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FEDERAL RESERVE BANK
OF NEW YORK

[

10165 1

Circular No.
April 23, 1987

OFFICIAL STAFF COMMENTARIES
Amendments to the Official Staff Commentaries on Regulations B, E 9 and Z
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 adopted final changes to the official staff commentaries to its Regu
lations B (Equal Credit Opportunity), E (Electronic Fund Transfers), and Z (Truth in Lending).
The major changes to the Regulation B official staff commentary pertain to notification regarding
denial of an incomplete application and data collection requirements for monitoring purposes.
The revisions to the Regulation E official staff commentary address systems for paying government
benefits by means of electronic terminals; coverage of dividend or interest payments on securities; re
strictions on payments to third parties from money market deposit accounts; and the practice of including
promotional material on ATM or POS receipts.
The update to the Regulation Z official staff commentary clarifies provisions affecting disclosures
for refinancing transactions and the right of rescission. In addition, the update clarifies the exception
from the finance charge for participation or membership fees and the prohibition against offsetting a
consumer’s credit card indebtedness with funds from a deposit account held with a credit card issuer.

Enclosed are copies of the changes to each of the Official Staff Commentaries, which have
been reprinted from the Federal Register. Questions may be directed to our Compliance Examina
tions Department (Tel. No. 212-720-8136).
E.

G e r a l d C o r r ig a n ,

President.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
EQUAL CREDIT OPPORTUNITY
AMENDMENTS TO THE OFFICIAL STAFF COMMENTARY ON REGULATION B
(effective April 1, 1987)

reser ve

B 'm r m

i2CFB Pari M2
[lteg.fi; EC-1]
C radK

O fficial §tef!
Update

Board of Governors of the
Federal Reserve System.

AGENCY:

Fisaa! ©Ucaal staff

interpretation. ___________________
SUMMARY: The Board as publishing in
final form revisions to the official staff
commentary to Regulation 3 (Equal
Credit Opportunity], The commentary
applies and interprets the requirements
of Regulation SBand is © substitute for
individual staff interpretations of the
r^ulatiosm The swisfons address
questions that have arisen about the
regulation, and include new material
©nd changes m existing material
EFFECTIVE © A T I: April 1 ,1 9 8 7 .
w

fo r

Adrienne Hurt or Leonard Chanin, Staff
Attorneys, Division of Consumer and
Community Affairs, at (202] 4 5 2 -3 8 6 7 or
4S2-36S7; for She hearing impaired only,
Telecommunications Device for the
Deaf, Earn®stine Hill or Dorothea
Thompson at (202) 4 5 2 -3 5 4 4 , Board of
Governors ®f the [Federal Reserve
System, Washington, D C 20551.
!&§F@05&flATS®IM: (1)

General. The Equal Credit Opportunity
Act (15 U.S.C 1691 et seq .) makes it

unlawful for creditors to discriminate in
any aspect of a credit transaction on the
basis of race, color, religion, national
origin, sex, marital status, age, receipt of
public assistance, or the exercise of
rights under the Consumer Credit
Protection Act. This statute is
Implemented by the Board’s Regulation
B (12 CFR Part 202),

On November 20, HESS, an official
staff commentary interpreting She
regulation was published along with the
final rule ©evising Regulation B (50 FR
48018). Ha® ram m atery is designed to
provide general guidance to creditors in
applying the regulation to specific
transactions.
Periodic updates provide the vehicle
for additional staff interpretations that
may be necessary ®s new questions
arise (although each unique situation
cannot fee individually addressed in the
commentary). This notice contains the
first update, which was proposed for
©omment oh December 2,1986 (51 FR
43371), The revisions are effective on
April 1,1987.
(2) Explanation of revisions.
Following is a brief description of the
revisions to the commentary:

to explain, that only telephone
companies that are regulated by ok that
file certain, information, with- a
government unit qualify for the (public
utilities exceptions available under
| 202.3(a)(2). The words “required to'”
were, deleted in the final comment, to
conform to the regulation.
Section 202.9—Notifications*
9(a) Notification of Action Taken, ECOA
Notice and Statement of Specific
Reasons

2(f) Application
A cross ©gferemce to comment ©(a)(1)(3) has been added to comment 2(f)—
5.
Comment 2(f)-5 is a general statement of
a creditor's duty to exercise reasonable
diligence in obtaining information from
applicants or third parties in connection
with an application for credit. Because a
creditor may deny an application on the
basis of incompleteness, the new cross
reference helps clarify the relationship
between this comment and the
treatment ©f incomplete applications.
2(z) Prohibited Basis
Editorial changes have been made to
the first and second sentences of
comment 2(z)r-l for clarity.. No
substantive change is intended..

Section. 20213—Information For
Monitoring Purposes».

Section 2022—Definitions.

Section 202.3—Limited Exceptions far
Certain Classes af Transactions.,
3(a), Pubiic-tltiiifies Credit
New comment 3{a)-3 has been added

Paragraph S(ai)(<l)

New comment 9(a)(l)-3 has been
added to explain that a. creditor may
deny an application missing information
from the applicant on the basis of
incompleteness.. Existing comments
9(a)(l)>-3 through 9(ja )(l)-§ are
redesignated as comments. 9(a)(,l)-4
through 9(a)(l)t-7, BBspectlvalyi
13(a) Information to Be Requested
New comment 13(a)^-5 has been added
to address transactions not covered by
the data collection requirements of
1 202.13(a). Based on suggestions made
by commenters, the final comment
clarifies that the test for determining
whether an application is covered by
§ 202.13(a) focuses ®n the purpose of the
transaction.. For example, second
mortgages and open-end home equity
lines obtained primarily for a purpose
other than the purchase or refinancing of
an applicant’s principal residence are
not covered by § 202.13(a). Existing
comment 13(a)-5 is redesignated as
comment 13{a}-8.
Appendix B—
-Model Application Forms
Comments 1 and 2 to Appendix B
have been revised to address the proper
use of two mortgage application forms
issued in October 1986 by the Federal
(OVER)

PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 52, NO. 64, pp. 10732-10734.

[Enc. Cir. No. 10165]

contact th© applicant promptly. (Set ese
Home. Loaa Mortgage Corf oration
5. Transactions not covered. The
comment ®(a)(l)-8, which discusses fe®
Information collection requirements ©f
(FHLMC] and 4he Federal- National
§ 202.13(a) apply to applications for credit
Mortgage Association (FNMA). The- two creditors'sofoption to deny an application, on.
the basis incompleteness.),
.primarily for fee-purchase or refinancing o f a
forms—FHLMC 65/FNMA 1003-and
* * * * *
dwelling that is ©r w ill become fee
FHLMC1713/FNMA 1012—contain a
applicant's principal residence. Therefore,,
section for collecting fee monitoring2(z)’Prohibited basis.
applications for tome equity lines and other
information required by section 202.13.,
applications for credit secured-by fee1. Persons associated with
The forms do not, however,, differentiate “ Prohibited5basis"' ©•-used' in-applicant
applicant’s principal eesMsaos- but- mad©
©
this regulation
between transactions feat are covered
primarily for a purpose other thsaa.fe©
refers Esstenly- t® certain Ghasactorastios—
4he
by | 202.13(a), which limits data
purchase- or refinancing of fee principal
race, color; feligiDai.E®tiQnai ©Elgin,, sex,,
residence (such as toamo forhcnm®'
collection to applications for credit
marital dates*, or age-^rf'Ea applicant (j®improvement and debt ©msolidationj; are not
primarily for fee purchase or refinancing, o ffic e r ea cppMcest fe fee-ess&of o
subject to the information collection
corporation): buiSate® fc fee dkaracteristics of
®
o£ an applicant’s, pteieipal re-sideac®;;
requirements of | 202.13(a).
individuals with whom. e applicant isss.
and oth®r transactions in which
affiliated or with whom. the. applicant
coMectio® is- required for certain
Appendix B—Model Application Forms
associates. This means, for example, that
creditors fey a» enforcement agency1 FHLMC/FNMA form—residential loan
under the general rule stated in § 202;4, aunder'the sufesti-tete monitoring.
application. The residential loan application
creditor may not discriminate- against an
picov-iswEs of § 2fl2.13{d)..The residential- applicant because of feat person’s personal
.form (FHLMC 05/FNMA 1003), including
supplemental form (FHLMC 65A/FNMA
loasa application is iiypically used- for
or business dealings wife- members o f a
second mortgages as- wsM as: fee- more
certain religion, because o f the* national- origin, 1003A), prepared by the Federal Home Loan
Corporation and the
limited class of. mortgage leans covered of any persons-associated wife the extension MortgageMortgage AssociationFederal
National
and dated
of credit (such ss fee tenants in the
by | 202.13(a), of the. regulation,, for
October 1988, complies with fee requirements
apartment complex being, financed), or
example.
of this regulation in some transactions but
because o f the race of other residents in the
Revised comments %and' 2 provide
not others' because of the form’s section,on,
neighborhood where fee property offered as
that creditors which are governed solely collateral is located.
“Information for Government Monitoring
by § 202.13(a), should delete,, strike,, or
Purposes.” Creditors that are governed by
: § 202.13(a) of the regulation (which limits
modify fee “Information for Government * * * * *
collection to applications primarily for the
Monitoring Purposes" section when,
Section 202.3—Limited Exceptions for
purchase or refinancing of the applicant’s
using fee FHIMC/ETMMA forma in . ■ Certain Classes of Transactions.
principal residence) should delete, strike, or
transactions, in which they are. not
* * * * *
modify the data collection section on the
permitted to doUect the information.
form when using it for transactions not
3(a) Public utilities credit.
Other creditors may use the forma as
covered by § 202.13(a) to assure that they do
* * * * *
issued m compliance with thete
not collect the information. Creditors that are
3. Telephone companies . A telephone enforcement agency’s Substitute
subject to more extensive collection
company’s credit transactions qualify for the
requirements by a substitute monitoring
monitoring, program.
exceptions provided m § 202.3(a)(2)- only if
program under § 202.13(d) may use fee form
List of Subjects aa 22 CFH Pest
the company is-regulated by a government
as issued, in compliance with the substitute
-

Banks; Banking; Civil rights;

unit or files the charges for service, delayed

program.

9(a)(l)-S are redesignated1comments S(a)(l)-4
through 9(a)(l}-7, respectively.

for Government Monitoring Purposes.” Creditors that are governed by f 202.13(a) of
the regulation (which limits collection to
applications primarily for fee purchase or :
refinancing of fee applicant’s principal
residence) should delete, strike, or modify fee
data collection section on fee form when
using it for transactions not covered by
§ 202.13(a)' to assure that they do not collect
the information. Creditors that are subject to
more extensive collection requirements by a
substitute monitoring program under
§ 202.13(d) may use the' form as issued, in
compliance with that substitute program.
Board of Governors of fee Federal Reserve
System, March 31,1987.
William W. Wiles,
,

2. FHLMC/FNMA form —homepayment, or any discount for prompt payment
Consumer protection; Credit; Federal
improvement loan application. The home- with a government Mail.
Reserve System;- Marital status
improvement and energy loan application
*
*
4
tf
O
discrimination; Minority groups;,
form (FHLMC 7Q3/FNMA 1012), prepared by
Penalties; Religious discrimination; Sex Section 202.9^—Notifications
the Federal Home Loan Mortgage
discrimination;’Women.
*
* *
* *
Corporation and the Federal National
Mortgage Association and dated October
(3) Text of revisions. The revisions t®
Taken,. EGOA 1988, complies with the requirements of the
the commentary (12 CFR Part 202,. Supp, 0(a):Notification of AclionSpecific. Reasons.
Notice, and Statement of
regulation for some creditors but not- others
i) read- as. follows;
because of fee -form’s section on “Information
Current comments 9 fa)(l}m through

PART 202—[AMENDED]
Sepp!em©2*l= € M ,idaI Staff Commentary
f

« * * * • *

Section 202:2—Definitions..
*

2(p)AppLicaticm>
5. CompletedApplication—diligence
requirement. The- regulation defines- a-

completed application to terms feet give a
creditor the latitude to establish its-own
information requirement©.. Nevertheless, fee
creditor must act with reasonable diligence to
collect information needed to complete fee
application. For example, fee creditor should
request information- from' third parties, such
as a credit report, promptly after receiving,
the application. Sf additional information is
needed iro a fee-applicant, such as an
address or telephone number needed: to.
verify employment, th®. creditor should

* * * -

•**'

Paragraph 8(a)(1)
tr 4 ** * *•’
3. Incomplete application,—denial far
incompleteness. When an application is
incomplete regarding matters feat fee
applicant can complete and fee creditor lacks
sufficient data for a credit decision,, fee
creditor may deny the application giving as
fee reason.for denial feat fee application is
incomplete. The creditor has the option,
alternatively, ©f providing a notice-of
incompleteness under | 202.9(c).

Section 202.13—Information For Monitoring
Purposes
Current comment I3fa}-5 is redesignated
13(a}-6.
13(a)-Information to Be Requested'

Secretary of the Board.

[FR Doc. 87-7409 Filed 4-2-S7; 8:45 amj
31LUKG © O 0£ 8210-31-C3

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
ELECTRONIC FUND TRANSFERS
AMENDMENTS TO THE OFFICIAL STAFF COMMENTARY ON REGULATION E

(effective April 1, 1987)

12 CFR Part 2@
§
[R©0. i ; E F T-2]

Etectronlc Fund Transfers; Official
Staff Ccmmentanf Updat®

Board of Governors of the
Federal Reserve System.
ACTION: Final official staff
interpretation.
A©E&!CY:

summary: The Board is publishing

revisions to the official staff
commentary to Regulation E (Electronic
Fund Transfers). The commentary
applies and interprets the requirements
of Regulation E and is a substitute for
individual staff interpretations of the
regulation. The revisions represent final
action on proposed changes published
for comment in December 1986.
EFFECTIVE DATE: April 1,1987.
f u r t h e r in f o r m a t io n : Contact
Sharon Bowman or Heather Hansche,
Staff Attorneys, Division of Consumer
and Community Affairs, Board of
Governors of the Federal Reserve
System, Washington, DC 20551, (202)
452-2412. For the hearing-impaired only,
Telecommunication Device for the Deaf
(TDD), Eamestine Hill or Dorothea
Thompson, (202) 452-3544.
SUPPLEMENTARY INFORMATION: "(1) .

General. The Electronic Fund Transfer
Act (15 U.S.C. 1693 et seq.) governs any
transfer of funds that is electronically
initiated and that debits or credits a
consumer’s account. This statute is
implemented by the Board’s Regulation
E (12 CFR Part 205). Effective September
24,1981, an official staff commentary
(EFT-2, Supp. II to 12 CFR Part 205) was
published to interpret the regulation.
The commentary is designed to provide
guidance to financial institutions in

applying the regulation to specific
situations. The commentary is updated
periodically to address significant
questions that arise. There have been
four updates so far. The proposed
version of this fifth update was
published for comment on December 3,
1986 (51 FR 43615); this notice contains
the final version.
(2) Revisions to Commentary. Four of
the questions included in this
document—-questions 2-12.6, 3-3.6, 711.5, and 9-3.5—are new. Question 2- ■
12.6 addresses systems for paying
government benefits, such as public
assistance, by means of electronic
terminals; it clarifies that Since the
benefits are not disbursed from an
account established by or in the control
of the recipient, Regulation E does not
apply. Question 3-3.6 concerns the
regulation’s coverage of dividend or
interest payments on securities; it has
been modified from the proposed
version to avoid indicating that such
payments are necessarily
“preauthorized” transfers.
Question 7-11.5 deals with the
Regulation D restrictions on payments to
third parties from money market deposit
accounts; it describes the circumstances
under which the institution would be
required by Regulation E to disclose
those restrictions. Question 9-3.5
addresses the practice of including promotional material on ATM or POS
receipts, and is adopted without change
from the proposed version.
The remaining two questions—
questions 9-36 and 11-11.5—are
revisions of existing commentary
provisions; the new material deals with
the treatment of cash-back and cashonly transactions at merchant point-ofsale terminals. These have been adopted
without change from the proposed
versions.

List of Subjects in 12 CFR Part 205

Banks, banking; Consumer protection;
Electronic fund transfers; Federal
Reserve System; Penalties.

Text of Revisions

The revisions to the Official Staff
Commentary on Regulation E (EFT-2,
Supp. II to 12 CFR Part 205) read as
follows:
§ 205.2 Definitions and rules off
construction.

☆.

Q 2-12.6: Fund transfer—electronic
payment of government benefits. A recipient
of government benefits, such as public
assistance or food stamps, receives the
benefits from an automated teller machine or
a staffed electronic terminal. Fpr example,
the recipient presents an identification card
to a clerk, the card is run through an
electronic terminal, the recipient's identity is
verified by some means (such as a
photograph, personal identification number,
or signature), and the benefits are given in
the form of cash, food stamps, or food items.
The benefits are disbursed from an account
of the governmental entity paying the
benefits, not an account established by or in
the control of the consumer. Are these
transactions subject to Regulation E?
A: No, since there is no debit or credit to a
consumer asset account. (See questions 2-4
and 2-12.) (Section 205.2(b) and (g))

§ 205.3 isempttona,

£
r

Q 3-3.6: Payment of dividends or
interest on securities. A payment of interest
or dividends on securities is made by
electronic fund transfer into a consumer’s
account. The payment may be made, for
example, by a discount brokerage firm into
an account at an affiliated depository
institution or, for government securities, by a
Federal Reserve Bank into the consumer’s
account at a depository institution. Is the
transfer covered by Regulation E?
(OVER)

PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 52, NO. 64, pp. 10734-10735.

[Enc. Cir. No. 10165]

A: Yes. The securities exemption does not
apply since there is no purchase or sale of
securities. (Section 205.3(c))

§ 2QB.7

* ' *

initial Disclosure @ T©nwo andl
?

©mdStfon©.
* * * *
Q

7-11.5:

Restrictions on certain deposit

accounts. Regulation D imposes restrictions

on the number of. payments, to- third parties;
that may he made from & money market
deposit account (whether made by electronic
or nonelectronic means). I f an institution,
chooses to-implemenPthe resfrictions by
Eefhsing' to execute transfers that' would
exceed the limit,, must: it disclose the
Egstrictfons unrier RegulatJon E ae limitations
on the frequency of electronic frrnd'transfers?
A: Yes, limitations on account activity that
restrict the consumer’s ability to-make
electronic fund transfers must be disclosed to
the consumer as part of the Regulation E
disclosures. (Section 205.7(a)(4))

f 205.9

Documentation o f transfers*

ft•

f>
t

Q 8-3.5: Receipts—inclusion o f
promotional material: A financial institution

uses receipts on which there is promotional
material (suck as, discount: coupon© for food
items at restaurants). Is. the: printing, of such

promotional material on receipts.prohibited
by the regulation?'
A: No. The regulation does, however,
mandate that the required receipt information
be set forth clearly; this may be achieved, for
example, by separating it from the
promotional material, In addition,, a consumer
most not be required to surrender the receipt
(or that portion containing the required
disclosures) in order te take advantage o f a
promotion. (Section 205.9(a)]
*
rft ft . * ft
Q, S-3&: Receipts/periodic statements—
type erf transfer, ifflhst degree of specificity is

required on terminal receipts and periodic
statements for the type o f transfer?.
A: Common: descriptions; are’ sufficient,.
There ia no<prescribed:terminology,, although
some examples are contained'in the
regulation. On. periodic statements. & is
enough simply to show the amount of the
transfer in. the debit or the credit column if
other information on the statement (such as a
terminal location orthird-party name)
enables foe consumer toidentify the type of
transfer. When a consumer obtains cash from
a merchant at a POS terminal in addition to
purchasing,goods, or obtains cash only,.it,is
not necessary to differentiate the transaction
from one involving, only the purchase o f
goods.. (See question 9-27.) (Section.
205.S(a)(3) and (b )(l)Iiii)l

f
t

f
t.

f
t

§•265.t?f

f
t

Q- 11-11.5:

fe r 5 s® v St errors.
© 3 s^

f
t

POS debit-card transactions..

The deadlines for investigating errors are
'extended for all transfers resulting from’POS
debit-card transactions, regardless ©f
whether am electronic torminaii iia involved.
For purposes of these deadlinea, what types
of transactions-ca®.be mewed as^POS-debitcaffd transactions?
A:.PQS debitrcard transactions include a ll
debit card, transactions at merchants’ pointof-sale terminals, including those for cash
only. (Transactions at ATMs, however, ht&
not POS transactions-even though the-ATM
may be is ©merGfa^fo®atfbn]‘M>Sdtebittcasd fraztsactaora gmasrally tefee. piece: et
merchant fosedons but ©Iso-'include m ail
telephone orders of goods or services
involving a debit card. (Section 205.11(c)(4))

f
t

ft .. : ft. .

-t
f

• •>' .
<■
$

Board of Governors of the Federal Reserve
System«March 30,1087.
>
Wiffiam-W. W ise,

Secretary'of the Board.
[FR Doc. 87-744M Filed 3-2-87; &45 am); '
5
SILLING CODE ©210-01-C3

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
TRUTH IN LENDING
AMENDMENTS TO THE OFFICIAL STAFF COMMENTARY ON REGULATION Z
(effective April 1, 1987)

FEDERAL MESERWE SYSTEM
. 12 CFR Part 22®
[(Flog. gjTSL-U

T
rafifii Sn
o

Official SMI?

Update
Ikfard of Governors; of fee
Federal Rescue System.
ACTUCSa: Final official staff
interpretation.
SUMMARY: The Hoard is pabbshisg m
final iorm change to the official staff
commentary to Regulation Z jjTroih hi
Lending). The sommentary applies and
interprets fee ge^mFem^ite of
Regulation Z and is a substitute fsy
individual staff iaterpreSaitigass of tfes
regulation. The revisions address a
variety ,©f questions that have arisen
©bout tbs regulation, and include mew
material and changes in exists^*
material.
As a result of the increased use of
home-equity lines of credit and second
mortgage loans, partly due to the new
limitations on the deductibility of sonbusiness interest expanses raider the
revised federal tax laws, the Board has
received a number of inquiries
concerning real eatate-sessred
extensions of credit. These qisesttoee are
adkkesml by several esviskma, @sse @
?
whic^ clarifies fee rides feat apply when
a credit©? adds g security mterest fin the
consumer’s principal dwelling to a
transaction feat was prevte^ely exempt
from the regulafen.
The update feshides a variety of ofesr
revisions ksdtodEg dariSfcatkjn ®5 the
exception from the finance charge for
participation or membership fees under
§ 226.4(c)(4), and clarification of the
prohibition against offsetting a
consumer’s credit card indebtedness
with funds from a deposit account held
with a. credit card issuer under ,
| 226.12(d).

Subpart A—General
Section 226.2—Definitions and Rules
1987.
of Construction— 2(a) Definitions—
2(a)(20) “Open-End Credit”, Comment
FyKTOSffi! inform ation : Contact the
2(a)(20}-4 is amended to further clarify
©ATES: Effective April 1,1987, but
compliance optional until October 1,

following attorneys in the Division of
Consumer and Community Affairs at
(202) 452-3667 or (202) 452-3867:
Open-end—Kathleen Brueger, Heather
Hansche, Susan Kraeger
Closed-end—Sharon Bowman, Leonard
Chanin, Adrienne Hurt, Thomas Noto
For the hearing impaired only,
Telecommunications Device for the Deaf
(TDD), Earnestine Hill or Dorothea
Thompson at (202) 452-3544, Board of
Governors of the Federal Reserve
System, Washington, DC 20551.
SUPPLEMENTARY INFORMATION:

(1) General

■ -*
_ •

The Truth in Lending Act (15 U.S.C.
1601 etseq.) governs Consumer credit J
transactions and is implemented by the
Board’s Regulation Z (12 CFR Part 226).
Effective October 13,1981, an official
staff commentary (TIL-1, Supp. 1 to 12
CFR Part 228) was published to interpret
the regulation. The commentary is !'
designed to provide guidance to
creditors in applying the regulation to
specific transactions. The commentary
is Updated periodically to address '
Significant questions that arise. There
have been five general updates so far.
This notice contains the sixth general
update, which was proposed for
comment on December 2,1986 (51 FR
43372). The changes are effective on
April 1,1987. Although creditors are free
. to rely on the provisions as of that date
and are protected if they do so, they
need not follow the revisions until
October 1,1987.
(2) Revisions
The following is a brief description of
the revisions to the commentary: ■ .

that an open-end credit plan may exist
even though the creditor does not
normally impose a finance charge, ,
provided the creditor has the right to
impose a finance charge from time to
time on the outstanding balance.
Section 226.3—Exempt
... i
Transactions— 3(b) Credit Over $25,000
Not Secured by Real Property or a
Dwelling—Comment 3(b)— is amended
2
to clarify that an open-end credit plan
which was exempt from the regulation’s
coverage under § 226.3(b) becomes
subject to the regulation when a security
interest is taken in any real, property, or
in personal property used or expected to
be used as the consumer’s principal
dwelling. As a result, creditors must give
the consumer an initial disclosure
statement reflecting the current account
terms at the time such security interest
is taken, and comply with the other
provisions of the regulation applicable
to open-end credit. If the security
interest that is taken is in the
consumer’s principal dwelling, the
creditor must also give the consumer the
right to rescind the security interest.
Comment 3(b)-3 is amended to correct
the reference to the $25,000 limitation
and to add a reference to the consumer’s
principal dwelling in the first sentence.
In addition, the caption “Refinanced
obligations" has been changed to
“Closed-end credit—subsequent
changes" to more closely parallel the
language used in the caption for the
preceding comment on open-end credit.
The revisions clarify the rule that
disclosures for previously exempt
closed-end credit transactions are
required only when the existing
obligation is satisfied and replaced by a
mew obligation. A cross reference to the
commentary to § 226.23(a)(1), which

PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 52, NO. 65, pp. 10875-10880.

[Enc. Cir. No. 10165]

discusses the right of rescission when a
security interest in a consumer's
principal dwelling is added to a
previously exempt transaction, has also
been added to the comment.
Section 226.4—Finance Charge—4(c)
Charges Excluded from the Finance
Charge—Paragraph 4(c)(4). Comment
4(c)(4)— is amended and a new
1
comment 4(c}(4)-2 is added to clarify the
types of charges that may be treated as
participation or membership fees, and
thus excluded from the finance charge.
Specifically, comment 4(c)(4)— is
1
amended to make clear that a one-time
charge imposed when an account is
opened, such as a loan origination fee,
• may not be treated as a participation
fee. Comment 4(c)(4)— is added to make
2
clear that fees based on either the
degree of account activity or on the
amount of credit available under the
plan (such as a fee based on a
percentage of the credit limit) are not
participation fees and, if imposed, must
be treated as finance charges.
Subpart B— Open-End Credit

Section 226.5—General Disclosure
Requirements—5(b) Time of
Disclosures —5(b)(1) Initial disclosures.

Comment 5(b)(1)-! is revised to make
clear that, in general, the initial
disclosure statement must be provided
to the consumer before the consumer
pays any fees or charges under the plan,
including real estate charges of the type
excluded from the finance charge in
i 226.4(c)(7). However, the comment
would continue to allow imposition of
an application fee (§ 226.4(c)(1)) or
membership fee (§ 226.4(c)(4)) prior to
giving the initial disclosure statement;
any membership fee imposed before the
initial disclosures are given must be
refunded if the consumer rejects the
plan.

Section 226.6—Initial Disclosure
Statement—6(b) Other Charges— .

Comment 6(b)— is amended by adding
1
examples of the types of real estate
charges included in § 226.4(c)(7). In
addition, taxes and filing or notary fees
excluded from the finance charge under
§ 226.4(e) are deleted as examples-of an
“other charge" in comment 6(b)— and
1,
comment 6(b)-2 is amended to include
them as examples of what is not an
“other charge.” Since taxes and filing or
notary fees excluded from the finance
charge under § 226.4(e) must be itemized
and disclosed, it is unnecessary to
specifically require them to be treated
as “other charges" in order to ensure
that they are disclosed to the consumer.
The creditor has the option of either
itemizing and disclosing these fees
separately under § 226.4(e), or including

the fees as part of the initial disclosure
stateritent as an “other charge" under
| 226.6(b). Under either option, the
creditor may disclose the amount of the
fees or, alternatively, an explanation of
how (he amount will be determined. .
6(c) Security Interests. Comments
6(c)-2 and 6(c)— arfe revised to take into
4
account the Board’s Credit Practices
Rule, Subpart B of Regulation AA, 12
CFR Part 227, and the credit practices
rules of the Federal Trade Commission
and the Federal Home Loan Bank Board,
10 CFR Part 444 and 12 CFR Part 535, • •
respectively. These rules declare it^n
unfair or deceptive act or practice for
creditors to take or enforce a
nonpurchase money, nonpossessory
security interest in “household goods,"
as that term is defined by the rules.
Some state laws also limit the , .
availability of security interests in
household goods. Comments 6{c)-2 and
6(c)— have been supplemented with
4
parenthetical statements designed to
alert creditors to the existence of these
restrictions, rather than deleting the
references to “household appliances”
and “household goods" altogether, as
was originally proposed.
Section 226.7—Periodic Statement—
7(f) Amount of Finance Charge. A new
comment 7(f)-8 is added to darify that
finance charges assessed at the time an
account is opened must be disclosed on
the periodic statement if they are
financed under the plan.
7(h) Other Charges. Comment 7(h)-l
is amended to make clear that creditors
may disclose real estate-related charges
excluded from the finance charge under
i 226.4(c)(7) as a single amount with a
term such as “closing costs" on the
periodic statement, if the charges were
itemized and described by the same
term on the initial cfisdosure. Creditors
may continue, however, to disdose
these charges on the initial disdosure
statement by explaining how the charge
will be determined (see § 226.6(bl).
Section 226.12—Special Credit Card
Provisions— 12(d) Offsets by Card
Issuer Prohibited—Paragraph 12(d)(2).
Comment lZ[d)[2)-l is revised to clarify
that the security interest exception to
the prohibition on offsetting a
cardholder’s indebtedness ageing? funds
on deposit with the care? issuer does not
include a security interest that is the
functional equivalent of the right of
offset Therefore, security interests
granted by language routinely included
in credit card agreements aFe not within
the exception. For the exception to
apply, there most be some affirmative
indication that the consumer to aware
that a security interest to a condition for
an account (or for more favorable terms

on an account) and specifically Intends
to grant the security interest, fti
addition, to qualify for the exception, a
security interest in the consumer's
deposit account must be obtainable amd
enforceable by creditors generally. Tbs
revised comment eliminates the
examples at the end of the p^evimis
comment since they are msym
incorporated in die pespitoesaeate
discussion.
Section 226.15—Right of Rescission—
15(c) Delay of Creditor's Performance.
Comment 15(c)-l is amended to clarify
that a creditor is not prohibited fr©5»
disbursing funds during the rescissieoi
period when property subject to the
right to rescind is added as security
under an existing open-end eredit plan.
Comment 15(c)-3 is revised to darify
that the examples of actions a e^editor
may take during the rescission period
are permissible actions provided they
are not prohibited by state law or other
requirements. In addition, the caption
“Permissible actions” has been changed
to “Actions during the delay period.”
These revisions were prompted by the
fact that some creditors mistakenly
believed that the regulation authorized
the scsraai of finance charges d ^ isg the
rescission period, even when state few
does not permit the practice. The
revisions make it clear that the : : .u-V:
regulation neither authorizes no® - v
prohibits the listed actions. ?;
!
Subpart C—Closed-End Credit
—Section 226.18—Content of
Disclosures— 18(g) Payment Schedule—
Paragraph 18(g)(2). Comment 18(g)(2)-!
is revised to incorporate a discussion of
transactions in which interest ami
principal payments occur at different
intervals. The revision clarifies that a
creditor may disclose the two series of
payments separately and use an
abbreviated payment schedule for the
interest payments. The revision also
makes clear that this option is available
for transactions in which interest and
principal payments are scheduled on the
same, as well as on different, dates of
the month.
18(m) Security Interest—Comment
18(m)-2, addressing disclosure ©f
nonpurchase money security interests,4s
revised to reflect the existence ©f the
Board's Credit Practices Rule, Subpart B
of Regulation AA, 12 CFR Pari 227, and
the credit practices rules ®f the Federal
Trade Commission, 16 CFR Part 444, and
the Federal Home Loan Bank Board, 12
CFR Part 535. These rules declare it an
unfair or deceptive act or practice for
creditors to take or enforce a
nonpossessory, nonpurchase money
security interest in “household goods,”
as that term is defined by the rules.

Some state laws also limit the
availability of security interests in
household goods. Cossiaent
2 has
therefore been supplemented with a •
parenthetical statement &E33pE3d to - =
alert creditors to the existence of these
restrictions.
Rather than delating the reference to
“household goods” altogether, as was
originally proposed, an echhfional
,example has been provided: ‘"certain .
household items.” Some creditors have ,
expressed reluctance, in Ight of .the
credit practices rales, to use the term
“household goods.” Accordingly, the .
additional lens has been provided m
comment 18(fn)-2 as am alternative
means of describing tMs type of
property, •
Ssctim
■
Disclosure Bequirensents—gS{s]
Refinancing—Paragraph 20(a)(2). The
discussion la comment 20(aX2)-l on
what qualifies as a corresponding
change in the payment schedule is .
deleted as a result of the addition off ,
comment 26{a)(2}-2.
-;
Comment 26{&)(2}-2 m added to clarify
what is a corresponding change m A©
payment ccfesdial® -feat wossM not' - ;:
require m w disclosures* The addition
also makes dear that a reduction In the
annual percentage rate accompanied by
an increase in the term -of the original
obligation is an event requiring new ■
disclosures.
Section 226.23—Right of Rescission—
23(a) Consumer’s Right to Rescind—
Paragraph 23(a)(1). Comment 23(a}(l}-5
is modified to clarify the circumstances
in which the addition of a security
interest to an existing obligation is
rescindable. The revised comment
makes clear that if a security interest in
■ the consameF’s principal (dwelling is
added t® a transaction that was
previously exempt from the regulation
(because it was credit over $25,000 not
secured by real property or a principal •
dwelling), the consumer has the right to
rescind the addition ©f that security
interest even if the existing obligation is
not satisfied and replaced by a mew
obligation. Finally, the term
“preexisting” has been replaced by
“existing” for consistency of
terminology.
23(c) Delay of Creditor's
PerformaM3B—£msmm&
ss
revised to dsrify t e l f a tsxaspfes @
ff
actions a creditor s a y ’take daring f e
rescission period me p<sfmismbhs asd&ms'
provided fees ere not prahibiied.by.
state law of other rsqmlrenieiata. ha ■
addition, fee caption “Penafeaibl®
actions” has been changed to “Actions
during the delay period” to Fewest a
inaor® neutral statement off the ss&pet off

the comment. These revisions were ■
prompted by the fact that some creditors
mistakenly believed feat fee regulaMe®
authorised the accrual off-finance
charges during the rescission period,
even if state law prohibited such a
practice. The revisions-snakeit dean? ’ '
that the regulation neither: authorises
nor prohibits the listed ac&oas.
23(f) Exempt Transactions—ki
December, the Board adopted an
amendment to Regulation Z to redefine
what constitutes a new advance of '
money to a consumer for purposes of the
rescission exemption for refinancings
with the original creditor. Hfede? the
amendment, a new advance of money to
a consumer would no longer include
amounts attributed solely to the costs of
the refinancing. Comment 23(f)-4 has
been changed to incorporate the revised
definition of a new advance of money in
a refinancing with the original creditor
and to further explain what amounts are
included and excluded when
determining what constitutes a new advance. In a refinancing, if the new
“amount financed" exceeds the-unpaid
principal balance, any earned unpaid
finance charges on the existing debt, 1
and the amounts attributable solely for
the costs of the refinancing, the
consumer has the right of.rescission as
to the difference. Final comment 23(f)=4
differs from the proposal in that it
explains that in determining whether
there is a new advance in a refinancing,
creditors may rely on the information .
stated in the latest Truth in Lending *disclosure given to the consumer.'Thus,
for example, if the-actual dollar amount
of refinancing costs determined at the .
time a Joan closes differs from that
reflected in the latest Truth in Lending
disclosure, the creditor may rely on the
amounts contained in the disclosure in
determining whether there is a new advance in the refinancing. A minor
editorial change has also been made in ■
the first sentence of this comment to
clarify that a consolidation is a type of
refinancing: no substantive change is
intended.
.?
■
Appendix D—Multiple-Advance

permitted to make interest payments as
they become due, the interest reserve
.should be disregarded in the -disclosures
and calculations under appendix D. The
comment also provides, however, that iff
a creditor automatically deducts the
interest payments from the interest
reserve rather than allow the consumer
to make the interest payments as they
become due, the estimated interest must
reflect the fact that interest will accrue
on the interest payments as well as the
other loan -proceeds. The comment
explains how to account for that
accrual. ■
Hist off Subjects fa 12 CFR. Part 22(5
Advertising, Banks, Banking,
Consumer protection, Credit, Federal
Reserve System, Finance, Penalties,
Truth in lending.
Pursuant to authority granted in
section 105 off the Truth In Lending Act •
(15 U.S.C. 1604 as amended), the Board
amends the official staff commentary to
Regulation' Z (12 CFR Part 226 Supp. I) :
as follows:.
1. Authority Citation
The authority citation for Part 226
continues to read:
Authority: Sec, 105, Truth in Lending Act,

as amended by sec. 605, Pub. L. 96-221,94
Stat. 170 (15 U.S.C. 1604

et seq.). ,

PART 2 2 6 -W M O E D ] ' /
2. Text off Revisions
-:The commentary (TIL-1, Supplement I
‘ to 12 CFR Part 226) is amended by '
revising comments 2(a)(20)-4, 3(bht2, 3(b)-3, and 4(c)(4)-!; by adding
. comment 4(c){4}-2; by revising the first .;
sentence of comment 5(b)(l)-l; by
revising the third bulleted paragraph
and removing the fourth bulleted . paragraph, off.comment ©(b)— by adding
1;
a new bulleted paragraph at the end of .
comment 6(b)-2; by revising comment ■'
-. ©(c)— by adding parenthetical material.
2;
at the end off comment ©(c)— by adding
4;
Construction Loans
new comment 7(£)-@; by .adding a new
■ Comment Appendix D-5 is added to second-sentence to comment 7(h)-l; by
revising comment 12(d)(2)-!; by addingexplain the way in which “interest
two new sentences at the end of
reserves” for multiple-advance
comment I5(c}-1; -by revising the
construction loans should be treated
heading and second sentence of
when a creditor uses appendix D to
3;
calculate the annual percentage rate and comment 15(c)— by revising comments
1;
disclosures. The final comment provides 18(g)(2)-!, l®(m}-2, 20(a)(2)— by adding
comment 2Q(a){2)~2; by revising
that regardless of the amount of the
comments 23(a)(1)-®, 23(c)-3, and
Interest reserve, it is not treated as a
23(f)— and by adding comment app. -O—
4;
prepaid finance charge. The comment
5, to read as follows:
explains that iff the consumer is

Supplement I—Official Staff
Interpretations
ft

Subpart A — General

Section 226.2—Definitions and Rules of
Construction
2(a) Definitions
it

'
it

2(a)(20) ‘Open-End Credit”
it

i
t

4. Finance charge on an outstanding
.balance. The requirement that a finance
charge may be computed and imposed from
time to time on the outstanding balance
means that there is no specific amount
financed for the plan for which the finance
charge, total of payments, and payment
schedule can be calculated. A plan may meet
the definition of open-end credit even though
a finance charge is not normally imposed,
provided the creditor has the right, under the
plan, to impose a finance charge from time to
time on the outstanding balance. For
example, in some plans, such as certain “china club" plans, finance charge is not
imposed if the consumer pays all or a
specified portion of the outstanding balance
within a given time period. Such a plan could
meet the finance charge criterion, if the
creditor has the right to impose finance
charge, even though the consumer actually
pays no finance charges during the existence
of the plan because the consumer fakes
advantage of the option to pay the balance
(either in full or in installments} within the
time necessary to avoid finance charges.

.ft , . . ; .

- -J. ' '

Section 226.3—Exempt Transactions
f
t

f
t

ft.

3(b) Credit Over $25,000 Not Secured by Real
Property or a Dwelling.
*

.}.*

Open-end credit.

.2.
An open-end credit
plan is exempt under § 226.3(b) (unless
secured by real property o r personal property
used or expected to be used as the
consumer’s principal dwelling) if either of the
. following conditions is met
o The creditor makes a firm commitment to
lend over $25,000 with no requirement of
additional credit information for any
advances.
.
° The initial extension of credit on the line
exceeds $25,000.
If a security interest is taken at a later time
in any real property, or in personal property
used or expected to be used -as the
consumer’s principal dwelling, the plan
would no longer be exempt. The creditor
must comply with all of the requirements of
the regulation including, for example,
providing the consumer with an initial
disclosure statement. I f the security interest
being added is in the consumer’s principal
dwelling, the creditor must also give the
consumer the right to rescind the security
interest. (See the commentary to § 226.15

concerning the right of rescission.)

Closed-end credit—subsequent changes.

A closed-end loan for over $25,000 may later
be rewritten for $25,000 or less, or a security
interest in real property or in personal
property used or expected to be used as the
consumer's principal dwelling may be added
to an extension of credit for over $25,(X ).
X
Such a transaction is consumer credit
requiring disclosures only if the existing
obligation is satisfied and replaced by a new
obligation made for consumer purposes
undertaken by the same obligor. (See the
commentary to § 226.23(a)(1) regarding the
right of rescission when a security interest in
a consumer’s principal dwelling is added to a
previously exempt transaction.)

f
t

Section 226.4—Finance Charge
f
t

f
t

4(c) Charges Excluded from the Finance
Charge
ft

Paragraph 4(c)(4)
1. Participation fees—periodic basis. The

Section 226.6—Initial Disclosure Statement
.*

f
t

r . .f t
.

•

.* • ;

6(b) Other Charges
[ , ■
1. General; examples of other charges.
Under § 226.6(b), significant charges related
to the plan (that are not finance charges)
must also be disclosed. For example: 4 4 4
0 Charges imposed in connection with real
estate transactions such as title, appraisal,
and credit report fees (See § 226.4(c)(7)) * * 4
2.
The following are examples
of charges that are not “other charges’’: 4 4 4
° Taxes and filing or notary fees excluded
from the finance charge under § 226.4(e).

Exclusions.

6(c) Security Interests
f
t

f
t

•/

f
t

Identification of property.

2.
Identification
of the collateral by type is satisfied by
stating, for example, “motor vehicle” or
"household appliances.” (Creditors should be
aware, however, that the federal credit
practices rules, as well as some state laws,
prohibit certain security interests in
household goods.) The creditor may, at its
option, provide a more specific identification
(for example, a model and serial number).
ft

.f t

ft •
•

participation fees mentioned in g 226.4(c)(4)
4.
Additional collateral. 4 4 4 (See comment
do not necessarily have to be formal
6(c)—
2.)
membership fees, nor are they limited to
ft ft
ft' ft
credit card plans. The provision applies to
any credit plan in which payment of a fee is a Section 226.7—Periodic Statement
condition of access to the plan itself, but it
ft ft ft *ft ' -*’■■ * " jdoes not apply to fees imposed separately on
individual closed-end transactions. The fee
7(f) Amount of Finance Charge : '
may be charged on a monthly, annual, or
ft
ft
ft
..‘. A f t * ’ - ^ I ft
other periodic basis; a one-time, non
8. Start-up fees. Foinls, loan fees, and
recurring fee imposed at the time an account
similar finance charges relating to the
is opened is not a fee that is charged on a
opening of the account that are paid prior to
periodic basis, and may not be treated as a
the issuance of the first periodic statement
participation fee.
2.
Participation fees —exclusions. Minimum need not beIf,disclosed on the periodic are
statement.
however, these charges
monthly charges, charges for non-use of a
credit card, and othercharges based on either financed as part of the plan, including
charges that are paid out of the first advance,
account activity or the amount of credit
the charges must be disclosed as part of the
available under the plan are not excluded
from the finance charge by § 226.4(c)(4). Thus, finance charge on the first periodic statement.
However, they need not be factored into the
for example, a fee that is charged and then
annual percentage rate. (See footnote 33 in
refunded to the consumer based on the extent
the regulation.)
to which the consumer uses the credit
f
t
f
t
f
t
f
t
f
t
available would be a finance charge. (See the
commentary to § 2126.4(b)(2).)

f
t

;f
t

Subpart E—Open-End Credit

Section 226.5—General Disclosure
Requirements
ft

* ft

5(b) Time of Disclosures—5(b)(1) Initial
Disclosures
1. Disclosure before the first transaction.

The rule that the initial disclosure statement
must be furnished “before the first
transaction’’ requires delivery of the initial
disclosure statement before the consumer
becomes obligated on the plan. For example,
the initial disclosures must be given before
the consumer-makes the first purchase,
receives the first advance, or pays any fees or
charges under the-plan other than an
application fee or refundable-membership fee
(see below). 4 4 4

f
t

-f
t

7(h) Other Charges
1. Identification. In identifying any "other

charges" actually imposed during the billing
cycle, the type is adequately described as
“late charge” or “membership fee,” for
example. Similarly, “closing costs” or
“settlement costs," for example, may be used
to describe charges imposed in connection
with real estate transactions that are
excluded from the Finance charge under
§ 226.4(c)(7), if the same term (such as
"closing costs") was used in the initial
disclosures and if the creditor chose to .
itemize and individually disclose the costs
included in that term. (See comment 6 (b )-l for
examples of "other charges.")

f
t

Section 226.12—SpecialCredit Card
Provisions
■ft

- - ft

. ft

ft '

12(d) Offsets by Card Issuer.Prohibited . .
Paragraph 12(d)(2)
1. Security interest — limitations. In order to
qualify for the exception stated in
§ 226.12(d)(2), a security interest mu9t be
affirmatively agreed to by the consumer and
must be disclosed in the issuer's initial
disclosures under § 226.0. The security
interest must not be the functional equivalent
of a right of offset; as a result, routinely
including in agreements contract language
indicating that consumers are giving a
security interest in any deposit accounts
maintained with the issuer does not result in
a security interest that falls within the
exception in § 220.12(d)(2). For a security
interest to qualify for the exception under
§ 226.12(d)(2) the following conditions must
be met:
° The consumer must be aware that
granting a security interest is a condition for
the credit card account (or for more favorable
account terms) and must specifically intend
to grant a security interest in a deposit
account. Indicia of the consumer's awareness
and intent could include, for example:
— Separate signature or initials on the
\
agreement indicating that a security
interest is being given
■
— Placement of the security agreement on a
separate page, or otherwise separating the
security interest provisions from other
contract and disclosure provisions
— Reference to a specific amount of deposited
funds or to a specific deposit account
number
-• » •
.
° The security interest must be obtainable
and enforceable by creditors generally. If
other creditors could not obtain a security
interest in the consumer’s deposit accounts to
the same extent as the card issuer, the
security interest is prohibited by
'
§ 226.12(d)(2).
::y

)

' * " *- ' • ~!

Section 226.15—Right of Rescission
☆

15(c) Delay of Creditor's Performance
1. General rule. Until the rescission period
has expired and the creditor is reasonably
satisfied that the consumer has not rescinded,
the creditor must not, either directly or
through a third party:
Disburse advances to the consumer.
° Begin performing services for the
consumer.
° Deliver materials to the consumer.
A creditor may, however, continue to allow
transactions under an existing open-end
credit plan during a rescission period that
results solely from the addition of a security
interest in the consumer’s principal dwelling.
(See comment 15(c)-3 for other actions that
may be taken during the delay period.)

the creditor may, for example:
® Prepare the cash advance check.
° Perfect the security interest.
_• Accrue finance charges during the delay
period. •

Section 226.18—Content of Disclosures
it

' it

18(g) Payment Schedule
it

☆

Paragraph 18(g)(2)
1. Abbreviated disclosure. The creditor
may disclose an abbreviated payment
schedule when the amount of each regularly
scheduled payment (other than the first or
last payment) includes an equal amount to be
applied on principal and a finance charge
computed by application of a rate to the
decreasing unpaid balance. This option is
also available when mortgage-guarantee
insurance premiums, paid either monthly or
annually, cause variations in the amount of
the scheduled payments, reflecting the
continual decrease o f increase in the
premium due. In addition, in transactions
where payments vary because interest and
principal are paid at different intervals, the
two series of payments may be disclosed
separately and the abbreviated payment
schedule may be used for the interest
payments. For example, in transactions with
fixed quarterly principal payments and
monthly interest payments based on the
outstanding principal balance, the amount ot
the interest, payments, w ill change qaaxteriy
as principal'declines. In such, cases, the.
creditor may treat the interest and principal
payments as two,separate series o f
payments, separately disclosing the, number,
amount, and due dates of principal payments,
and, using the abbreviated payment schedule,
the number, amount, and due dates of
interest payments. This, option- may- fee used
when interest and principal are scheduled to
be paid on the same date of the month as
well as on different dates,«£ the-month*. The
creditor using this alternative must disclose
the dollar amount o f the highest and5lowest
payments’ and make reference- to the
variation' in payments.
*
*

-tr ir te
18(m) Security' Interest
*

iti 6
Section 226.20—Subsequent Disclosure.
Requirements 20(a) Refinancings

4
;

Nonpurchase money transactions>.

2.
la
nonpurchase money transactions, the.
property subject to the security interest must
be identified1by item or type. This, disclosure
is satisfied by a general disclosure, o f the
category of property-subject to the, security
interest, such as-"motor vehicles,"'
“securities,” “certain household items," o r
it
it
it
it
it
"household goods." (-Creditors should be
3.
Section
aware, however, that the federal credit
226.15(c) does not prevent the creditor from
practices mites,, as well aa some state laws,
taking other steps during the delay, short of
prohibit certain! security interests in,
beginning actual performance. Unless
hor®eh®M gp®ds>)iAl the; creditor's opfica
otherwise prohibited, such as by state law,

Actions during the delay period.

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Subpart C—Closed-End Credit
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Paragraph 20(a)(2)
1. Annual percentage rate rndneium. A

reduction in the annual percentage rate, with
a corresponding change in the payment
schedule-is oat a refinancing. If de. aanaaalt
percentage rate is subsequently increased
(even though it remains below its original
level) and the increase, is effected, in such a
way that the old obligation is satisfied and
replaced, new disclosures must then be
made.
2. Corresponding change. At eorrespondirtgchange to the payment schedule to implement
a lower anmaal percentage rate- would: be. a
shoetaming'of the maturity, ora rsiuefem ia
the payment amount the mrasberof
payments of an obligation. Tbeexceptem ict

§ 226.2fi(!a){2 )ldoes; net apply if the- maturity is;
lengthened, ori# the paymsmt amount or
number ©f payments is ©Greased beyond that
remaining;on the-existing tmmaGfisjn..
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Section 226.23—Right @f Rescission

23(a) Consumer's Right to,Rescind
Paragraph 23(a)(If
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it-

ia .

Addition of a security interest.

5.
Under
footnote 47,. the addition of a security kUerest
in a consumer's, principal dwelling, ta an
existing obligation, is restitodafele eves if the
existing. obDgatioa is ants aatM kd and
replaced by a new obligation,, and even, if. the
existing, obligation; was- previously exempt
(because, it was credit-.over $25J39Q
.BDtsecured by reai property or a consumer’s
principal, dwelling^.The, right of.rescission
applies; only to the added security interest,
however,, and, not to the erigjnaA ©fahgatioa, to
those, sites tim si only the-1226.23(jb): notice:
need be.-delivered1net new, material
,
disclosures; the- rescission period w ill
to run from the delivery of the aoteue,
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23(c) Delay of Creditor's Performance
it

<
b

St Motions dMrifag' Mi®-1May period. Section
2®.23(g): does not prevent' the creditor from
taking other steps; daring-die dtetey, short of
beginning actual performance. Unless
otherwise-prohibited, such as by steteP&w,
ise-creditor may,, for example*
Prepare tbs- I©s® check
° Perfect the security interest.
° Pteepsse te. disseomit assigsr the
contract to a ttdrd party.
° Accrue Soanes charges durisag the- delay
period.

23(f) Exempt TrtmsmbiQm
it

4. New advances. The exemption in
§ 226.23(f)(2); applies ©oly te refisa ©sings,
(including consolidations) by the original
creditor. If the refinancing involves a now
advance of money, the amount of the new
advance? a Besctodafetei lit delerHiaaaifflg,
whether there is a new advance, a creditor
may rely on the amount financed, refinancing
costs, and other figures stated.ha the fetegt
Tuulbi in Landing- dtscto&ures. provided, ta the
consumer and is not required, to use,, for
example,, more precise, information that raa^
orriy become, available! when, the, lean ia
closed. Foa paeposes, of the right of rescisswin,.
a new adwaasa-does aot fesfede. aroeaeife
ateafaMtsd- solely to the casts ,of therefinancing.. These amounts ’siQaald ifedtad®
§ 22&A{f.}f,7}; daesgss (such- as, afctensays fees
and title eKaisdeatioB and uasasansG fees, if
bona fide and reasonable- to aremsetl. as ^ e ll
as, imurasee psecsajims aad ®th«? e ja g g
fe sg e
that are not &aaaee changes. (Finance
charges,on thanes &8§asactfeor-pQiKt&.fer
example—would not be coss&disred: to
determtou^ whether there: ia a » advaBca
of money in a refinancing since finance
charges ©re-net part ® tojea^omdSnaiced.)
£
Toiillustrate, if the siu©© the- outstanding
£
fwincipal balance plus the gassed cupaid
finance change bs: $5Q Q and the sear ammint
i 8Q
financed to $51,030;. to@a fe® gefinasmefeg
vaojild be, exempt if the extra $1,600 to
attributed safely ta costs financed to
connection with, the seftoanciajg; that em- not

finance charges, Of course, if new advances,
of money are made (for ©sroapfe. ta pay-for
home, improvemeats); and the easeiisner
exesetoes the right ®f rescission!,. toe
consumer must be placed is tfeesssae
position aahs-CHrsfee caaa to pricer to ®afering
into the- sew csodit- tsasaaetton, Thns,. all
amounts of m m ay (M&cfc would tocfe&fe ad
the costs of the refinancing) already psad
the consumer to the creditor or to a third
party as. part of the. refinancing, ©fiQjjid feau©to
be refunded to the consumer,. (Sg® toe
commentary to § 226.23(d)(2) ferfficaiiseHssion
© refunds tottosasusaers:) A Bffiffldef rescission
£
notice applicable to. tnrasnsacliens. irnsvclviag,
s a advances. appears in Appendix M
a sw
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A p pen ds

Loasa
«r *-

QaastructiOB

<
a

5. Interest reserves. In a multiple-advance
construction loan, a creditor may establish an
"interest reserve" to ensure that interest is
paid as it accrues by designating a portion of
the loan to be used for paying the. interest
that accrues on the loan. An interest reserve
is not treated a®a prepaid finance charge,
whether the interest reserve is the same as, or
different from the estimated interest figure
calculated under Appendix D.
° If a creditor permits a consumer to make
interest payments as they become due-, toe
interest reserve should be disregarded in the

disclosures and caleislaboae under Appendix.
D.
0 If a creditorrequires toe establishment of
>
an interest ress^e and; automatically deducts:
interest payments from the reserve amount
rather than allraw. toe consumer to make
interest payments as they become due, the
feet that interest uriLL accrue on those interest
payments as well as the other loan proceeds
mast fee reflected in the calculations and’
disclosures. To reflect the effects o f such
compounding, a creditor should first calculate
interest on the commitment amount
(exclusive of toe- interest reserve)" and then
add the figure obtained by assuming that onehalf of that interest is outstanding at the.
contract interest rate for the entire
construction period. For ©xa®apte, using the
exempte steam roster paragraph A, part Pof
Appendix Ik toe estimated- interest would be
$1,117.68 ($1<0& plus an additional1
S .7'5$23.93"
cafcutated fey- assuming half © $109375 w
5
outstanding at toe contract interest rate for
the entire construction period), aad1
the
estimated annual percentage ra te would be
21.18%.

-C
r

Board of Governors of the Federal Reserve
System, March 31,1987.

William W. Wiles,

Full text of Federal Reserve Bank of New York Circulars : 10165. Official Staff Commentaries

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