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FEDERAL RESERWE BAMK
©F MEW Y©REC
/ d pp
Circular No. 10131
[ January 6, 1987 ]
TRUTH IN LENDING
— Ameimdlmeiffil to Regulation Z
— Proposed Amendment Updating Official Staff Commemttary
Comment Invited by January 3®9 1987
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board has issued a final rule that modifies a provision of Regulation Z (Truth
in Lending) exempting refinancings by original creditors from the right of rescission. The rule states that
if the original creditor finances nonfinance charges such as attorney’s fees, title examination fees, and
insurance premiums, the right of rescission will not apply. This final rule is effective immediately.
At the same time, the Board withdrew its proposal, issued on August 6, to exempt refinancings
secured by the consumer’s principal dwelling by other than the original creditor. The proposal would
have excluded refinancings when (1) no new advances of money are made to the consumer, (2) the
annual percentage rate on the new obligation is not subject to increase after consummation and is the
same as or lower than the annual percentage rate on the obligation being replaced, and (3) the new trans
action does not have a balloon payment feature.
The Board also issued for public comment a revised interpretation to its official Regulation Z staff
commentary. The proposed revision to the commentary describes what constitutes a new advance of
money in a refinancing that is exempt from the rescission provision. Comment is requested by
January 30.
Printed on the reverse side is the text of the proposal, which has been reprinted from the Fed
eral Register of December 18; comments thereon should be submitted by January 30, 1987, and
may be sent to our Compliance Examinations Department.
Also enclosed is a copy of the amendment to Regulation Z, effective December 16, 1986. Ques
tions may be directed to the Compliance Examinations Department (Tel. N q. 212-720-8136).
E.
ald
C orrigan , .
President.
(OVER)
created to allow consumers time to
reexamine their credit contracts and
12 ©FR Part 22S
cost disclosures and to reconsider
whether they want to place an
|[R®0. Z; R-0577J
important asset—the home—at risk by
offering it as security for the credit.
Traftlh in Lending; Pr©p©s®d Update to
Not all credit transactions secured by
©ffltelal Stelf ©©mm®nteiry
a consumer’s principal dwelling are
A<3iW©Y: Board of Governors of the
subject to the right of rescission. Under
Federal Reserve System.
section 125(e) of the TILA a refinancing
by the same creditor (the original
ACTION: Proposed official staff
creditor) is not subject to the right of
interpretation.
rescission if no new advances of money
SUMMARY: The Board is publishing for
are made to the consumer. The Board
comment a proposed revision to the
has recently adopted an amendment to
official staff commentary to Regulation
Regulation Z to redefine what
Z (Truth in Lending) regarding the right constitutes a new advance of money
of rescission in the refinancing of a
obtained by a consumer for purposes of
closed-end credit transaction. The
the rescission exemption for
revision relates to an amendment to
refinancings. The regulatory amendment
Regulation Z recently adopted by the
is contained elsewhere in this issue. The
Board that redefines what constitutes a amendments redefines a new advance
new advance of money in a refinancing of money as only amounts above the
that is exempt from the rescission
costs attributable to the refinancing that
provisions. (The regulatory amendment are in the amount financed.
is contained elsewhere in this issue.)
Comment 23(f)— would be revised to
4
The proposed commentary provision
incorporate the revised definition of a
would revise existing comment 23(f)—
4
new advance of money in a refinancing
which explains what constitutes a new
and to further explain what amounts are
advance of money in a refinancing by
included in determining what constitutes
the original creditor that would require
a new advance. In addition, a minor
the creditor to give a consumer the
editorial change would be made in the
opportunity to rescind an extension of
first sentence of comment 23(f)-4 to
additional credit.
clarify that a consolidation is a type of
©ATI: Comments must be received on or refinancing. No substantive change is
intended.
before January 30,1987.
It is expected that revisions to
ABOB1S1: Comments should be mailed
comment 23(f)-4 will be adopted in final
to William W. Wiles, Secretary, Board
form in March 1987 (along with the final
of Governors of the Federal Reserve
version of the sixth general update to
System, Washington, DC 20551, or
the commentary to Regulation Z,
delivered to the 20th Street mail service proposal of which was published a 51
courtyard entrance, 20th Street between FR 43372 on December 2,1986). at
C Street and Constitution Avenue, NW., Compliance would be optional until the
Washington, DC, between 8:45 a.m. and uniform effective date of October 1,
5:15 p.m. weekdays. Comments should
1987, for mandatory compliance. Certain
include a reference to R-0577.
used to highlight
Comments may be inspected in Room B- conventions have beenNew language is
the proposed revision.
1122 between 8:45 a.m. and 5:15 p.m.
shown inside build-faced arrows, while
weekdays.
language that would be deleted is set off
FyprrasiMi in f o r m a t io n : Contact
Adrienne Hurt or Leonard Chanin, Staff with brackets. authority granted in
Pursuant to
Attorneys, Division of Consumer and
section 105 of the Truth in Lending Act
Community Affairs, at (202) 452-3867 or (15 U.S.C. 1604 as amended), the Board
(202) 452-3667; for the hearing impaired proposes to amend the official staff
only, Telecommunications Device for
commentary to Regulation Z (12 CFR
the Deaf (TDD) Eamestine Hill or
Part 226 Supp. I) as follows:
Dorothea Thompson, at (202) 452-3544,
List of Subjects in 12 (CFM Part 22S
Board of Governors of the Federal
Reserve System, Washington, DC 20551.
Advertising, Banks, Banking,
SUPPLEMENTARY INFORMATION:
Consumer protection, Credit, Federal
Reserve System, Finance, Penalties,
(1) General
Truth in Lending.
The Truth in Lending Act (TELA)
provides that, in a consumer credit
transaction in which the consumer’s
principal dwelling secures an extension [PART 226— [AMENDED]
For the reasons set forth above, the
of credit, the consumer has three
Board proposes to amend 12 CFR Part
business days, generally from the date
226 as follows:
of consummation of the credit
1. The authority citation for Part 226
transaction, in which to rescind the
transaction. This right of rescission was continues to read as follows:
FEDERAL RESERVE SYSTEM
Authority: Sec. 105, Truth in Lending Act,
as amended by sec. 605, Pub. L 86-221, 94
Stat. 170 (15 U.S.C. 1604 et seq.).
2. Text of revisions. The proposed
revisions to the Official Staff
Commentary (12 CFR Part 226, Supp. I)
read as follows:
Supplement I—Official Staff
Interpretations
* * * * *
Section 226.23—Right of Rescission
it it * * it
23(f) Exempt Transactions
* * *
« *
4. New advances. The exemption in
§ 226.23(f)(2) applies only to refinancing (or
consolidations] n>(including
consolidations)^ by the original creditor. [If
the transaction involves the advance of new
money, then only the amount of the new
money is rescindable. For example, if the sum
of the outstanding principal balance plus the
earned finance charge is $1,000 and the new
amount financed is $1,000, then the
refinancing would be exempt. On the other
hand, if the new amount financed exceeds
$1,000, then the amount in excess of that
$1,000 would be rescindable.] o l f the
refinancing involves a new advance of
money, the amount of the new advance is
rescindable. For purposes of the right of
rescission, a new advance does not include
amounts attributable to the costs of the
refinancing. These amounts would include
| 226.4(c)(7) charges (such as attorneys fees
and title examination and insurance fees, if
bona fide and reasonable in amount), as well
as insurance premiums and other charges
that are not finance charges. (Finance
charges on the new transaction—points, for
example—would not be considered in
determining whether there is a new advance
of money in a refinancing since finance
charges are always excluded from the
amount financed.) To illustrate, if the sum of
the outstanding principal balance plus the
earned unpaid finance charge is $50,000 and
the new amount financed is $51,000, then the
refinancing would be exempt if the extra
$1,000 is attributed solely to costs financed in
connection with the refinancing that are not
finance charges. Of course, if new advances
of money are made (for example, to pay for
home improvements) and the consumer
exercises the right of rescission, the
consumer must be placed in the same
position as he or she w as prior to entering
into the new credit transaction. Thus, if
applicable, all amounts of money (which
would include all the costs of the refinancing)
already paid by the consumer to the creditor
or to a third party as part of the refinancing
w ould have to be refunded to the consumer.
(See the commentary to i 226.23(d)(2) for
discussion of refunds to consumers.)< A
model rescission notice applicable to
transactions involving new advances appears
in Appendix H.
Board of Governors of the Federal Reserve
System, December 11,1986.
William W. Wiles,
Secretary of the Board.
[FR Doc. 86-28316 Filed 12-17-86; 8:45 am]
BILLING CODE S210-01-D3
Printed in New York from Federal Register, Vol. 51, No. 243
Board off Governors off the Federal Reserve System
TRUTH IN LENDING
AMENDMENT TO REGULATION Z
(effective December 16, 1986)
FEDERAL RESERVE SYSTEM
n CFR F r 2 6
at 2
[Regulation Z; Docket Mo. B-0577]
Truth 8n Lending; Right @ Rescission
fl
A©£^©v: Board of Governors of the
Federal Reserve System.
A€78@IM: Final rule.
SUMMARY: The Board is publishing a
final rule revising Regulation Z, its
regulation implementing the Truth in
Lending Act. The rule modifies the
existing provision that exempts original
creditors from providing the right of
rescission in certain refinancings
secured by the consumer’s principal
dwelling. The regulation provides that
the right of rescission will not apply if
the original creditor finances nonfinance
charges such as attorney’s fees, title
examination fees, and insurance
premiums.
The Board has decided not to amend
Regulation Z to exclude certain
transactions by a creditor other than the
original creditor from the right of
rescission. An earlier proposal would
have excluded from the right of
rescission extensions of credit that
replace a transaction secured by the
consumer’s principal dwelling where (1)
no new advances of money are made to
the consumer, (2) the annual percentage
rate on the new obligation is not subject
to increase after consummation and is
the same as or lower than the annual
percentage rate on the obligation being
replaced, and (3) the new transaction
•foes not have a balloon payment
Mure.
x.: light of significant concerns
expressed by a number of persons
commenting on the proposal, including
significant consumer opposition to any
expansion of the rescission exemptions,
dissatisfaction with the limited nature of
the proposed exemption, the complexity
associated with a rule that might
accommodate all interests, and the
statutory concerns accompanying any
attempt to accommodate those interests,
the Board has decided not to create a
new rescission exemption for
nonoriginal creditors.
EFFECTIVE DATE: December 16, 1986, but
reliance optional until October 1,1987.
info rm atio n
©©o t a st :
Adrienne Hurt or Leonard Chanin, Staff
Attorneys, (202) 452-3887 or (202) 4523667, Division of Consumer and
Community Affairs, or for the hearing
impaired only, Telecommunications
Device for the Deaf (TDD) Eamestine
Hill or Dorothea Thompson, at (202)
452-3544, Board of Governors of the
Federal Reserve System, Washington,
DC 20551.
§yp>PLSR3!SKnrAKv info rm atio n :
(1) Background
Section 125 of the Truth in Lending
Act (TILA) provides that consumers
have the right to rescind certain credit
transactions in which a security interest
is taken in the consumer’s principal
dwelling. The right of rescission was
established to provide consumers an
opportunity to reexamine their credit
contracts and cost disclosures in order
to reconsider their decision to place an
important asset—the home—at risk by
offering it as security for the credit
extension. The rescission period runs for
three business days ending on midnight
of the third business day following
consummation, delivery of material
Truth in Lending disclosures, or delivery
to the consumer of the notice of the right
to rescind, whichever occurs last. Under
| 226.23 of Regulation Z, which
implements the act’s rescission
provision, a creditor is prohibited from
performing services or disbursing funds,
other than in escrow, dining the
rescission period. A consumer may
waive the right to rescind where the
consumer has a bona fide personal
financial emergency.
Currently, both the act and Regulation
Z provide that refinancings 1 by the
same creditor of credit already secured
by the consumer's principal dwelling are
exempt from the right of rescission
where no “new money" is advanced to
the consumer. The regulation treats as
new money the difference between the
new "amount financed” and the unpaid
principal balance plus any earned
unpaid finance charges on the obligation
being refinanced. Under this rule,
nonfinance charges, such as attorney’s
fees, title examination fees and
insurance premiums, if financed by the
creditor, are added to the old debt to
arrive at the new amount financed. The
provisions in existing § 220.23 (f)(2)
provide that the transaction is
rescindable to the extent of these
charges.
In light of the substantial increase in
consumer applications to refinance
residential mortgage loans, the Board
received a number of inquiries and
complaints about the applicability of the
rescission rules to refinancings. As a
result of consumer and creditor
concerns, the Board published for public
comment on August 8,1980 (51 FR 28245)
1 Although the term “refinancing” in § 226.23 of
Regulation Z refers only to new transactions by the
same creditor that had made the original extension
of credit the term in this discussion is used in a
generic sense to refer to a transaction by any
creditor that satisfies and replaces an existing
obligation.
For this Regulation to be complete, retain:
1) Regulation Z pamphlet, amended to April 1, 1981.
2) Amendments effective December 3, 1981, April 1, 1982, October 1, 1982,
and December 31, 1984 {printed, in slip sheet dated December 1984).
3) Technical amendment, effective March 4, 1985.
4) This slip sheet.
PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 51, NO. 243
I
a proposal to create a new exemption
from the right of rescission for
transactions involving the nonoriginal
creditor, and to revise the definition of
new money for purposes of the current
exemption for original creditors. The
Board received approximately 165
comments on the proposed amendments.
The Board has decided not to create a
new exemption for nonoriginal creditors,
but has decided to revise its definition
of new money for purposes of the
existing exemption from the rescission
right for original creditors.
(2) Proposal To Exempt “Refinancings”
by the Nonoriginal Creditor
Section 125(e) of the TILA exempts
from rescission only refinancings by the
original creditor where no new
advances of money are made. The
proposed amendment to Regulation Z
would have expanded the class of
transactions exempt from the rescission
provisions to include certain types of
refinancings by creditors other than the
original creditor. The expansion of the
rescission exemption to exempt certain
additional types of refinancings was
based on the idea that it would benefit
both consumers (in allowing for
immediate access to credit) and
creditors (in relieving some compliance
costs) and, if limited, would be
consistent with congressional intent in
creating the right of rescission. In an
effort to ensure that transactions remain
subject to the right of rescission where
the consumer arguably needs the right,
and in view of the existing statutory
exemption applicable to the original
creditor only, the proposal would have
limited the types of refinancings offered
by a new creditor that could be exempt
from the right of rescission. Under the
proposal, a refinancing by a new
creditor would have qualified for the
exemption only if:
(1) No new advances of money were
obtained by the consumer,
(2) The annual percentage rate (APR)
on the new transaction was not subject
to increase after consummation and was
the same as or lower than the APR on
the obligation being refinanced, and
(3) The new transaction did not have
a balloon payment feature.
After careful consideration of the
comment letters and further evaluation
of the proposal, the Board has decided
not to amend Regulation Z to create a
new exemption from the right of
rescission for refinancings by a new
creditor. The Board’s decision is based
on several considerations. First, there
was a strong belief among persons
opposed to expanding the rescission
exemptions—-particularly those
representing the consumer interest—that
the Board’s proposed amendment would
eliminate an important consumer right.
These commenters felt that the purpose
of the right of rescission—to allow
consumers time to reconsider the risks
in encumbering their homes for an
extension of credit—is crucial,
particularly at a time when so many
consumers are refinancing loans. The
opponents believed that the proposal,
even with its limitations aimed at
exempting only loans that would pose
no greater risk than the original loans,
was not sufficient to ensure that
consumers will have the right of
rescission in all transactions when it
would be desirable. In addition to the
concerns about the loss of a substantive
consumer protection, those opposing the
proposed amendment often cited their
belief that the Board would be
exceeding its rulemaking authority
under the TILA if it were to exempt
transactions by a creditor other than the
original creditor because the current
statute expressly exempts only
refinancings by the same creditor.
While most commenters generally
favored expansion of the category of
refinancings that would be exempt from
the rescission provisions, many
commenters did not favor the Board’s
specific proposal. A number of creditors,
for example, urged the Board to adopt
similar exemption rules for original and
nonoriginal creditors by deleting the
various qualifications from the proposed
amendment. They argued that where a
consumer refinances a loan, regardless
of who the creditor is, the right to
rescind is an unnecessary protection
because there is adequate time between
application and closing for
reconsideration of a credit decision.
They also claimed there is little support
for the idea that a consumer undertakes
less risk when refinancing a loan with
the same creditor, or that the consumer
needs the additional rescission
protections only when dealing with a
different creditor.
While the Congress’ rationale for
restricting the exception to the original
creditor may be unclear, the statute
unambiguously exempts refinancings
only with the original creditor. It is the
Board’s view that adopting a broad
exemption that would treat new
creditors the same as original creditors
would be inconsistent with the statutory
intent of the rescission provisions. Any
exemption would have to be tailored to
ensure that the rescission provisions
apply to transactions where the right of
rescission is arguably a needed
protection.
With regard to the exemption as
proposed, many commenters urged that
various modifications be made in the
2
proposal to exempt additional
transactions that they believed would
impose no increased risk to consumers.
For instance several commenters
suggested that:
—The refinancing of a variable rate loan
with no caps to a variable rate loan
with caps should be exempt from the
right of rescission.
—The refinancing of a fixed rate loan to
a variable rate loan with a rate cap
that is equal to or less than the APR
(or interest rate) on the existing loan
should be exempt from the right of
rescission.
—Only where a balloon payment
feature is added or where a balloon
payment on the refinancing is higher
than the balloon payment on an
existing loan should the transaction
remain subject to the right of
rescission.
The Board believes that modifying the
proposal to expand the rescission
exemption to include more transactions
in which additional risk is not an
apparent concern would likely result in
a very technical and complex rule.
Several commenters, in response to
the Board’s solicitation for comment as
to whether additional limitations should
be contained in the proposal, felt that
additional conditions should be imposed
before a transaction is exempt from the
right of rescission. Most of those
addressing the question stated that
refinancings with a demand feature
should be subject to the right of
rescission on the ground that a demand
loan is just as risky, if not more so, than
a loan with a balloon payment feature.
Others stated that scheduled payments
on the refinancing should be lower than
scheduled payments on the existing loan
before the right of rescission is
eliminated. Other commenters suggested
additional conditions. The Board
believes that drafting a rule
accommodating these concerns would
create a very technical regulation, and
would significantly limit the number of
transactions that would be covered by
the amendment.
In light of the strong opposition to any
expansion of the rescission exemptions
from a number of commenters, the
desire of many commenters to have the
rescission exemption expanded beyond
that which was proposed by the Board,
the complexity associated with a rule to
accommodate all interests, and the
statutory constraints, the Board has
decided not to adopt the proposed
amendment to create a new rescission
exemption regarding refinancings by a
creditor other than the original creditor.
(3) New Money Proposal
In addition to proposing to amend
Regulation Z to exempt certain
refinancings by a nonoriginal creditor,
the Board proposed to redefine what
constitutes a new advance of money
obtained by a consumer for purposes of
the existing exemption for refinancings.
The Board has decided to adopt the
proposed amendment to Regulation Z
that would redefine a new advance of
money. Section 226.23(f)(2) currently
provides that a consumer shall receive
the right of rescission in a refinancing by
the original creditor if the consumer
receives “new money." Under this rule,
new money has been treated as the
difference between the new amount
financed and the outstanding balance
plus any earned unpaid finance charges.
Because of this definition, the right of
rescission often would be triggered if the
consumer merely finances costs that are
not finance charges, such as attorney’s
fees, title examination fees, and
insurance premiums, even where a
consumer does not get additional money
for other purposes. The Board proposed
for comment a revision to this rule to
provide that if the new money results
solely from a decision by the consumer
to finance nonfinance charges such as
attorney’s fees, title examination fees,
and insurance premiums, these costs
would not trigger the right of rescission.
(Under the existing rule, points and
other finance charges, even if financed
by the creditor, would not trigger the
right of rescission since they are not part
of the “amount financed.”)
Over two-thirds of the commenters
supported the Board’s proposal to revise
the definition of new money. The
majority of commenters stated that most
consumers ask to finance these costs
when refinancing their mortgage, thus
triggering the right of rescission in a
large number of refinancings. While
commenters varied in the estimates of
these costs, it appears that these costs
are generally below $1,000 or 3% or less
of the principal loan amount. Most
commenters stated that these costs were
not significant enough to Justify the
consumer receiving the right of
rescission solely for these charges.
Several commenters opposed to
revising the definition of new money
stated that costs such as attorney’s fees,
title examination fees, and insurance
premiums can be significant, and that
consumers need an opportunity to
reconsider a transaction when these
costs are financed by a creditor. A few
commenters felt the Board should not
take any action that may reduce
consumer protections in the rescission
area.
After careful consideration of all
comments received and further
examination of the proposal, the Board
has decided to adopt the new money
proposal. The Board believes that
consumers do not need the right of
rescission when refinancing with an
original creditor if the only reason for
receiving the right is due to a decision to
finance nonfinance charge closing costs.
Such amounts do not appear to be
significant, in light of the principal loan
amount being refinanced, and thus do
not put the consumer’s principal
dwelling at any significantly greater
risk.
The Board also believes that the
requirement in § 226.4(c)(7) that common
closing costs must be bona fide and
reasonable to be excluded from the
finance charge should allay concerns
expressed by some commenters that
creditors may use this revision to add
unreasonable charges to the new
transaction. Furthermore, it should be
noted that if the consumer rescinds a
transaction involving new money,
i 226.23(d) provides that the consumer is
not liable to pay any amount, including
the cost of the refinancing.
Minor editorial revisions have been
made to the proposal so that the
provision will be phrased in terms of
what transactions are subject to the
right of rescission rather than what
transactions are covered by the
exemption. These revisions were made
to more clearly state the rule that, where
a transaction involves new money, only
the new money is rescindable.
In addition to its final rule, the Board
is also publishing for public comment in
this issue of the Federal Register a
proposal to amend the official staff
commentary to address issues that may
3
arise as a result of the new rule.
(4) Regulatory Impact
The revision to the rescission
provision in Regulation Z would reduce
the number of transactions for which
creditors would need to provide
consumers with a notice of their
rescission rights and an opportunity to
rescind. Therefore, it appears that
creditors, including small entities, would
not incur any additional costs as a result
of the proposed changes.
List of Subjects in 12 CFR Part 226
Advertising, Banks, Banking,
Consumer protection, Credit, Federal
Reserve System, Finance, Penalties,
Truth in lending.
m m 226—[AMENDED]
Pursuant to authority granted in
section 105(a) of the Truth in Lending
Act, 15 U.S.C. 1604(a), the Board is
amending Regulation Z (12 CFR Part
226) as follows:
1. The authority citation for Part 226
continues to read as follows:
Authority: Sec. 105, Truth in Lending Act,
as amended by sec. 605, Pub. L. SS-221, 945
Stat. 170 (15 U.S.C. 1604 et seq.).
2. 12 CFR Part 226 is amended by
revising § 226.23(f)(2) to read as follows:
§ 226.23 Right of reactosfoR.
a a o a
(f) Exempt transactions. * 0 *
(2) A refinancing or consolidation by
the same creditor of an extension of
credit already secured by the
consumer’s principal dwelling. The right
of rescission shall apply, however, to the
extent the new amount financed
exceeds the unpaid principal balance,
any earned unpaid finance charge on the
existing debt, and amounts attributed
solely to the costs of the refinancing or
consolidation.
a * < a a
t
By order of the Board of Governors of the
Federal Reserve System, December 21,1988.
William W. Wiles,
Secretary of the Board.
[FR Doc. 86-28315 Filed 12-17-86; 8:45 am]
BILLINGCODE 6210-41-tt
@FedFRASER