Full text of Federal Reserve Bank of New York Circulars : 10204. Amendment to Regulation Z

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FEDERAL RESERVE BANK
OF NEW YORK
No.
November 16, 1987 J
[ Circular

1 0 2 0 4 "1

AMENDMENT TO REGULATION Z
Adjustable Rate Mortgage Caps

To All Depository Institutions in the Second
Federal Reserve District, and Others Concerned:
Follow ing is the text o f a statem ent issued by the Board o f G overnors o f the Federal R eserv e
System :
The Federal Reserve Board has approved a final rule that amends Regulation Z (Truth in Lending)
to implement a provision of the Competitive Equality Banking Act of 1987 regarding adjustable rate
mortgage caps.
The amendment requires creditors that offer adjustable rate mortgages, for both open- and closedend credit, to set a lim it on the maximum interest rate that may be charged. Determination of the maxi­
mum rate is within the creditor’s discretion.
The amendment applies only to closed-end transactions (such as a traditional second mortgage) or
open-end plans (such as home equity lines of credit) entered into on or after December 9, 1987, the
effective date of the law. Under the amendment, creditors are required to specify in their credit contracts
the maximum interest rate that may be imposed during the term of the obligation.

E nclosed — for depository institutions in this D istrict and others who m aintain sets o f the
B o a rd ’s regulations — is the text o f the am endm ent to R egulation Z , w hich has been reprinted from
the F ed era l R egister o f N ovem ber 9 ; copies w ill be furnished to others upon request directed to the
Circulars Division o f this Bank (Tel. No. 2 1 2 -7 2 0 -5 2 1 5 or 5 2 1 6 ). Questions regarding Regulation Z
may be directed to our Compliance Examinations Department (Tel. No. 2 1 2 -7 2 0 -8 1 3 6 ).
E . G e r a l d C o r r ig a n ,

President.

Board of Governors of the Federal Reserve System

TRUTH IN LENDING
AMENDMENT TO REGULATION Z
(e ffe c tiv e D e c e m b e r 9 , 1 9 8 7 )

FED ER A L R E S E R V E SYSTEM
12 C F R P a r t 2 2 6

[Reg. Z; Docket No. R-0613]
T ro th in L e n d in g ; C o m p e titiv e E q u ality
B a n k in g A c t; L im ita tio n s o n in te r e s t
R a te s
AGENCY: B o a rd of G o v e rn o rs of the
F e d e ra l R e s e rv e S y stem .
ACTION: F in al rule.
SUMMARY: T h e B o a rd is rev isin g
R eg u latio n Z (the reg u latio n th at
im p lem en ts the T ru th in Lending A ct) to
im p lem en t s e ctio n 120 4 o f the
C o m p e titiv e E q u a lity B an k in g A c t of
1 9 8 7 . S e ctio n 1 2 0 4 p ro v id e s th at,
e ffe ctiv e D e ce m b e r 9 ,1 9 8 7 , an y
a d ju sta b le ra te m o rtg ag e lo an o rig in ated
by a c re d ito r m u st in clu d e a lim itatio n
on the m a x im u m in te re st ra te th at m ay
ap p ly during the terraosf the lo an . T h e
final rule, in co rp o ra tin g the n ew la w
into R eg u latio n Z, lim its th e s co p e of
se ctio n 12 0 4 to d w e llin g -se cu re d
co n su m e r cre d it, th a t is s u b je ct to the
T ru th in L en din g A c t an d R eg u latio n Z,
in w h ich a c re d ito r m a y m a k e in te re st
ra te c h a n g e s during the term o f the
cre d it o b ligatio n — w h e th e r th o se
c h a n g e s a re tied to an in d e x o r form ula
o r a re w ithin the c re d ito r’s d iscre tio n .
T h e rule ap p lies the s ta tu to ry
req u ire m e n t to b oth c lo s e d -e n d an d

o p en -en d c re d it, A s a re su lt, e ff e c tiv e
D e ce m b e r 9 ,1 9 8 7 , c re d ito rs a re req u ired
to s e t a lifetim e m axim u m in te re st ra te
on all cre d it o b lig atio n s s e cu re d b y a
d w ellin g th a t req u ire v a r ia b le -r a te
d isc lo s u re s u n d er R eg u latio n Z, w h e re
the in te re st ra te m a y in c r e a s e . In
ad d itio n , c re d ito rs offerin g o p en -en d
lin es o f c re d it s e c u re d b y a d w ellin g in
w h ich the c m S t a * l a s tl&e © s n t e a c t e l
right to ch a n g e th e in te re st ra te — the
p erio d ic ra te an d co rre sp o n d in g a n n u al
p e rc e n ta g e ra te — on a n a c c o u n t a re a lso
req u ired to set a lifetim e m axim u m
in te re st ra te a p p lica b le during th e p lan.
T h e rule ap p lies on ly to cre d it
o b lig a tio n s e n te re d in to o n o r a fte r
D ecem b er 9, 1 9 8 7 .
C re d ito rs m u st sp e cify th e lifetim e
m axim u m r a te o f in te re st th a t m a y be^
im p o sed on o b lig atio n s su b je ct to
s e ctio n 1204 in th eir c re d it c o n tr a c ts (th e
in stru m en t sign ed b y th e c o n su m e r th a t
im p o ses p e rs o n a l liab ility ).
D eterm in atio n o f the m axim u m r a te is
w ithin th e c re d ito r’s d isc re tio n . U ntil
O c to b e r 1,1988, c o m p lia n ce w ith s e ctio n
-1204— sp ecify in g the m axim u m in te re st
r a te in c re d it c o n tra c ts — m e e ts the
req u irem en t in R eg u latio n Z th at
c re d ito rs d isc lo s e lim itatio n s on ra te
in c r e a s e s a s p a rt o f the v a r ia b le ra te
d isc lo s u re s fo r o p e n -en d cre d it p lan s
an d c lo s e d -e n d c re d it tra n s a c tio n s .
e f f e c t iv e

BATE: D e ce m b e r 9,1987.

FOF! FURTHER INFORMATION CONTACT:
A d rien n e D. H u rt, S e n io r A tto rn e y ,
D ivision o f C o n su m e r an d C om m u n ity
A ffairs, a t (202) 4 5 2 -2 4 1 2 o r 4 5 2 -3 8 6 7 ; for
the h earin g im p aired only, c o n ta c t
E a rn e stin e Hill o r D o ro th e a T h o m p so n ,
T e le c o m m u n ic a tio n s D e v ice fo r the
D eaf, a t (202) 4 5 2 -3 5 4 4 , B o a rd of
G o v e rn o rs o f the F e d e ra l R e s e rv e
S y ste m , W a sh in g to n , D C 20551.
SUPPLEMENTARY INFORMATION:
1. B a ck g ro u n d
O n A u g u st 1 0 ,1 9 8 7 , the C o m p e titiv e
E q u ality B an k in g A c t of 1987, Pub, L.
1 0 0 - 8 6 ,1 0 1 S ta t. 552, w a s e n a c te d in to
law . S e ctio n 120 4 o f th e a c t p ro v id e s
th at ‘‘[a jn y a d ju s ta b le ra te m o rtg a g e
lo an o rig in a te d b y a c re d ito r sh all
in clu d e a lim itatio n on th e m axim u m
in te re st r a te th a t m a y a p p ly during the
term of th e m o rtg a g e lo a n .” (T h e la w
d o es n ot se t th e m axim u m in te re st ra te .)
A n a d ju sta b le ra te m o rtg a g e lo a n is
d efin ed in s e ctio n 120 4 a s “ a n y lo a n
s e cu re d by a lien on a o n e -to -fo u r fam ily
d w ellin g unit, in clu din g a co n d o m in iu m
unit, c o o p e ra tiv e h ou sin g unit, o r m o b ile
h om e, w h e re th e lo a n is m a d e p u rsu a n t
to an a g re e m e n t u n d er w h ich th e
c re d ito r m a y , from tim e to tim e, a d ju st
the ra te o f in te re s t.” C re d ito rs w h o
re g u la rly e x te n d c re d it fo r p e rso n a l,
fam ily o r h o u seh o ld p u rp o se s a r e
su b je ct to the s ta tu to r y req u irem e n t.
S e ctio n 1 2 0 4 fu rth er p ro v id e s th a t

For this Regulation to be complete, retain:
1) Regulation Z pamphlet, revised effective April 1, 1981.
2) Amendments effective December 3, 1981, April 1, 1982, October 1,
1982, December 31, 1984, April 4, 1985, and December 16, 1986
(printed in slip sheet dated April 1 9 8 7 ; also includes amendments to the
Truth in Lending Act).

3) This slip sheet.
—
4) Official Staff Commentary, effective October 16, 1984.
5) Amendments to the Official Staff Commentary (slip sheet

Furnished on request

dated April

1987).

[Enc. Cir. No. 10204]
PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 52, NO. 216, p. 43178

fa ilu re to co m p ly w ith the s e ctio n is t©
b e tre a te d a s a v io la tio n o f the T ru th in
L en d in g A c t ( T E A ) ; it s p e c ific a lly re fe rs
to th e civ il liab ility a n d a d m in istra tiv e
e n fo rce m e n t p ro v isio n s o f th e a c t,
s e c tio n s 1 3 0 a n d 108, re s p e ctiv e ly . T h e
la w d ire c ts the B o a rd to p re s crib e
re g u la tio n s to c a r r y ou t its purposes*
T h e la w w ill b e co m e e ffe ctiv e on
D e ce m b e r 9 ,1 9 8 7 .
G iven th e b ro a d lan g u ag e o f s e ctio n
1 204, m o st o f the q u e stio n s a b o u t the
la w h a v e c o n c e r n e d th e s co p e o f its
c o v e r a g e . O n S e p te m b e r 1 5 ,1 9 8 7 , th e
B o a rd p u b lish ed fo r p u b lic co m m e n t a
p ro p o sa l to a m en d R eg u latio n Z to
in co rp o ra te th e s u b s ta n c e o f s e ctio n
1 2 0 4 in to the re g u latio n (52 F R 341811).

se e a ls o co m m e n t 6 ( a ) ( 2 ) - 2 an d
co m m e n ts 1 8 { f ) - l a n d 1 8 (f )-6 for
d efin itio n s an d e x p la n a tio n s o f v a r ia b le
ra te o b lig atio n s an d d isclo su re
re q u ire m e n ts). S e c tio n 2 2 6 .3 0 a p p lie s to
cre d it s a le s a s w ell a s to lo a n s.
T h e fo llo w in g a re e x a m p le s o f the
ty p e s o f c lo s e d -e n d tr a n s a c tio n s o r
o p en -en d p lan s th a t a re su b je ct to
§ 2 2 6.30:
° D w e llin g -secu red o p en -e n d lin es o f
cre d it in w h ich the c re d ito r h a s the
c o n tra c tu a l right to m ak e in te re st ra te
T h is n o tic e p ro v id es g u id an ce on a
c h a n g e s during ihe p lan, ev e n if the
n u m b er o f q u estio n s a s k e d by
a d ju stm en ts ap p ly to n e w a d v a n c e s
c o m m e n te rs. (R e fe re n c e s a re m a d e to
on ly. (S ee co m m en t 6 (a )(2 )—2)
v a rio u s s e c tio n s o f R eg u latio n Z (12 C F R
° R e n o g o tia b le ra te m o rtg ag e
P a rt 226) a n d co rre sp o n d in g co m m e n ts
in stru m en ts, d e sc rib e d in co m m e n t
oh th o se s e c tio n s w h ich a re c o n ta in e d in 18(f)- 9 a s a s e rie s o f sh o rt-te rm lo a n s
The Board proposed to limit the sctope of
the O fficial S ta ff C o m m e n ta ry to
w h ere upon m a tu rity the c re d ito r is
the statute to adjustable (interest) rate,
R eg u latio n Z (12 C F R P a rt 226, Supp. I).)
legally o b lig ated to re n e w th e lo a n . (T h e
dwelling-secured consumer credit
M uch o f this g u id a n ce w ill be
legal o b lig atio n o f the p a rtie s to a n
obligations that are subject to the TILA
and Regulation Z— both open-end and ~ in co rp o ra te d into the se v e n th u p d ate to e x te n sio n o f cre d it su b je ct to R eg u latio n
the s ta f f c o m m e n ta ry th a t w ill be
Z is d e te rm in e d b y a p p lica b le s ta te o r
c lo s e d -e n d c r e d it — e n te re d in to o n o r
published! fo r co m m en t in e a rly
o th er la w . S e e g e n e ra lly co m m e n ts
a fte r D e c e m b e r 9 , 1 9 8 7 . T h e re fo re ,
D ecem b er.
1 7 ( c ) ( 1 ) - ! an d 1 7 ( c ) ( l ) - ( 2 )
R e g u la tio n Z d e fin itio n s , e x e m p tio n s ,
55 M ultiple a d v a n c e tra n s a c tio n s
a n d in te rp re ta tio n s w o u ld a p p ly to th e 2. T h e A m e n d m e n t to R eg u latio n Z
d isc lo s e d a s a single tra n s a c tio n , if the
n e w ru le , w h e re a p p lic a b le . U n d e r th e
in te re st r a te on the a d v a n c e s is
T h e B o a rd is ad o p tin g a rule
p ro p o s a l, c r e d ito r s w o u ld b e re q u ire d to
u n k n ow n a t co n su m m a tio n . (S e e
asaon din g R eg u latio n Z to in co rp o ra te
s p e c ify a life tim e in te re s t r a te c a p in th e ir
th® s u b s ta n c e o f s e c tio n 1 2 0 4 into a n ew § 2 2 6 .1 7 (c )(6 )(i) an d co m m e n t 1 7 ( c ) ( 6 ) - l )
c r e d it c o n tr a c ts .
0
R efin an cin g s a s d efin ed in
1 2 3 9 .3 0 in S u b p art D o f th e reg u latio n .
§ 2 2 6 .2 0 ( a ) — e n te re d in to o n o r a fte r
In a d d itio n , te c h n ica l am e n d m e n ts a re
T h e B o a rd re c e iv e d a p p ro x im a te ly 135
b eing m a d s to | 226.1 of R eg u latio n Z, in D e ce m b e r 9 ,1 9 8 7 — of c re d it o b lig a tio n s
pub lic co m m e n ts on the p ro p o sed
th at a re d w e llin g -se cu re d an d th a t a llo w
th e p a ra g ra p h s on a u th o rity ,
am e n d m e n t. A m a jo rity of the
for in te re st ra te ch a n g e s
orgaiM
sation
o
f
the
reg
u
latio
n
,
an
d
c o m m e n te rs a g re e d w ith the B o a rd 's
° A s s u m p tio n s — e n te re d in to o n o r
en fo rce m e n t an d liab ility .
in te rp re ta tio n o f the la w ’s g e n e ra l
a fte r D e c e m b e r 9 , 1 9 8 7 — of c r e d it
S e c tio n 2 2 6 .3 0 lim its the s ta tu to ry
c o v e r a g e a n d the B o a rd ’s p ro p o sed rule
o b lig a tio n s th a t a re d w e llin g -s e c u r e d a n d
req u irem en t, th at a m axim u m in terest
fo r im p lem en ting the law . S om e
th a t a llo w fo r in te re s t ra te c h a n g e s (S e e
ra te be set. to d w e llin g -secu red
c o m m e n te rs d isa g re e d w ith the B o a rd ’s
g e n e ra lly d is c u s s io n of a s s u m p tio n s in
e x te n s io n s o f c o n s u m e r cre d it c o v e re d
in te rp re ta tio n th a t se ctio n 1204 ap p lies
by th e T IL A a n d R eg u latio n Z in w h ich a s e c tio n F o f th is n o tic e )
to o p e n -e n d d w e llin g -secu red p lan s th at
G C red it o b lig atio n s allo w in g to r
cre d ito r m a y m ak e in te re st ra te ch a n g e s.
a re n o t v a ria b le ra te for p u rp o ses of
in te re st ra te c h a n g e s to w h ich a se cu rity
T h u s, the rule ap p lies only to co n su m e r
in te re st in a d w ellin g is ad d e d on or
T IL A d isclo su re s, but in w h ich the
cre d it an d n o t b u sin e ss cred it. A s a
a fte r D e c e m b e r s , 1987
c re d ito r h a s the c o n tra c tu a l right to
resu lt, an a d ju s ta b le ra te b u sin ess
° D w e llin g -secu red c re d it o b lig atio n s
ch a n g e the te rm s o f the p lan, in cluding
p u rp o se lo an is n ot su b ject to § 226.30,
to w h ich a v a r ia b le r a t e fe a tu re is ad d e d
th e right to m a k e in te re st ra te c h a n g e s.
ev en if the lo a n is s e cu re d by a dw elling.
on o r a fte r D e ce m b e r 9 ,1 9 8 7
A small number of commenters
(S ee § 2 2 6 .3 (a ), an d the c o m m e n ta ry to
B. Credit Obligations Not S u bject to
questioned whether open-end credit
th at se ctio n ; s e e a lso § 2 2 6 .2 (a )(1 9 ) for
§ 2 2 6 JO
should be covered at all. Some
the defin ition o f a d w ellin g)
commenters urged limiting coverage to
S e ctio n 2 2 6 .3 0 d o e s not ap p ly to
A.
Credit Obligations Subject to § 226.30 d w e llin g -se cu re d clo se d -e n d
principal dwellings or owner-occupied
dwellings. Other commenters suggested
S e ctio n 2 2 6 .3 0 w ill ap p ly to all clo se d - tra n s a c tio n s a n d o p en -en d c re d it p la n s
that more flexible rules be adopted to
in w h ich the in te re st r a te m a y not
en d cre d it tra n s a c tio n s an d o p en -en d
allow for changes in a maximum interest cre d it p lan s allow in g fo r in te re st ra te
ch a n g e during the term of the o b ligatio n .
rate in certain instances during the term c h a n g e s during the term o f the
T h e re fo re , the follow in g ty p e s of
of an obligation. Most of the
tra n s a c tio n s o r p lan s a re not su b je ct to
o b ligatio n . A s a resu lt, m o st d w ellingcommenters that opposed the proposal
§ 226.30.
s e cu re d e x te n s io n s of cre d it for w h ich
did so because they opposed the law
° “ S h a re d -e q u ity ” o r “s h a re d R eg u latio n Z v a ria b le ra te d isclo su re s
itself, not the Board’s proposed rule
m ust be giv en w ill b e su b je ct to § 226.30. a p p r e c ia tio n " m o rtg ag es a s d e sc rib e d in
c o m m e n t 18 {f)—©
implementing the law.
{S e e § 2 2 6 .6 (a )(2 )n . 12 an d § 226.18(f):
F o llo w in g a fu rth er a n a ly s is of the
law , an d a n a ly s is o f the co m m e n ts, the
B o a rd is n o w ad o p tin g a final rule
im p lem en ting s e ctio n 1204. T h e final
ra le is m u ch the sa m e a s the p ro p o sal
but re fle c ts so m e m in o r re v isio n s. S om e
e d ito rial re v isio n s h a v e b een m ad e to
the re g u la to ry te x t to m o re clo se ly
re fle ct th e lan g u ag e of the s ta tu te a n d to
p ro v id e m o re cla rity . F o o tn o te 50 h as
b een cla rifie d a n d e x p a n d e d to c o v e r
b oth o p en -en d a n d clo se d -e n d cred it.

2

0 T h e in te re st ra te will n e v e r be
higher th an X p e rc e n ta g e p oin ts a b o v e
the in itial ra te of Y%,
0 T h e m axim u m in te re st ra te will not
e x c e e d X% o r the s ta te usury ceiling,
w h ich e v e r is le ss.
T h e fo llow in g s ta te m e n ts w ould not
co m p ly w ith the reg u latio n :
0 T h e in te re st r a te will n e v e r be
higher th an X p e rc e n ta g e p oin ts o v e r the
going m a rk e t ra te .
0 T h e in te re st ra te w ill n e v e r be
h igh er th an X p e rc e n ta g e p oin ts ab o v e
C. Statem ent o f the Cap in Credit
(a r a te to fee d eterm in ed at so m e future
Contracts
point in tim e).
C re d ito rs w ill b e req u ired to sp ecify in
o T h e in te re st ra te w ill not e x c e e d the
th eir c re d it c o n tr a c ts (th e in stru m en t
s ta te u su ry ceilin g w hich is cu rren tly
sign ed th a t c r e a t e s p e rs o n a l liab ility ) a
X%.
m a x im u m in te re s t r a te (a lifetim e c a p )
T h e la tte r e x a m p le d o es not m ean that
th a t co u ld b e im p o sed on cre d it
a cre d it m a y n ot e stab lish a s ta te usury
o b lig a tio n s. C re d ito rs m a y co m p ly w ith
ceilin g a s th e m a x im u m ra te to be
the req u irem en t, for e x a m p le , by
im p osed on a cre d it ob ligatio n , sin ce
a tta ch in g an a d d en d u m to e x istin g
c h o ice of a m axim u m is w ithin the
cre d it c o n tr a c ts , o r typ in g o r stam p in g a c re d ito r’s d iscre tio n . T h e p ro b lem w ith
p ro v isio n o n to th e c re d it c o n tra c t,
the la tte r s ta te m e n t is th at it su g g ests
p ro v id e d th a t su ch m o d ifica tio n s a re
th at if the s ta te u su ry ceilin g la te r
d e e m e d p a rt o f the leg al o b lig atio n
in cre a se s , th en the m axim u m ra te
u n d er a p p lica b le s ta te la w . C re d ito rs
im p osed on the tra n s a c tio n will
m ay s e t the lifetim e c a p a t a n y am o un t
in cre a se , w ithou t sta tin g w h at the o u ter
th ey c h o o s e .
limit of an in c r e a s e in th e ra te m ight be.
O n lo a n s w ith m u ltip le v a ria b le ra te
(S ee e x a m p le u nd er p erm issib le
fe a tu re s, c re d ito rs m a y e s ta b lis h a
sta te m e n ts )
m axim u m in te re st r a te fo r e a c h v a ria b le
A cre d ito r w ou ld be in co m p lia n ce
ra te fe a tu re o r m a y e s ta b lis h on e th at
w ith § 2 2 8 .3 0 b y statin g the m axim u m
w ill ap p ly to a l l F o r e x a m p le , in a
in te re st ra te in term s o f a m axim u m
v a ria b le ra te lo a n th at h a s a n op tion to
an n u al p e rc e n ta g e ra te th at m ay be
c o n v e rt to a fix e d -ra te (w h ich is itself a
im p osed . U n d er an o p en -en d cre d it plan,
v a ria b le ra te fe a tu re ) a cre d ito r m ay set
this w ou ld b e th e co rresp o n d in g
a m a x im u m in te re st ra te on e a c h featu re (n om in al) an n u al p e rce n ta g e ra te . (S ee
(o n e for the in itial v a ria b le ra te featu re
§§ 2 2 8 .6 (a ) an d 2 2 6.7(d ))
an d one for the fix e d -ra te co n v e rsio n
U n d er R eg u latio n Z. § 226.19. early
op tion ) o r m a y e sta b lish o n e m axim u m
T IL A d isclo su re s a re req u ired for c e rta in
in te re st ra te a p p lica b le to all featu res.
clo se d -e n d re sid en tial m o rtg ag e
S ta te la w m a y a llo w an in te re st r a te
tra n s a ctio n s . A lthough the m axim u m
a fte r d efau lt to b e h igh er th an the
in terest ra te set forth in the cred it
c o n tr a c t ra te ; h o w e v e r, the default
c o n tra c t u n d er § 2 2 6 .3 0 m ust be sta te d
in te re st ra te m a y n ot e x c e e d the
w ith ce rta in ty , th at req u irem en t d oes
m axim u m in te re st ra te on a cred it
not a ffe ct the d isclo su re re q u irem en ts of
o b ligatio n th a t is o th e rw is e su b ject to
§ 226.19. T h o s e d isclo su re s m ay
the req u irem en t o f §-226.30.
co n tin u e to be s ta te d a s e s tim a te s,
T h e m a x im u m in te re st ra te m ust be
w h ere a p p ro p ria te . (S ee co m m en t 1 9 ( a ) s ta te d e ith e r a s a sp ecified am o un t or in 2 an d § 2 2 6 .1 7 (c ))
an y o th e r m a n n e r th a t w ou ld allo w the
co n su m e r to e a s ily a s c e r ta in , at the time D. Prospective Application
of en terin g in to the o b lig atio n , w h at the
S e ctio n 226210 d o es n ot c o v e r cre d it
lifetim e ca p w ill b e o v e r the term of the
o b lig atio n s e n te re d in to p rio r to
D e ce m b e r 9 .1 9 8 7 . C o n seq u en tly , new
ob ligatio n . F o r e x a m p le , the follow ing
a d v a n c e s u nd er o p en -en d cre d it p lan s
s ta te m e n ts w ou ld be su fficien tly
ex istin g p rio r to D e ce m b e r 9 ,1 9 8 7 a re
sp e cific:
not su b je ct to § 226.30. M o d ifica tio n s of
0 T h e m axim u m in terest ra te will not
a g re e m e n ts e n te re d into p rio r to
e x c e e d X%.

° F ix e d -r a te m u ltiple a d v a n c e
tra n s a c tio n s in w h ich e a c h a d v a n c e is
d isclo se d a s a s e p a r a te tra n s a c tio n
° F ix e d -r a te b allo o n p ay m en t
m o rtg ag es th a t the c re d ito r m ay , but
d o e s n ot h a v e a leg al o b lig atio n to,
re n e w a t m a tu rity . {T h e leg al ob ligation
of the p a rtie s to a n e x te n s io n of cre d it
su b je ct to R e g u la tio n Z is d e term in ed b y
a p p lica b le s t a t e la w o r o th e r la w .) S ee
g e n e ra lly c o m m e n ts T 7 (c )(l)-1 and
1 7 (c H l}-2 f

3

D e ce m b e r 9 ,1 9 8 7 a re n ot c o v e re d by
§ 226.30; h o w e v e r, if a v a ria b le ra te
fe a tu re is ad d e d on or a fte r D e ce m b e r 9,
1 9 8 7 to a d w e llin g -se cu re d cre d it
o b ligatio n , the o b lig atio n b e co m e s
su b je ct to § 226.30. If a s e cu rity in te re st
in a d w ellin g is a d d e d on o r a fte r
D e ce m b e r 9 ,1 9 8 7 , to a c re d it.o b lig a tio n
w ith a v a ria b le ra te fe a tu re , the
o b lig atio n b e c o m e s su b je ct to § 2 26.30.
In d eterm in in g w h e th e r an ob ligatio n
is e n te re d into on o r a fte r D e ce m b e r 9,
1987, the c o n su m e r’s signing o f the
in stru m en t th at im p o ses p erso n a l
liab ility (w h ich is ty p ica lly d on e a t
clo sin g ) g o v ern s w h e th e r an ob ligatio n
is su b je ct to the req u irem en t in § 2 2 6 .3 0 .
In so m e s ta te s , the signing o f a
co m m itm en t le tte r m a y c r e a te a binding
ob lig atio n , for e x a m p le , co n stitu tin g
“ co n su m m a tio n ” a s d efin ed in
§ 2 2 6 .2 (a )(1 3 ) w h ich req u ires T IL A
d isclo su re s to be g iv en a t th a t tim e. In
this situ atio n , it is still th e a c tu a l d a te o f
the signing o f the lo an d o cu m e n ts th a t
w ould g o v ern w h e th e r the tra n s a c tio n is
su b je ct to § 226.30,

E. Changes in the M aximum Interest
Rate Cap
O n e issu e ra is e d b y s e v e ra l
co m m e n te rs w a s w h e th e r th e req u ired
in te re st ra te c a p on a lo a n co u ld be
ch a n g e d during the term o f the
o b lig atio n . F o r e x a m p le , th ey a sk e d
w h e th e r the m axim u m in te re st ra te
co u ld be ch a n g e d using the ch a n g e in
term s p ro v isio n of R e g u latio n Z,
§ 2 2 6 .9 (c ), o r w h e th e r the m ax im u m
in te re st ra te co u ld be c h a n g e d by the
c re d ito r if a co n su m e r an d a le n d e r
a g r e e d t o c h a n g e s ifr ih e te r m s arid
co n d itio n s o f the orig in al o p en -e n d o r
c lo s e d -e n d c re d it ob lig atio n .
T h e law req u ires th a t a m ax im u m
in te re st ra te b e set fo r th e term o f a
lo an . U n d e r the B o a rd ’s ru le, a c re d ito r
w o u ld n ot be p erm itted to in c r e a s e the
m axim u m in te re st ra te o rig in ally set
u n less the c o n su m e r a n d the c re d ito r
e n te re d into a n ew o b lig atio n . U n d er a n
o p en -en d p lan su b je ct to § 2 2 6 .3 0 , a
c re d ito r c a n n o t ra is e the m axim u m
in te re st ra te on the p lan b y u se o f a
c h a n g e in term s n o tice . If a c re d ito r
w e re p erm itted to u se a c h a n g e in te rm s
n o tic e to in c r e a s e a m axim u m in te re st
r a te th at h a s b een im p o sed on a p lan,
the c re d ito r w ou ld not, in fa c t, h a v e se t
a m axim u m ra te on th e p lan in
a c c o r d a n c e w ith § 226.30.

that it is the only reason that an account
might be called. Although the Board
solicited comment on disclosure of the
right, a few commenters went further, to
say the right itself was undesirable, and
indicated their support for its being
prohibited. Although the Board believes
that disclosure of this matter should be
made, it is not now making it
mandatory. Rather, the Board has
decided to consider the question of such
disclosure as part of a comprehensive
proposal for new home equity line
C o m p etitiv e E q u ality B an k in g A c t untii
disclosures under the TILA that the
O c to b e r 1 ,1 9 8 8 , p ro v id ed th a t the
Board will soon be reviewing. This
req u irem en t in § 2 2 6 .3 0 is m et.
decision is based on the Board’s desire
Transition rules. In so m e in sta n ce s
the req u irem en t to g iv e T IL A d isclo su re s to avoid the unnecessary burden of
F. Assumptions
multiple changes in TILA disclosure
m a y n ot be c o n te m p o ra n e o u s w ith the
forms within a short period of time,
d a te o f signing lo an d o cu m en ts. In
U n d e r the B o a rd ’s p ro p o sa l, the
should the Board decide to propose new
situ
a
tio
n
s
in
w
h
ich
T
IL
A
d
isclo
su
re
s
a
re
a ssu m p tio n o f a n o b lig atio n su b je ct to
home equity line disclosures.
giv
en
b
efo
re
D
e
ce
m
b
e
r
9
,1
9
8
7
an
d
the
the n e w la w w o u ld a llo w fo r a ch an g e in

A n e w m axim u m in te re st ra te cou ld
b e s e t on ly if th e re w a s a refin an cin g a s
d efin ed in § 2 2 6 .2 0 (a ) o f R eg u latio n Z o r
an o p en -en d p lan w a s c lo s e d an d a n ew
one o p en ed . T h u s, m o d ificatio n s of an
e x istin g a g re e m e n t th at do not
co n stitu te a re fin an cin g o r a n ew plan
do not a llo w fo r a ch an g e in the
m a x im u m in te re st ra te c a p s e t u n d er the
origin al a g re e m e n t, ev e n if a d d itio n al
c re d it is-e x te n d e d . If an o p en -en d p lan
su b je ct to § 2 2 6 .3 0 h a s a fixed m atu rity
a n d a c re d ito r re n e w s the p lan a t
m a tu rity , w ith o u t h av in g a legal
o b lig atio n to do so, a n ew m axim u m
in te re st ra te m a y be set a t th at tim e.

p lacin g the m axim u m in te re st r a te c a p
in the c re d it c o n tr a c t— w ill sa tis fy the
R eg u latio n Z req u irem en t, co n ta in e d in
I 2 2 6 .6 (a )(2 )n .l2 an d § 2 2 6 .1 8 (f)(2 ), to
d isc lo s e a lim it on r a te in c r e a s e s on
v a ria b le r a te c lo s e d -e n d tra n s a c tio n s
an d o p en -en d p lan s. In o th e r w o rd s, no
re v is io n s to T ru th in L en d in g d isclo su re
fo rm s to a d d the lim itatio n s on an
in c r e a s e d isclo su re a re req u ired b y this
a m e n d m e n t to R eg u latio n Z to
im p lem en t s e c tio n 120 4 o f the

the m a x im u m in te re st ra te if the
a ssu m p tio n m e t the te s t s e t fo rth in
§ 2 2 6 .2 0 (b ). In § 2 2 6 .2 0 (b ) on ly
a ssu m p tio n s o f p u rch a se m o n e y
re sid e n tia l m o rtg ag e tr a n s a c tio n s , in
w h ich a c re d ito r fo rm ally a s s e n ts to a n
a ssu m p tio n in w ritin g, a re c o n sid e re d
n e w tra n s a c tio n s fox p u rp o se s o f T ru th
in L en din g d isclo su re . A s s e v e ra l
c o m m e n te rs p o in ted out, w h en a n ew
ob ligo r is su b stitu te d fo r the origin al
p a rty to a cre d it o b lig atio n , it e sse n tia lly
b e co m e s a n e w lo an . U n d er the final
rule, for p u rp o se s of § 2 26.30, w h e re an
o b lig atio n s u b je ct to § 2 2 6 .3 0 is assu m e d
a n d the origin al o b lig o r is re le a s e d from
liab ility, the m a x im u m in te re st ra te se t
on the o b lig atio n m a y b e c h a n g e d a s
p a rt of the a ssu m p tio n a g re e m e n t.

signing m a y o c c u r on o r a fte r D e ce m b e r
9 ,1 9 8 7 — thus triggering the § 2 2 6 .3 0
req u irem en t—-the failu re to in clu d e a
m axim u m in te re st ra te d isclo su re in
T IL A d isclo su re s giv en a t the e a rlie r
tim e w ou ld n ot v io la te the T IL A ,
p ro v id ed th a t § 2 2 6 .3 0 is co m p lied
w ith— th at is, th e m axim u m in te re st ra te
is s ta te d in the cre d it c o n tra c t. (S ee
g e n e ra lly d iscu ssio n o f p ro sp e ctiv e
a p p lica tio n in s e ctio n D o f this n o tice )

G. Truth in Lending Disclosure o f
Limitations on Increases
V a rio u s p ro p o s a ls p ro v id in g for
co m p re h e n siv e re v isio n s to T ru th in
L en din g A c t re q u ire m e n ts fo r c lo s e d -e n d
a d ju s ta b le r a te m o rta g e lo a n d isclo su re s
a n d o p e n -e n d h o m e eq u ity lin es of
c re d it a re c u rre n tly b ein g c o n sid e re d for
B o a rd re v ie w . T o re lie v e so m e o f the
b u rd en o f m ak in g m ultiple c h a n g e s in
T1LA d isclo su re s w ith in a sh o rt p eriod
tim e— sh o u ld th e B o a rd a d o p t th ese
p ro p o s a ls — the B o a rd is ad o p tin g an
in terim ru le (a s fo o tn o te 5 0 to § 226.30).
T h e ru le p ro v id e s th a t b e tw e e n
D e ce m b e r 9 ,1 9 8 7 an d O c to b e r 1 ,1 9 8 8
co m p lia n ce w ith § 2 26.30— th a t is,

H. Creditor’s Right To Terminate and
Call a Loan Due Solely Because the
M aximum Interest Rate Cap is Reached
In its S e p te m b e r p ro p o sa l, the B o a rd
e x p re s s e d c o n c e r n ab o u t the p o ssib ility
th a t a c re d ito r m ight term in a te an op en en d p lan an d c a ll the o u stan d in g
b a la n c e p a y a b le in full— so lely b e c a u s e
the m axim u m in te re st ra te ca p is
re a c h e d — cou ld h a v e a n a d v e rs e e ffe ct
on co n su m e rs. S in ce R eg u latio n Z d o es
n ot cu rre n tly c a ll fo r d isclo su re o f this
p a rticu la r right to te rm in ate, the B o a rd
so licite d co m m e n t on w h e th e r a cre d ito r
th at re s e rv e s this right should be
req u ired to s p e c ific a lly d isc lo s e this
fa ct.

3. E co n o m ic Im p a ct S tatem en t'

The Board’s Division of Research and
Statistics has prepared an economic
impact statement on the revisions to
Regulation Z. A copy of the analysis
may be obtained from Publications
Services, Board of Governors of the
Federal Reserve System, Washington.
DC 2 0 5 5 1 , at (2 0 2 ) 4 5 2 -3 2 4 5 .
List o f S u b je cts an 12 C F R P art 226

Advertising, Banks, banking,
Consumer protection, Credit. Federal
Reserve System, Finance, Penalties,
Rate Limitations, Truth in lending.
4. T e x t o f th e R ev isio n s
P u rsu an t to au th o rity g ra n te d in T itle
X II. s e ctio n 1 2 04(b ) o f the C o m p e titiv e
E q u ality B an kin g A c t o f 1987, Pub. L No.
1 0 0 - 8 8 ,1 0 1 S ta t. 552, the B o a rd is
am en d in g R egu lation Z (12 C F R P a rt
226) a s fo llow s:

PART 22®—imUTO OMUEMOON©

1. T h e a u th o rity c ita tio n fo r P a rt 2 2 8 is
A m a jo rity of the co m m e n te rs th at
re v ise d to re a d a s fo llow s:
resp o n d e d to this p a rticu la r issu e s h a re d
Authority: Sec. 105, Truth in Lending Act,
the B o a rd ’s c o n c e r n a b o u t the right an d
as amended by sec. 605, Pub. L 96^-221, 94
su p p o rted d isclo su re o f the right. A few
Stat. 170 (15 U.S.C. 1604 et seq.): sec. 1204(c),
c o m m e n te rs ca u tio n e d th a t highlighting
Competitive Equality Banking Act. Pub. L
this on e right o f term in atio n m ight
100-86,101 Stat. 552.
e n co u ra g e the p r a c tic e or, a lte rn a tiv e ly ,
m ight con fu se a c o n su m e r into thinking
2. Section 228.1 is amended by

4

re v isin g p a ra g ra p h s (a ), (d )(4) a n d (e) to
re a d a s fo llo w s:

Sofepsrt A—Generali
§ 226J Aotterifly, p4orp>@s©, @@v©r©fo5
organization, enforcement

liability.

(a ) Authority. T h is re g u la tio n , k n o w n
a s R e g u la tio n Z , is iss u e d b y th e B o a rd
o f G o v e rn o r s o f th e F e d e r a l R e s e r v e
S y s te m to im p le m e n t th e fe d e r a l T ru th
in L en d in g a n d F a ir C red it B illin g A c ts ,
w h ich a r e c o n ta in e d in title I o f th e
C o n su m e r C re d it P r o te c tio n A c t, a s
a m e n d e d (15 U .S .C . 1601 et seq.). T h is
re g u la tio n a ls o im p le m e n ts title X II,
s e c tio n 1 2 0 4 o f th e C o m p e titiv e E q u a lity
B a n k in g A c t o f 1 9 8 7 (P ub. L. 1 0 0 - 8 0 ,1 0 1
S t a t 5 5 2 ). In fo rm a tio n -c o lle c tio n
re q u ire m e n ts c o n ta in e d in th is
re g u la tio n h a v e b e e n a p p ro v e d b y th e
O ffic e o f M a n a g e m e n t a n d B u d g e t u n d er
the p ro v is io n s o f 4 4 U .S .C . 3501 et seq.
a n d h a v e b e e n a s s ig n e d O M B N o. 7 1 0 0 0199.
<r

☆

*

(d) 46 "

*

Hi

LirafiSsftfoin) ©si ratos.
(4)
S u b p a r t D c o n ta in s ru le s o n o ra i §
d is c lo s u re s , S p a n is h la n g u a g e d is c lo s u re
A c re d ito r s h a ll in c lu d e in a n y
in P u e rto R ic o , re c o r d r e te n tio n , e ffe c t
c o n su m e r c re d it c o n tr a c t s e c u r e d b y a
o n state- la w s , s t a te e x e m p tio n s , an d
d w e llin g a n d s u b je c t to th e a c t a n d this
r a te lim ita tio n s .
re g u la tio n th e m a x im u m in te re s t ra te
*
*
*
<r
6
th a t m a y b e im p o se d during the term o f
th e o b lig a tio n 50 w h en :
(e )
Enforcement and liability. S e c tio n (a ) In th e c a s e o f c lo s e d -e n d cre d it,
108 o f the- a c t c o n ta in s th e
th e a n n u a l p e r c e n ta g e r a te m a y in c r e a s e
a d m in is tr a tiv e e n fo r c e m e n t p ro v isio n s .
a fte r c o n su m m a tio n , o r
S e c tio n s 1 1 2 ,1 1 8 ,1 3 0 ,1 3 1 , a n d 134
(b ) In th e c a s e o f o p e n -e n d c re d it, the
c o n ta in p ro v is io n s re la tin g to lia b ility
a n n u a l p e rc e n ta g e r a te m a y in c r e a s e
fo r fa ilu re to c o m p ly w ith th e
d uring th e p lan .
re q u ire m e n ts o f th e a c t a n d th e
reg u la tio n . S e c tio n 1 2 0 4 (c ) o f T itle X II o f
th e C o m p e titiv e E q u a lity B a n k in g A c t o f
1987, P ub. L N o. 1 0 0 - 8 0 ,1 0 1 S ta t. 552,
in c o r p o r a te s b y r e fe r e n c e a d m in istra tiv e
e n fo rc e m e n t a n d c iv il lia b ility
p ro v isio n s o f s e c tio n s 108 an d 130 o f the
a c t.

By order of the Board of Governors of the
Federal Reserve System, dated November 5.
1987.

W illiam W . W iles.
Secretary o f the Board.

[FR Doc. 87-26049.Filed 11-6-87; 9:16 ami
BILLING COKE 6210-01-1*

3.
A n e w § 2 2 8 .3 0 is a d d e d to S u b p a rt 50 Compliance with this section will constitute
D to re a d a s fo llo w s :
com pliance with the disclosure requirements on

Ssjfepsrt D— Miscellaneous

5

limitations on increases in footnote 12 to
§§ 228.6(a)(2) and 228.18(f)(2) until October 1. 198a