. DATES: This rule is effective February 28,1997. Compliance is optional until October 1,1997. FOR FURTHER INFORMATION CONTACT: Jane E. Ahrens or James A. Michaels, Senior Attorneys, or Sheilah A. Goodman or Manley Williams, Staff Attorneys, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, at (202) 4523667 or 452-2412; for users of Telecommunications Device for the Deaf (TDD) only, contact Dorothea Thompson at (202) 452-3544. SUMMARY: SUPPLEMENTARY INFORMATION: I. Background The purpose of the Truth in Lending Act (TILA; 15 U.S.C. 1601 et seq.) is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. The act requires creditors to disclose the cost of credit as 10194 Federal Register / Vol. 62, No. 44 / Thursday, March 6, 1997 / Rules and Regulations a dollar amount (the finance charge) and as an annual percentage rate (the APR). Uniformity in creditors’ disclosures is intended to assist consumers in comparison shopping. The TILA requires additional disclosures for loans secured by a consumer’s home and permits consumers to rescind certain transactions that involve their principal dwelling. The act is implemented by the Board’s Regulation Z (12 CFR Part 226). The Board’s official staff commentary (12 CFR Part 226 (Supp. I)) interprets the regulation, and provides guidance to creditors in applying the regulation to specific transactions. The commentary is updated periodically to address significant questions that arise; it is a substitute for individual staff interpretations. In November, the Board published proposed amendments to the commentary to Regulation Z (61 FR 60223, November 27, 1996). The Board received about 30 comments. Most of the comments were from financial institutions, mortgage lenders, insurance providers, and other creditors (or their representatives); about a half dozen were from consumer representatives and lawyers. Overall, commenters generally supported the proposed amendments. Views were mixed on a few comments, and some commenters expressed concerns about issues not addressed in the proposal. Except as discussed below, the commentary is being adopted as proposed; some technical suggestions or concerns raised by commenters are addressed. Compliance is optional until October 1,1997, the effective date for mandatory compliance. The revisions mainly incorporate guidance given in the supplementary information that accompanied September 1996 amendments to Regulation Z implementing the Truth in Lending Act Amendments of 1995 (Pub. L. 104-29, 109 Stat. 271). The rulemaking clarified the treatment of fees typically associated with real estate-related lending, and revised tolerances for finance charge calculations for loans secured by real estate or dwellings (61 FR 49237, September 19,1996). It also addressed the treatment of fees charged in connection with debt cancellation agreements. II. Commentary Revisions Supplem ent I—Official Staff Interpretations Subpart A — General Section 226.4— Finance Charge 4(a) Definition 4(a)(1) Charges by Third Parties Comment 4(a)(1)— illustrates the 1 general rule that amounts charged by a third party are included in the finance charge if the creditor requires the use of a third party, even if the consumer may choose the service provider. Comment 4(a)(1)— addresses the 2 treatment of annuity premiums associated with some reverse mortgages. The proposal treated the cost of the premiums as a finance charge when the purchase of an annuity is effectively required incident to the credit. Commenters expressed concern about uncertainties that could result from such a test; the “effectively required” standard has been deleted for clarity. 4(a)(2) Special Rule; Closing Agent Charges Comment 4(a)(2)— is revised and a 1 new comment 4(a)(2)— is added to 2 address commenters requests for further guidance about the treatment of charges by third-party closing agents when the creditor requires the use of a closing agent. Comment 4(a)(2)— provides 2 examples of the types of fees charged by a closing agent that may be excluded from the finance charge, even though the creditor requires the use of a closing agent. 4(a)(3) Special Rule; Mortgage Broker Fees Two comments addressing the treatment of mortgage broker fees were proposed. These comments are adopted with some modification for clarity, and a third comment is added. Under the 1995 Amendments, mortgage broker fees paid by the borrower are finance charges unless otherwise excluded. Comment 4(a)(3)— clarifies that mortgage brokers 1 fees may be excluded from the finance charge if the fee would be excluded when charged by the creditor. To illustrate the rule, the comment discusses certain application fees as an example of fees charged by mortgage brokers that could be excluded from the finance charge. New comment 4(a)(3)— addresses the 2 scope of the special rule for mortgage broker fees. Commenters requested that the scope be clarified; some suggested defining the term “mortgage broker.” Instead, the Board has clarified that the special rule for mortgage broker fees applies to consumer credit transactions secured by real property or a dwelling. The Board believes this interpretation carries out the purposes of the 1995 Amendments, and simplifies compliance by using existing definitions in the regulation rather than adding a new one. Comment 4(a)(3)— redesignated from 3, the proposal and revised for clarity, addresses the treatment of compensation paid by the creditor to a mortgage broker. 4(c) Charges Excluded From the Finance Charge Paragraph 4(c)(5) Comment 4(c)(5)-2, adopted substantially as proposed, addresses the treatment of finance charges paid by a noncreditor seller on a consumer’s behalf before loan closing; it clarifies that disclosures should reflect the payment if the consumer is not legally bound to the creditor for the amount paid. 4(d) Insurance and Debt Cancellation Coverage 4(d)(3) Voluntary Debt Cancellation Fees The comments are adopted as proposed, with minor revisions for clarity. Several commenters, including a credit insurance provider, disagreed with the Board’s interpretation of section 226.4(d)(3), which in their view is not consistent with the TILA. These commenters objected to the proposed comments on the same grounds. Comment 4(d)(3)— clarifies that 2 although debt cancellation coverage and credit insurance are treated similarly for purposes of cost disclosures under the TILA, state law governs whether a creditor may represent that debt cancellation coverage is insurance. A provider of credit insurance commented that creditors should be permitted to disclose debt cancellation fees as insurance premiums only if the coverage is regulated by the state as insurance. Regulation Z does not provide a definition of insurance for purposes of the TILA, and under § 226.2(b)(3) the term’s meaning is determined by state law—which may or may not take account of the extent to which the particular product is regulated by the state. Consequently, the comments are adopted substantially as proposed. 4(e) Certain Security Interest Charges Section 226.4(e) excludes certain security interest charges paid to public officials from the finance charge if the amounts are itemized and disclosed. A Federal Register / Vol. 62, No. 44 / Thursday, March 6, 1997 / Rules and Regulations new § 226.4(e)(3) was added to implement a provision in the 1995 Amendments which excludes from the finance charge taxes levied on security instruments or on documents evidencing indebtedness that must be paid to record the security instrument. Comments 4(e)-l (adopted substantially as proposed) and -2 are revised to reflect the recent amendment to § 226.4(e)(3). Subpart B—Open-end Credit Section 226.5— General Disclosure Requirements 5(b) Time o f Disclosures 5(b)(2) Periodic Statements Paragraph 5(b)(2)(ii) An addition to comment 5(b)(2)(ii)-3 is made to clarify that periodic statements may be provided electronically, for example, via home banking systems. Commenters generally supported the proposal and encouraged the Board to provide further guidance on how to adapt current rules to the way electronic disclosures may be used. A review is now underway that will seek to adapt current rules under the Board’s Truth in Lending and other consumer protection regulations to the way electronic disclosures may be provided and retained, responding to technological developments in the way financial service transactions are conducted via electronic means. Subpart C—Closed-end Credit Section 226.17— General Disclosure Requirements 17(c) Basis o f Disclosures and Use o f Estimates Paragraph 17(c)(2)(H) Comment 17(c)(2)(ii)— addresses the 1 new rule applicable to the disclosure of per-diem interest charges. Under the rule, the disclosure of any numerical amount affected by the per-diem interest charge is considered accurate if it is based on the information known to the creditor at the time the disclosure is prepared, whether or not the disclosure of per-diem interest is accurate when it is received by the consumer. The comment clarifies that, in such cases, the resulting finance charge is considered accurate without regard to the tolerance for errors under § 226.18(d)(1). In response to requests for guidance, the comment clarifies that disclosures may be considered accurate under this rule without regard to whether they were labeled as estimates. Section 226.18— Content o f Disclosures 18(c) Itemization o f A m ount Financed Comment 18(c)— is adopted 4 substantially as proposed. Some commenters expressed concern that this comment imposed additional disclosure requirements. This is not the case. The comment is meant to streamline disclosure requirements for transactions that are also covered by Real Estate Settlement Procedures Act (RESPA) by allowing—not requiring—creditors to substitute the good faith estimate or the HUD-1 settlement statement for the itemization of the amount financed. Guidance is added regarding the format requirements for these disclosures. A proposed revision to comment 18(c)(l)(iv)-2 responded to a proposal by the Department of Housing and Urban Development (HUD) to change the way that the amount collected at closing for escrow items is reflected on the HUD-1 for RESPA purposes (61 FR 46511, September 3, 1996). The Board is withdrawing the proposed revision given that HUD has not yet taken final action on its proposal. Section 226.22—Determination o f the Annual Percentage Rate 22(a) Accuracy o f the Annual Percentage Rate Paragraphs 22(a)(4) and 22(a)(5) Section 226.22(a)(4) and 22(a)(5) provide APR tolerances for mortgage loans when the finance charge has been misstated but is considered accurate. The comments provide specific examples of these tolerances. Minor revisions have been made for clarity. Section 226.23—Right o f Rescission 23(h) Special rules for foreclosures Paragraph 23(h)(l)(i) Section 226.23(h), which implements section 125(i) of the TILA, contains special rescission rules that apply after a foreclosure action has been initiated. Section 226.23(h)(1) allows a consumer to rescind a loan in foreclosure if a mortgage broker fee that should have been included in the finance charge under the laws in effect at consummation was not included. Section 226.23(h)(2) contains a separate finance charge tolerance of $35 for loans in foreclosure; such loans may be rescinded if the finance charge was understated by more than $35. Comment 23(h)(l)(i)-l is intended to clarify the relationship between these two provisions. As proposed, the comment interpreted § 226.23(h)(1) to allow rescission if a mortgage broker fee was 10195 omitted from the finance charge entirely or if it was understated, without regard to the dollar amount involved. Under that interpretation, any finance charge understatement traceable to a misstatement of a mortgage broker fee would allow rescission of a loan in foreclosure; the $35 finance charge tolerance in § 226.23(h)(2) would not apply. Several commenters objected to this interpretation and expressed the view that the $35 finance charge tolerance should also apply to the rescission rights granted under § 226.23(h)(l)(i). They believed that the $35 tolerance in § 226.23(h)(2) provides the applicable rule for determining whether a mortgage broker fee has been included “in accordance with the laws and regulations in effect” at the time the loan was consummated. They noted that otherwise, creditors would be liable for inadvertent and technical errors—for example, if a mortgage broker fee was rounded down from fractional to whole dollar amounts. The commenters argued that this would be inconsistent with the purpose of the 1995 Amendments as a whole, which was to reduce lender liability for small technical errors. Upon further analysis and after consideration of the comments received, a narrower interpretation of § 226.23(h)(l)(i) has been adopted. The Board believes that this narrower interpretation is consistent with the intent of section 125(i) of the TILA. The $35 tolerance in § 226.23(h)(2) reduces creditors’ potential liability by replacing the $10 tolerance that applied before the 1995 Amendments became effective. Accordingly, comment 23(h)(l)(i)-l clarifies that for loans in foreclosure, a right of rescission exists under § 226.23(h)(l)(i) only if the entire mortgage broker fee has been omitted from the finance charge. If the amount of a mortgage broker fee is misstated, the consumer’s right to rescind is based on the rule in § 226.23(h)(2). A new comment 23(h)(2)-l has been added to clarify that the $35 tolerance is based on the total finance charge and not its component charges. Subpart E—Special Rules for Certain Home Mortgage Transactions Section 226.31—General Rules 31(d) Basis o f Disclosures and Use o f Estimates 31(d)(3) Per-diem Interest Several commenters noted that a comment to paragraph 31(d)(3) like the comment to 17(c)(2)(ii) would be useful; a conforming comment has been added. 10 1 9 6 Federal Register / Vol. 62, No. 44 / Thursday, March 6, 1997 / Rules and Regulations Section 33—Requirements for Reverse Mortgages 33(a) Definition Paragraph 33(a)(2) Comment 33(a)(2)— which addresses 2, reverse mortgages, is adopted substantively as proposed. List o f Subjects in 12 CFR Part 226 Advertising, Banks, banking, Consumer protection, Credit, Federal Reserve System, Mortgages, Reporting and recordkeeping requirements, Truth in lending. For the reasons set forth in the preamble, the Board amends 12 CFR Part 226 as follows: PART 226—TRUTH IN LENDING (REGULATION Z) 1. The authority citation for part 226 continues to read as follows: Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 a n d 1637(c)(5). 2. In Supplement I to Part 226, under Introduction, the last sentence in paragraph 5. is revised to read as follows: Supplement I—Official Staff Interpretations In tro d u c tio n * * * * * 5. C o m m en t d esig nations. * * * C o m m en ts to th e a p p e n d ic e s m ay be cite d , for ex am p le, as C om m ent ap p . A - l . * * * * * 3. Supplement I to Part 226, under § 226.2—Definitions and Rules o f Construction, paragraph 2(a)(25) is amended by removing the last two sentences of the second paragraph of paragraph 6. 4. In Supplement I to Part 226, under §226.4—Finance Charge, the following amendments are made: a. Under 4(a) Definition., paragraphs 3. and 4. are removed and paragraphs 5. through 7. are redesignated as paragraphs 3. through 5., respectively, and new paragraphs 4(a)(1), 4 (a)(2), and 4(a)(3) are added after the end of the text of 4(a); b. Under 4(b) Examples o f finance charges., a new paragraph 4(b)(10) is added; c. Under 4(c) Charges excluded from the finance charge., under paragraph 4(c)(5)., paragraph 2. is revised; d. Under 4(d), the heading is revised, and a new paragraph 4(d)(3) is added; and e. Under 4(e) Certain security interest charges., paragraphs l.i. and 2. are revised. The additions and revisions read as follows: * * * * * S u b p a rt A — G eneral * * * * * § 226.4— F in a n c e Charge 4(a) D efin itio n . * * * * * 4(a)(1) C harges b y th ird pa rties. 1. C ho osin g th e p ro v id e r o f a req uired service. A n e x am p le of a th ird -p a rty charge in c lu d e d in th e fin an ce charge is th e co st of re q u ire d m ortgage in su ra n ce , ev en if th e c o n su m e r is a llo w e d to c h oo se th e in su rer. 2. A n n u itie s a sso cia ted w ith reverse m ortgages. S o m e cred ito rs offer a n n u itie s in c o n n e c tio n w ith a rev erse m ortgage tran sac tio n . T h e a m o u n t of th e p re m iu m is a fin an ce ch arg e if th e c re d ito r re q u ire s the p u rc h a se of th e a n n u ity in c id e n t to th e cred it. E x am p les in c lu d e th e follow ing: i. T h e c re d it d o c u m e n ts reflect th e p u rc h a se o f a n a n n u ity from a specific p ro v id e r or pro v id ers. ii. T h e c re d ito r assesses a n a d d itio n a l charge o n c o n su m ers w h o do n o t p u rc h ase an a n n u ity from a specific pro vid er. iii. T h e a n n u ity is in te n d e d to re p la ce in w h o le o r in p a rt th e c re d ito r’s p a y m e n ts to th e c o n su m e r e ith e r im m e d ia tely or at som e fu tu re date. 4(a)(2) S p e c ia l rule; c lo sin g ag en t charges. 1. G eneral. T h is ru le a p p lie s to charges by a th ir d p a rty serv in g as th e clo sin g agent for th e p a rtic u la r loan. A n e x am p le o f a closing agent charge in c lu d e d in th e fin an ce charge is a c o u rie r fee w h e re th e c red ito r req u ires th e u se o f a courier. 2. R eq u ire d clo sin g agent. If th e cred ito r re q u ire s th e u se of a closing agent, fees ch arg ed b y th e closing agent are in c lu d e d in th e fin an ce ch arg e o n ly if the c red ito r re q u ire s th e p a rtic u la r service, re q u ire s the im p o s itio n o f th e charge, or re ta in s a p o rtio n of th e charge. F ees charged by a th ird -p a rty c lo sin g agen t m ay be o th erw ise e x clu d e d from th e fin a n c e charge u n d e r § 226.4. For ex am p le, a fee th a t w o u ld be p a id in a c o m p arab le c ash tran sac tio n m ay be e x c lu d e d u n d e r § 226.4(a); a lu m p -su m fee for real-estate c losin g costs m ay be e x clu d e d u n d e r § 226.4(c)(7). 4(a)(3) S p e c ia l rule; m ortgage broker fee s. 1. G eneral. A fee ch arg ed b y a m ortgage b ro k er is e x c lu d e d from th e fin an ce charge if it is th e ty p e o f fee th at is also e x clu d e d w h e n ch arg ed b y th e cred ito r. For exam ple, to e x clu d e a n a p p lic a tio n fee from th e fin an ce ch arg e u n d e r § 226.4(c)(1), a m ortgage b ro k e r m u st ch arg e th e fee to all a p p lic a n ts for c red it, w h e th e r or n o t cred it is e x ten d ed . 2. Coverage. This rule applies to charges paid by consumers to a mortgage broker in connection with a consumer credit transaction secured by real property or a dwelling. 3. C o m p en sa tio n b y lend er. T h e ru le re q u ire s all m ortgage bro k er fees to be in c lu d e d in th e fin an ce charge. C reditors so m e tim es c o m p e n sa te m ortgage brokers u n d e r a se p a rate a rran g e m e n t w ith tho se p arties. C red ito rs m ay d ra w on a m o u n ts p a id b y th e c o n su m er, s u c h as p o in ts or closing costs, to fu n d th e ir p a y m e n t to th e broker. C o m p en satio n p a id b y a c re d ito r to a m ortgage b ro k e r u n d e r a n a g reem en t is n ot in c lu d e d as a se p a ra te c o m p o n e n t o f a c o n s u m e r’s total fin an c e c h arg e (alth o ug h th is c o m p e n sa tio n m ay be re fle cte d in the fin an c e ch arg e if it co m es fro m a m o u n ts p a id b y th e c o n su m e r to th e c re d ito r th a t are fin an c e charges, s u c h as p o in ts a n d interest). 4(b) E x a m p le s o f fin a n c e charges. * * * * * 4(b)( 10) D ebt c a n ce lla tio n fe e s. 1. D efin itio n . D ebt c a n c e lla tio n coverage p ro v id es for p a y m e n t or sa tisfac tio n o f all or p a rt o f a d e b t w h e n a sp e c ifie d e v e n t occurs. T he term in c lu d e s g u a ran tee d a u to m o b ile p ro te c tio n or “ G A P” ag reem en ts, w h ic h p ay o r satisfy th e re m a in in g d e b t a fter p ro p e rty in su ra n c e b e n efits are ex h au ste d . 4(c) C harges e x c lu d e d fro m th e fin a n c e charge. * * * * * P aragraph 4(c)(5). * * * * * 2. O th er se lle r-p a id a m o u n ts. M ortgage in su ra n c e p re m iu m s a n d o th e r fin an c e charges are so m e tim es p a id at or before c o n su m m a tio n or se ttle m e n t o n th e b o rro w e r’s b e h a lf b y a n o n c re d ito r seller. T he c red ito r s h o u ld treat th e p a y m e n t m ad e by th e se lle r as se lle r’s p o in ts a n d e x clu d e it from th e fin an c e ch arg e if, b a se d o n th e se lle r’s p a y m e n t, th e c o n su m e r is n o t legally b o u n d to th e c re d ito r for th e charge. A c red ito r w h o gives d isc lo su re s before th e p a y m e n t h a s b e e n m ad e s h o u ld base th em on th e b e st in fo rm a tio n reaso n ab ly available. * * * * * 4(d) In su ra n ce a n d d e b t ca n ce lla tio n coverage. * * * * * 4(d)(3) V o lu n ta ry d e b t ca n ce lla tio n fees. 1. G eneral. Fees ch arg ed for th e sp e c ia liz ed form of d e b t c an c ellatio n a g reem en t k n o w n as g u a ran tee d a u to m o b ile p ro te c tio n (“G A P”) agreem en ts m u st b e d isc lo se d a cc o rd in g to § 226.4(d)(3) ra th e r th a n a cc o rd in g to § 226.4(d)(2) for p ro p e rty in su ra n c e . 2. D isclosures. C redito rs c a n c o m p ly w ith § 226.4(d)(3) by p ro v id in g a d isc lo su re th at refers to d e b t c an c e lla tio n coverage w h e th e r or n o t th e coverage is c o n sid e re d insu ran ce. C red itors m ay u se th e m o d el c re d it in su ra n c e d isc lo su res o n ly if th e d ebt c a n c ellatio n coverage c o n stitu te s in su ra n c e u n d e r state law . 4(e) C ertain se c u rity in te re st charges. 1. E xa m p les. i. E xc lu d a b le charges. S u m s m u st be a ctu a lly p a id to p u b lic officials to be e x c lu d e d from th e fin an ce ch arg e u n d e r § 226.4(e) (1) a n d (3). E x am p les are charges or o th er fees re q u ire d for filing or reco rd ing se c u rity ag reem en ts, m ortgages, c o n tin u a tio n sta te m en ts, term in a tio n sta te m en ts, a n d sim ila r d o c u m e n ts, as w ell as in tang ible p ro p e rty or o th er taxes ev en w h e n th e charges or fees are im p o s e d b y th e state so lely on th e c re d ito r a n d charg ed to th e c o n su m er (if th e tax m u st b e p a id to reco rd a se c u rity interest). (See c o m m e n t 4(a)-5 regard in g th e tre a tm e n t of taxes, generally.) * * * * * Federal Register / Vol. 62, No. 44 / Thursday, March 6, 1997 / Rules and Regulations 2. Ite m iza tio n . T h e v a rio u s charges d e sc rib e d in § 226.4(e) (1) a n d (3) m ay be to ta le d a n d d isc lo s e d as a n aggregate su m , or th e y m ay b e ite m iz e d b y th e sp e c ific fees a n d tax es im p o sed . If an aggregate su m is d isc lo se d , a gen eral term s u c h as se c u rity in te re st fees or filin g fees m a y b e used . * * * * * 5. In Supplement I to Part 226, under § 226.5— General Disclosure Requirements, under Paragraph 5(b)(2)(H)., paragraph 3. is revised to read as follows: * * * * * S u b p a rt B— O p en-E nd C redit § 2 2 6 .5 — G eneral D isclosure R eq u ire m e n ts * * * * * 5(b) T im e o f d isclosures. * * * * * 5(b)(2) P eriodic sta tem en ts. * * * * * P aragraph 5(b)(2)(ii). * * * * * 3. C alling fo r p e rio d ic sta te m e n ts. T he c re d ito r m ay p e rm it c o n su m e rs to call for th e ir p e rio d ic sta te m en ts, b u t m a y n o t re q u ire th e m to do so. If th e c o n su m e r w ish e s to p ic k u p th e sta te m e n t a n d th e p la n h a s a free-ride p e rio d , th e sta te m e n t (in clu d in g a sta te m en t p ro v id e d by e le c tro n ic m eans) m u st be m ad e av ailab le in a c c o rd an c e w ith th e 14-day rule. * * * * * 6. In Supplement I to Part 226, under § 226.17— General Disclosure Requirements, the following amendments are made: a. Under 17(c) Basis o f disclosures and use o f estimates., text is added under paragraph 17(c)(2)(h); and b. Under 17(f) Early disclosures., paragraphs 1. introductory text, l.i., the last sentence of l.ii. and l.iii. are revised and a heading is added to paragraph l.ii; and a new paragraph 17(f)(2) is added preceding 17(g). The additions and revisions read as follows: * * * * * S u b p a rt C—C losed-E nd C redit § 2 2 6.17— G eneral D isclo sure R eq u ire m e n ts * * * * * 17(c) B asis o f d isc lo su re s a n d u se o f e stim a te s. * * * * * Paragraph 17(c)(2)(H). 1. P er-diem in terest. T h is p arag rap h a p p lie s to any n u m e ric a l a m o u n t (such as the fin an ce charge, a n n u a l p e rce n ta g e rate, or p a y m e n t am o u n t) th at is affected b y th e a m o u n t o f th e p e r-d ie m in te re st ch arge th at w ill be c o lle cte d at c o n su m m a tio n . If the a m o u n t o f p e r-d ie m in te re st u se d in p re p a rin g th e d isc lo su res for c o n su m m a tio n is b a se d on th e in fo rm a tio n k n o w n to th e c re d ito r at th e tim e th e d isc lo su re d o c u m e n t is p re p are d , th e d isc lo su res are c o n sid e re d acc u rate u n d e r th is ru le, a n d affected d isc lo s u re s are also c o n sid e re d accu rate, e v en if th e d isc lo su res are n o t labeled as estim a te s. F o r ex am p le, if th e a m o u n t o f perd ie m in te re st u se d to p re p a re d isc lo su res is less th a n th e a m o u n t o f p e r-d ie m in te re st c h arg e d at c o n su m m a tio n , a n d as a re su lt th e fin an c e charg e is u n d e rsta te d by $200, th e d isc lo s e d fin an ce ch arge is c o n sid ere d a cc u rate even th o u g h th e u n d e rsta te m e n t is n o t w ith in th e $100 to le ra n ce of § 226.18(d)(1), a n d th e fin an c e charge w as n o t la b e le d as an estim ate. In th is e xam p le, if in a d d itio n to th e u n d e rsta te m e n t re la te d to th e p e r-d ie m in te re st, a $90 fee is in c o rre c tly o m itted from th e finance charge, cau sin g it to be u n d e rsta te d b y a total of $290, th e fin an c e charge is c o n sid ere d accu rate b e ca u se th e $90 fee is w ith in th e to le ra n c e in § 226.18(d)(1). * * * * * 17(f) E a rly disclosures. 1. C hange in rate or o th e r term s. R e d isclo su re is re q u ire d for changes th a t o c cu r b e tw e e n th e tim e d isc lo su res are m ad e a n d c o n su m m a tio n if th e a n n u a l p ercen tag e ra te in th e c o n su m m a te d tra n sa c tio n e x ceed s th e lim its p re sc rib e d in th is sectio n, ev en if th e in itia l d isc lo su res w o u ld be c o n sid ere d a cc u rate u n d e r th e to le ra n ce s in §§ 226.18(d) or 226.22(a). To illu strate: i. G eneral. A. If d isc lo su res are m ad e in a re g u la r tra n sa c tio n on ]u ly 1, th e tran sac tio n is c o n su m m a te d on July 15, a n d th e actu al a n n u a l p e rce n ta g e rate varies b y m ore th a n Vs o f 1 pe rce n ta g e p o in t from th e d isc lo sed a n n u a l p e rce n ta g e rate, th e c red ito r m u st e ith e r re d isclo se th e ch an g ed term s or fu rn ish a c o m p le te set o f n e w d isc lo su res befo re co n su m m a tio n . R ed isclo su re is re q u ire d ev en if th e d isc lo su res m ad e o n July 1 are b a se d on estim ates a n d m ark ed as su ch. B. In a reg u lar tran sac tio n , if early d isc lo su re s are m ark e d as estim ates a n d th e d isc lo se d a n n u a l p ercen tag e rate is w ith in Vs o f 1 p e rce n ta g e p o in t o f th e rate at c o n su m m a tio n , th e c red ito r n e ed no t re d isc lo se th e c h an g e d term s (in clu d in g th e a n n u a l p ercen tag e rate). ii. N o n m o rtg a g e loan. * * * (See § 226.18(d)(2) of th is part.) iii. M ortgage loan. A t th e tim e TILA d isc lo s u re s are p re p are d in July, th e lo an closin g is sc h e d u le d for July 31 a n d the cre d ito r do es n o t p la n to c o llect p er-d iem in te re st at co n su m m a tio n . C o n su m m atio n a ctu a lly o ccu rs on A u gu st 5, a n d p er-d iem in te re st for th e re m a in d e r of A ugust is c o lle cte d as a p re p a id fin an c e charge. A ssu m in g th ere w e re n o o th er changes re q u irin g re d isclo su re , th e c red ito r m ay rely o n th e d isc lo su re s p re p are d in July th a t w ere a cc u rate w h e n th ey w e re p re p are d . H ow ever, if th e c re d ito r p re p are s n e w d isc lo su res in A u g u st th a t w ill be p ro v id e d at c o n su m m a tio n , th e n e w d isc lo su res m u st take in to a cc o u n t th e a m o u n t of th e p e r-d ie m in te re st k n o w n to th e c re d ito r at th at tim e. * * * * * P aragraph 17(f)(2). 1. Irregular tra nsa ctions. F o r p u rp o se s o f th is p a rag rap h, a tran sac tio n is d e em e d to be “ irre g u la r” acco rd in g to th e d e fin itio n in fo o tn ote 46 o f § 226.22(a)(3). * * * * * 10197 7. In Supplement I to Part 226, under §226.18—Content o f Disclosures, the following amendments are made: a. Under 18(c) Itemization o f amount financed., paragraph 4. is revised; b. Under 18(d) Finance charge., a new paragraph 18(d)(2) is added; and c. 18(n) is amended by revising the heading and adding a new paragraph 2. The additions and revisions read as follows: * * * * * § 226.18— C o n ten t o f D isclosures * * * * * 18(c) Ite m iza tio n o f a m o u n t fin a n c e d . * * * * * 4. R E SP A transa ctio n s. T h e R eal E state S e ttle m e n t P ro c e d u res A ct (RESPA) re q u ire s c red ito rs to p ro v id e a good faith estim a te of c lo sing c o sts a n d a se ttle m e n t sta te m en t listin g th e a m o u n ts p a id by th e c o n su m er. T ran sac tio n s su bject to RESPA are ex em p t from th e re q u ire m e n ts o f § 226.18(c) if th e c red ito r c o m p lies w ith RESPA ’s re q u ire m e n ts for a good faith e stim a te a n d se ttle m e n t sta te m en t. T h e ite m iz a tio n o f th e a m o u n t fin a n c e d n e e d n o t be given, even th o u g h th e c o n te n t a n d tim in g of th e good faith e stim a te a n d se ttle m e n t sta te m en t u n d e r RESPA differ from th e re q u ire m e n ts of §§ 226.18(c) a n d 226.19(a)(2). If a cred ito r ch o o ses to su b stitu te RESPA ’s se ttle m e n t sta te m e n t for th e ite m iz a tio n w h e n re d is c lo su re is re q u ire d u n d e r § 226.19(a)(2), th e sta te m e n t m u st be d e liv e re d to th e c o n su m e r at o r p rio r to co n su m m a tio n . T h e d isc lo su res re q u ire d by §§ 226.18(c) a n d 226.19(a)(2) m ay a p p e a r on th e sam e page or o n th e sam e d o c u m e n t as th e good faith e stim a te or th e se ttle m e n t sta te m en t, so long as th e re q u ire m e n ts o f § 226.17(a) are m et. * * * * * 18(d) F in a n c e charge. * * * * * 18(d)(2) O th e r credit. 1. Tolerance. W h e n a fin an c e charge error re su lts in a m issta te m e n t o f th e a m o u n t fin an c ed , o r som e o th er d o lla r a m o u n t for w h ic h th e re g u la tio n p ro v id es n o specific to leran ce, th e m isstate d d isc lo su re does not violate th e act or th e re g u la tio n if th e finance charge erro r is w ith in th e perm issib le to le ra n ce u n d e r th is parag rap h. * * * * * 18(n) In su ra n ce a n d d e b t can cella tio n . * * * * * 2. D ebt ca n cella tio n . C red itors m ay u se th e m o d el c re d it in su ra n c e d isc lo su res o nly if th e d eb t c a n c ellatio n coverage c o n stitu tes in su ra n c e u n d e r state law . O therw ise, th ey m ay p ro v id e a p a rallel d isc lo su re th a t refers to d e b t c an c ellatio n coverage. * * * * * 8. In Supplement I to Part 226, under § 226.19— Certain Residential Mortgage and Variable-Rate Transactions, under 19(a)(2) Redisclosure required., the first sentence of paragraph 1. is revised to read as follows: * * * * * 10198 Federal Register / Vol. 62, No. 44 / Thursday, March 6, 1997 / Rules and Regulations § 2 26 .1 9— Certain R e sid e n tia l M ortgage a n d V ariable-R ate T ra n sa ctio n s * * * * * P aragraph 19(a)(2) R ed isc lo su re required. 1. C o n d itio n s fo r red isclo su re. C red itors m u s t m ak e n e w d isc lo s u re s if th e a n n u a l p e rce n ta g e rate at c o n su m m a tio n differs from th e e stim a te o rig in ally d isc lo se d b y m ore th a n Vs of 1 pe rce n ta g e p o in t in reg u lar tra n s a c tio n s or V* o f 1 p e rce n ta g e p o in t in irreg u la r tran sac tio n s, as d e fin e d in foo tno te 46 o f § 226.22(a)(3). * * * * * * * * 9. In Supplement I to Part 226, § 226.22—Determination of the Annual Percentage Rate, is amended by adding new paragraphs 22(a)(4) and 22(a)(5) to read as follows: * * * * * § 226.22— D eterm in a tio n o f th e A n n u a l P ercentage R ate 22(a) A c c u ra c y o f th e a n n u a l p ercen ta g e rate. * * * * * 22(a)(4) M ortgage loa ns. 1. E xa m p le . If a c re d ito r im p ro p e rly o m its a $75 fee from th e fin an c e charge on a re g u la r tran sac tio n , th e u n d e rsta te d fin an c e charg e is c o n sid e re d a cc u rate u n d e r § 226.18(d)(1), a n d th e a n n u a l p ercen tag e ra te c o rresp o n d in g to th a t u n d e rsta te d fin an c e charge a lso is c o n sid e re d a cc u rate ev en if it falls o u tsid e th e to le ra n ce of Vs o f 1 p ercentage p o in t p ro v id e d u n d e r § 226.22(a)(2). B ecause a $75 e rro r w a s m ade, an a n n u a l p ercen tag e rate c o rre sp o n d in g to a $100 u n d e rsta te m e n t of th e fin an c e charge w o u ld n o t b e c o n sid ere d accu rate. 22(a)(5) A d d itio n a l tolerance fo r m ortgage loa ns. 1. E xa m p le. T h is p a rag ra p h c o n ta in s an a d d itio n a l to le ra n ce for a d isc lo sed a n n u a l p ercentage rate th at is in co rre ct b u t is clo ser to th e actu al a n n u a l percen tage ra te th a n th e ra te th a t w o u ld be c o n sid ere d a cc u rate u n d e r th e to le ra n ce in § 226.22(a)(4). T o illu stra te : in a n irreg u la r tra n sa c tio n su b ject to a V« o f 1 pe rce n ta g e p o in t to leran ce, if th e actu al a n n u a l p ercen tag e rate is 9.00 p e rc e n t a n d a $75 o m issio n from th e fin an ce charge c o rre sp o n d s to a ra te of 8.50 p e rc e n t th a t is c o n sid e re d a cc u rate u n d e r § 226.22(a)(4), a d isc lo s e d APR o f 8.65 p e rc e n t is w ith in th e to le ra n ce in § 226.22(a)(5). In th is e x am p le of a n u n d e rsta te d fin an ce charge, a d isc lo sed a n n u a l percen tag e rate b elo w 8.50 or above 9.25 p e rc e n t w ill n o t be c o n sid ere d accu rate. * * * * * 10. In Supplement I to Part 226, §226.23—Right o f Rescission is amended by adding new 23(g) and 23(h) preceding the References to read as follows: * * * * * § 2 26.23— R ig h t o f R escission * * * * * 23(g) T olerances fo r accuracy. 23(g)(2) O ne p e rc e n t tolerance. 1. N e w ad va nce. T h e p h ra se “ n e w a d v a n c e ” h as th e sam e m eaning as in c o m m e n t 23(f)— 4. 23(h) S p e cia l R u le s fo r Foreclosures. 1. R escission. S ection 226.23(h) a p p lie s o n ly to tran sac tio n s th a t are su b je ct to re sc issio n u n d e r § 226.23(a)(1). P aragraph 2 3 (h )(l)(i). 1. M ortgage b ro ker fe e s. A c o n su m e r m ay re sc in d a lo an in foreclosure if a m ortgage b ro k e r fee th at s h o u ld hav e b een in c lu d e d in th e finance charge w a s o m itted , w ith o u t reg ard to th e d o lla r a m o u n t in v olv ed. If th e a m o u n t o f th e m ortgage b ro k e r fee is in c lu d e d b u t m isstate d th e ru le in § 226.23(h)(2) ap p lies. 23(h)(2) T olerance fo r d isclosu res. I . G eneral. T his se c tio n is b a se d o n th e accu racy of th e to tal fin an ce ch arg e ra th e r th a n its c o m p o n e n t charges. * * * * I I . In Supplement I to Part 226, under §226.31—General Rules, the following amendments are made: a. Under Paragraph 31 (c)(1) paragraph 1. is redesignated as paragraph 1. under Paragraph 31(c)., and paragraph 2., under Paragraph 31 (c)(1) is redesignated as paragraph 1; and b. Under 31(d), a new paragraph 31(d)(3), is added. The revisions and additions read as follows: * * * * * 32(b) D efinitions. Paragraph 32 (b)(l)(i). 1. G eneral. S e c tio n 226.32(b)(l)(i) in c lu d e s in th e to tal “ p o in ts a n d fees” ite m s d e fin e d as fin an c e ch arg es u n d e r §§ 226.4(a) a n d 226.(4)(b). Item s e x c lu d e d from th e fin an ce ch arg e u n d e r o th e r p ro v isio n s o f § 226.4 are n o t in c lu d e d in th e total “ p o in ts a n d fees” u n d e r p a rag ra p h 32(b)(l)(i), b u t m ay be in c lu d e d in “ p o in ts a n d fees” u n d e r p arag ra p h s 32(b)(l)(ii) a n d 32(b)(l)(iii). In terest, in c lu d in g p e r-d ie m in te re st, is e x c lu d e d from “ p o in ts a n d fees” u n d e r § 226.32(b)(1). * * * S u b p a rt E— Special R u les for C ertain H om e M ortgage T ran sactio n s § 226.31— G eneral R u le s * * * * * 31(d) B asis o f d isclo su res a n d u se o f estim a tes. * * * * * 31(d)(3) P er-diem in terest. 1. P er-diem in terest. T h is p arag rap h a p p lie s to th e d isc lo su re o f a n y n u m eric al a m o u n t (such as th e fin an ce charge, a n n u a l p ercentage rate, or p a y m e n t a m o un t) th at is affected by th e a m o u n t o f th e p er-d iem in te re st charge th a t w ill be co lle cte d at c o n su m m a tio n . If th e a m o u n t o f p e r-d ie m in te re st u se d in p re p a rin g th e d isc lo su re s for c o n su m m a tio n is b a se d o n th e in fo rm a tio n k n o w n to th e c red ito r at th e tim e th e d isc lo su re d o c u m e n t is p re p are d , th e d isc lo su res are c o n sid e re d a cc u rate u n d e r th is ru le, a n d affected d isc lo su res are also c o n sid ere d accurate, e v en if th e d isc lo su res w ere n o t lab eled as estim ates. (See c o m m e n t 1 7 (c)(2)(ii)-l generally.) * * * * * 12. In Supplement I to Part 226, under § 226.32—Requirements for Certain Closed-End Home Mortgages, the following amendments are made: a. Under Paragraph 32(b)(l)(i)., paragraph 1. is revised; and b. Under Paragraph 32(c)(3)., a new paragraph 2. is added. The revisions and additions read as follows: * * * * * § 2 2 6 .3 2 — R eq u ire m e n ts fo r C ertain C losedE n d H om e M ortgages * * * * * * * * * 32(c) D isclosures. * * * * P aragraph 32(c)(3) R egu lar p a y m e n t. * * * * * 2. B alloon p a y m e n ts . If a lo an w ith a term of five y ears or m o re p ro v id e s for a b allo o n p a y m e n t, th e b a llo o n p a y m e n t m u st be d isclo sed . F o r a lo an w ith a term o f less th a n five years, a ballo o n p a y m e n t is p ro h ib ite d . * * * * * 13. In Supplement I to Part 226, under § 226.33—Requirements for Reverse Mortgages, under Paragraph 33(a)(2), in paragraph 2., the third and fourth sentences are revised and a new sentence is added at the end of the paragraph to read as follows: * * * * * § 226.33— R eq u ire m e n ts fo r R everse M ortgages 33(a) D efin ition . * * * * * P aragraph 33(a)(2). * * * * * 2. D e fin ite term or m a tu rity date. * * * A n oblig atio n m ay state a d e fin ite m a tu rity d ate or term o f re p a y m e n t a n d still m ee t th e d e fin itio n o f a reverse-m ortgage tra n sa c tio n if th e m a tu rity d a te or term of re p a y m e n t u se d w o u ld n o t o p erate to cau se m a tu rity p rio r to th e o ccu rre n ce o f a n y o f th e m a tu rity ev en ts reco g n ized in th e reg u lation . F o r ex am ple, so m e re v erse m ortgage p ro g ram s sp ecify th at th e final m a tu rity d a te is th e b o rro w e r’s 150th b irth d a y ; o th er prog ram s in c lu d e a sh o rte r term b u t p ro v id e th a t th e term is a u to m a tic ally e x te n d e d for co n se cu tiv e p e rio d s if n o n e o f th e o th er m a tu rity ev en ts h a s y et o ccurred. T hese pro gram s w o u ld be p erm issible. * * * * * 14. In Supplement I to Part 226, under Appendices G and H—Open-End and Closed-End Model Forms and Clauses, a new paragraph 2. is added to read as follows: * * * * * A p p e n d ic e s G a n d H—O p en -E n d a n d C losedE n d M o del F orm s a n d C lauses * * * * * 2. D ebt c a n cella tio n coverage. T h is re g u la tio n does n ot au th o riz e c red ito rs to c h aracterize d ebt c a n c ellatio n fees as in su ra n c e p re m iu m s for p u rp o se s o f th is reg u lation . C red itors m ay p ro v id e a d isc lo su re th at refers to d e b t c an c ellatio n Federal Register / Vol. 62, No. 44 / Thursday, March 6, 1997 / Rules and Regulations coverage w h e th e r or n o t th e coverage is c o n sid e re d in su ra n c e . C re d ito rs m a y u se th e m o d el c re d it in su ra n c e d isc lo s u re s o nly if th e d e b t c a n c e lla tio n coverage co n stitu tes in su ra n c e u n d e r state law . * * * * * 15. In Supplement I to Part 226, under A ppendix H—Closed-End Model Forms and Clauses, a new sentence is added to the end of paragraph 11. to read as follows: * * * * * A p p e n d ix H— C losed-E nd M o d e l F orm s a n d C lauses * * * * * 11. M o d els H -8 a n d H -9 . * * * T h e p rio r v e rsio n o f m o d el form H - 9 is su b sta n tia lly sim ila r to th e c u rre n t v e rsio n a n d cred ito rs m ay c o n tin u e to u se it, as a p p ro p ria te. C red itors a re e n co u ra g ed , h o w e v e r, to u se th e cu rre n t v e rsio n w h e n re o rd e rin g or re p rin tin g form s. * * * * * By o rd e r o f th e B oard o f G ov ern ors of th e F ed eral R eserve System , actin g th ro u g h th e S ecretary o f th e B oard u n d e r d eleg ated au th o rity , F e b ru a ry 28, 1997. Jennifer J. Johnson, D e p u ty S e creta ry o f th e B oard. [FR Doc. 9 7 -5 4 4 7 F iled 3 - 5 - 9 7 ; 8:45 am] BILUNG CODE 6210-01- P 10199
