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FEDERAL RESERVE BAMK
OF MEW YORIC
[
Circular No. 10220 1
January 8, 1988
TRUTH IN LENDING
Proposed Changes in Official Staff Commentary on Regulation Z
Comment Invited by January 295 1988
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
The following statem ent has been issued by the Board of G overnors of the Federal Reserve
System:
The Federal Reserve Board has issued for public comment proposed changes to its official staff
commentary to Regulation Z, Truth in Lending. The proposed commentary interprets an amendment to
Regulation Z that requires creditors to provide consumers with more information regarding closed-end
variable-rate mortgage loans secured by the consumer’s principal dwelling.
Comment is requested by January 29, 1988.
Printed on the following pages is the text of the B oard’s notice in this m atter, which has been
reprinted from the Federal Register. Com m ents thereon m ay be sent to the B oard o f G overnors, as
specified in the notice, or to our C om pliance Exam inations D epartm ent, by January 29, 1988.
The proposed com m entary would offer guidance to creditors in com plying w ith the provisions
o f an am endm ent to Regulation Z, w hich becam e effective D ecem ber 2 8 ,1 9 8 7 . C reditors m ay com
ply with either the old rules or those introduced by the am endm ent until October 1, 1988; thereafter
com pliance w ith the new rules is m andatory. The am endm ent requires creditors to provide consum
ers with m ore extensive inform ation about the variable-rate feature o f closed-end adjustable rate
m ortgages (A R M s), w ith longer than one-year maturity secured by the consum er’s principal dw ell
ing. The am endm ent also requires creditors to distribute to prospective borrow ers educational m ate
rials about adjustable rate m ortgages and to provide a more detailed description o f the variable-rate
feature o f those m ortgages. The text o f the am endm ent to Regulation Z will be sent to you shortly.
E. G e r a l d C o r r i g a n ,
President.
PROPOSED CHANGES IN OFFICIAL STAFF COMMENTARY ON REGULATION Z
12C FR Part 22S
[Reg. 2; Doeftet No. KS-0S45A]
Proposed Update to Official Staff
Commentary
agency: Board
of Governors of the
Federal Reserve System.
action: Proposed official staff
interpretation.
summary: The
Board is publishing for
additional comment proposed changes
to the official staff commentary to
Regulation Z (Truth in Lending). The
proposed commentary would offer
guidance to creditors in complying with
the provisions of an amendment to
Regulation Z that is being published in
final form in this issue of the Federal
Register. The regulatory amendment
requires creditors to provide more
information to consumers about certain
closed-end variable-rate loans than is
currently required. The proposed
commentary revisions include new
material as well as numerous technical
changes in existing material.
dates: Comments must be received on
or before January 29,1988.
ADDRESSES: Comments should be
mailed to William W. Wiles, Secretary,
Board of Governors of the Federal
Reserve System, Washington, DC, 20551,
or delivered to the 20th Street courtyard
entrance, on 20th Street between C
Street and Constitution Avenue, NW.,
Washington, DC, between 8:45 a.m. and
5:15 p.m. weekdays. Comments should
include a reference to Docket No. R0545A. Comments may be inspected in
Room B-1122 between 8:45 a.m. and 5:15
p.m. weekdays.
FOR FURTHER INFORMATION CONTACT:
Sharon T. Bowman or Thomas J. Noto,
Staff Attorneys, or Michael S. Bylsma,
Senior Attorney, Division of Consumer
and Community Affairs, Board of
Governors of the Federal Reserve
System, Washington, DC, 20551, (202)
452-3667. For the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), contact Earnestine Hill or
Dorothea Thompson at (202) 452-3544.
SUPPLEMENTARY 8NFORMATSON:
(1) Background
This proposed official staff
interpretation is being published in
conjunction with a final amendment to
Regulation Z that is designed to provide
more information to consumers about
closed-end variable-rate transactions
secured by a consumer’s principal
dwelling with a term greater than one
year. The proposed commentary would
"apply and interpret the regulatory
amendment. Proposed revisions to the
commentary were originally published
for public comment on November 24,
1986 (51 FR 42248), however to obtain as
much input as possible on provisions
that will interpret the regulatory
amendment, the Board is publishing for
additional comment the proposed
changes to the commentary. Following
public comment, it is anticipated that
commentary revisions will be adopted in
final form with compliance optional
until October 1,1988.
The comment period for this proposal
has been limited to 30 rather than the
usual 60 days. The shorter comment
period will ensure that final commentary
provisions are in place as quickly as
possible to assist creditors in complying
with the new amendments to Regulation
Z. The proposed revisions include
material that was originally proposed
for comment in November of 1988, with
a few additions. Additional material is
included, for example, regarding the
definition of a variable-rate "program”
and the treatment of discount features
for disclosure purposes. The major
revisions proposed for the commentary
begin with comment 18(f)(2). Portions of
existing commentary that would
undergo only minor changes have been
reprinted to assist commenters in
understanding the proposed revisions.
(2) Explanation of Revisions
The following is a brief description of
the proposed revisions to the
commentary:
Subpart G—Closed-end Credit
Section 226.17—General disclosure
requirements.
17(a) Form of Disclosures
Paragraph 17(a)(1). Comment 17(a)(1)2 would be amended to clarify that the
general segregation requirement in
§ 228.17(a) does not apply to the
disclosures required under new
§ § 226.19(b) and 226.20(c). The
information contained in the fifth
bulleted paragraph under comment
17(a)(l}—5, which discusses disclosure of
a variable-rate feature on other
documents, would be deleted since
similar information would be required
under new paragraph (f)(2) of § 226.18.
In addition, the ninth bulleted paragraph
under comment 17(a)(l)-5, discussing
negative amortization, would be revised
to change the reference from
| 226.18(f)(3) to new 1 22&18(f)(l)(iii).
17(b) Time of Disclosures
Comment 17(b)—1 would be expanded
by adding a reference to the timing
requirements in new § 228.19(b) for
variable-rate transactions secured by
the consumer’s principal dwelling with a
term greater than one year. Comment
17(b)-2 would be amended by adding a
reference to the timing rules for
additional disclosures required upon the
conversion of open-end transactions to
certain closed-end variable-rate
transactions. 17(c) Basis of Disclosures
and Use of Estimates
Paragraph 17(c)(1). The first bulleted
paragraph in comment 17(c)(l}-2,
discussing preferential employee rates,
would be revised to change the
reference from § 226.18(f) to § 228.19(b).
This change would clarify that certain
preferred-rate employee loans are
variable-rate transactions subject to the
disclosure requirements of new
§ 226.19(b). Material generally relating
to the basis of disclosures for variablerate transactions currently in the
commentary to § 226.18(f) would be
moved to the commentary to
§ 226.17(a)(1) and the material currently
in the commentary to § 226.17(a)(1)
would be reordered to accommodate
this change. Comments 17(c}-8 -9 and
-10, discussing graduated payment
mortgages, Morris plans and number of
transactions would be redesignated,
respectively, as comments 17(c}-12, -14
and -15. Material currently contained in
comments 18(f) -2 and -3, discussing the
basis of disclosures and use of estimates
for variable-rate transactions, would be
added as comments 17(c)(1) -8 and -9.
Comment 17(c)(l)-10 would incorporate
material on discounted variable-rate
transactions currently contained in
comment 18(f)—8. Most of the material
currently in comment 18(f)—6 relating to
the basis of disclosure for certain
variable-rate transactions would be
incorporated in comment 17(c)(1)—11.
Two parts of existing comment 18(F)—6
that do not relate to the basis of
disclosure, namely the reference in the
second bullet to the conditions for
imposition of a shared-appreciation
PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 52, NO. 247
2
feature and the reference to the
hypothetical example in the third bullet,
would be deleted in the new comment
17(c)(1)—
11. The material currently in
comment 18(f)—7, discussing growthequity mortgages, would be
incorporated in new comment-17(c)(1)13, although detailed discussion Of the
option of disclosing by analogy to
variable-rate disclosures would be
deleted in favor of a more general
reference in the new comment 17(c)(1)13.
has become § 226.18(f)(1)Comment 18(f)(2)-l would be added to
clarify that where a variable-rate
transaction is secured by the consumer’s
principal dwelling and has a term
greater than one year, later Truth in
Lending disclosures must state that the
variable-rate feature exists and refer to
the variable-rate disclosures provided
earlier to the consumer under new
§ 226.19(b).
Section 226.19—Certain residential
mortgage transactions.
17(f) Early Disclosures
The title of this section of the
commentary would be revised to read
‘‘Certain Residential Mortgage and
Variable-Rate Transactions” to reflect
the fact that § 226.19 of the regulation
now incorporates disclosure provisions
for variable-rate loans secured by the
consumer’s principal dwelling that have
a term greater than one year.
As a result of the revisions to § 228.19
of the regulation, the reference in
comment 17(f)—3 to § 220.19(b) would be
revised to reference | 226.19(a)(2).
Section 226.18—Content o f disclosures.
18(f) Variable Rate
Comment 18{f}-l would be expanded
to explain whether paragraph (f)(1) or
(f)(2) of | 226.18 applies to a particular
variable-rate transaction. Comment
18(f)—1 would also indicate that
variable-rate loans that are for a term
longer than one year and are secured by
the consumer’s principal dwelling are
subject to the special early disclosure
requirements of new § 226.19(b).
With minor changes, material relating
to the basis of disclosures for variablerate transactions would be moved to the
commentary to § 226.17(c)(1).
Consequently, comments 18(f) -2 and -3
and comments 18{f) -6 through -8 would
be deleted. Present comment 18{f}-4
would be redesignated as comment
18(f)-2. The material currently in
comments 18(f) -2 and -3 would be
incorporated in comments 17(c)(1) -8
and -9, and the material currently in
comments 18(f)—8, -7 and -8 would be
incorporated, respectively, in comments
17(c)(1)—11, -13 and -12. The material
currently in comment 18(f)—5 would be
incorporated in the commentary to new
| 226.19(b), which contains the new
disclosure requirements. The material
currently in comment 18(f)-0 would be
incorporated in new comment 19{b)-4 to
clarify that the designated transactions
are subject to the general disclosure
requirements of new § 226.19(b). The
material currently in comment 18(f}-8
relating to the basis for disclosures
would not be transferred to new
comment 19(b)-4, since such information
would be incorporated in comment
17(c)(l}-12.
The current headings referring to
paragraphs 18(f)(1) through (4) would be
changed to reference paragraphs
18(f)(l)(i) through (iv) to reflect the fact
that current § 226.18(f) of the regulation
19(a) Time of Disclosure
The current heading referring to 19(a)
would be redesignated as 19(a)(1).
Existing comments 19(a)-l through
19(a)-5 would therefore become
comments 19(a)(1) -1 through -5.
19(b) Redisclosure Required
The current heading referring to 19(b)
would be redesignated as 19(a)(2).
Existing comments 19(b)-l through
19(b)-4 would therefore become
comments 19(a)(2) -1 through -4.
Comment 19(b)—
1 would be added to
clarify that the new requirements of
§ 226.19(b) apply to all variable-rate
transactions secured by the consumer’s
principal dwelling with a term greater
than one year.
Comment 19(b)-2 would be added to
explain the special timing rules under
§ 226.19(b) for cases where applications
are received through an agent or broker
or by telephone, as well as where openend accounts convert, pursuant to a
written agreement, to transactions
subject to | 226.19(b).
- Comment 19(b}-3 would incorporate
material previously contained in
comment 18(f)—5 to clarify that creditors
may substitute information provided in
accordance with the variable-rate
regulations of other federal agencies for
the disclosures required by § 226.19(b).
The reference to footnote 43 and
§ 226.18(f) in old comment 18(f)-5 would
be revised to reference footnote 45a and
§ 226.19(b), respectively, in the new
comment 19(b)-3.
Comment 19(b)—
4 would incorporate,
with some changes, material previously
contained in comment 18(f)—6 clarify
that the designated transactions are
subject to the general disclosure
requirements of §226.19(b). The last
3
sentence in the first bullet under old
comment 18(f)-6 referring to the
disclosures that must be given for
renegotiable rate mortgages would be
deleted in the new comment 19(b)—4, as
would the third and fourth sentences in
the second bullet dealing with
disclosures for shared-equity mortgages.
The language in the third bullet under
old comment 18(f)—
6 would be revised in
the new comment 19(b)-4 to take into
account transactions where the initial
underlying rate is fixed, and the
reference to the hypothetical example in
the last sentence would be deleted.
Paragraph 19(b)(1) Comment 19(b)(1)—
1 would be added to clarify what
constitutes a suitable substitute for the
Consumer Handbook on Adjustable
Rate Mortgates.
Paragraph 19(b)(2). Comment
19(b)(2)—1 would be added to explain
that a creditor must provide disclosures
for each of its variable-rate programs in
which the consumer expresses an
interest.
Comment 19(b)(2)—2 would be added
to clarify what constitutes a separate
loan program that would require
separate program disclosures. Comment
19(b)(2)—3 would be added to clarify that
the disclosures required under
§226.19(b)(2) need only be made as
applicable, and comment 19(b)(2)—4
would be added to explain the
circumstances under which a creditor
must revise its loan program disclosures.
Comments to new | 229.19(b)(2)(i)
through (xiv) would be added to clarify
the requirements imposed by these
paragraphs and to illustrate how a
creditor may comply with the new
provisions.
Section 226.20—Subsequent disclosure
requirements.
20(a) Refinancings
Comment 20(a)-3 would be amended
to clarify that the addition of a variablerate feature to an obligation or an
increase in the rate based on a
previously undisclosed variable-rate
feature are events requiring disclosures
under new § 226.19(b)(2) if the variablerate transaction is secured by the
consumer’s principal dwelling and has a
term greater than one year. The
comment explains that, in such cases,
disclosures must be given at the time of
the addition or increase.
20(b) Assumptions
Comment 2O(b)-0 would be amended
to provide that assumptions of variablerate transactions secured by the
consumer’s principal dwelling with a
term greater than one year may be
disclosed in accordance with
| 226.18(f)(2)(ij or | 226.18(f)(1).
20(c) Variable-Rate Adjustments
Comment 20(c)-l would be added to
explain what subsequent disclosures are
required in cases where a rate
adjustment is made in a variable-rate
transaction subject to new § 28.19(b).
Comment 20(c)-2 would clarify that
shared-equity loans and preferred-rate
employees loans with an underlying
fixed rate would be exempt from the
new subsequent disclosure requirements
of § 226.20(c).
Appendix H-Closed-End Model Forms
and Clauses
Commentary would be provided to .
interpret the new model clauses H-4(B)
through H-4(D) in Appendix H of the
regulation. These additions would be
numbered as comments app. H-5
through -7. In addition commentary
describing new Sample H-14 would be
added as comment app. H-18.
Consequently, existing comments app.
H-5 through -14 would be renumbered
as comments app. H-8 through -17 and
existing comments app. H-16 through
-20 would be renumbered as comments
app. H-19 through -23.
List of Subjects in 12 CFR Part 228
Advertising, Banks, Banking,
Consumer protection, Credit, Federal
Reserve System, Finance, Penalties,
Rate limitations, Truth in lending.
Certain conventions have been used
to highlight the proposed revisions. New
language is shown inside arrows, while
language that would be deleted is set off
with brackets. Pursuant to authority
granted in section 105 of the Truth in
Lending Act (15 U.S.C. 1604 as
amended), the Board proposes to amend
the official staff commentary to
Regulation Z (12 CFR Part 226 Supp. I)
as follows:
P m i 226—[AMENDED]
(1) The authority citation for Part 226
continues to read:
Authority: Sec. 105. Truth in Lending Act,
as amended by sec. 605, Pub. L. S8-221, 94
Stat. 170 (15 U.S.C. 1604 e t seq.)\ sec. 1204(c).
Competitive Equality Banking Act, Pub. L
1 0 0 - 8 6 ,101 Stat. 552.
(2) Text o f proposed revisions. The
proposed revisions to the commentary
(12 CFR Part 226 Supp. I) include
revising comment 17(a)(1)—2; removing
the information contained in the fifth
bullet under comment 17(a)(l)-5 and
changing the reference in the ninth
bullet under this comment from
| 226.18(f)(3) to § 226.18(f)(l)(iii);
revising comment 17(b)—1; changing the
reference in the first bullet under
comment 17(c)(1)—2 from | 226.18(f) to
§ 226.19(b); redesignating existing
comment 17(c)(1)—
S as comment
17(c)(l)-12; redesignating existing
comments 17(c)(l}-9 and 17(c)(l)-10 as
comments 17(c)(l)-14 and 17(c)(l)-15,
respectively; adding new comments
17(c)(1)—
S through 17(c)(l)-ll and
17(c)(l)-13; changing the reference in
comment 17(f)—3 from § 226.19(b) to
i 226.19(a)(2); revising comment 18(f)—
1;
deleting comment 18(f)—
2; redesignating
existing comment 18(f)—4 as comment
18(f)-2; deleting comments 18(f)—3
through 18(f)-8; redesignating comments
18(f)(1)-!, 18(f)(2)-!, 18(f)(3)-!, 18(f)(4)-!
and 18(f)(4)—2 as comments 18(f)(l)(i)-l,
18(f)(l)(ii)-l, 18(f)(l)(iii)-l, 18(f)(l)(iv)-l,
and 18(f)(l)(iv)-2, respectively; adding
new comment 18(f)(2)-!; revising the
title to the commentary to § 226.19;
redesignating paragraphs 19(a) and 19(b)
as paragraphs 19(a)(1) and 19(a)(2),
respectively; redesignating comments
19(a)-l through 19(a)—5 as comments
19(a)(1)-! through 19(a)(l)-5 and
comments 19(b)—1 through 19(b)-4 as
19(a)(2)-! through 19(a)(2)—
4; adding
new comments 19(b)—1 through
19(b)(2)(xiv)-l; revising comment
20(a).3; revising comment 20(b)-6 and
adding comments 20(c)-! and 20(c)-2;
amending the commentary to Appendix
H by redesignating comments app. H-5
through app. H-20 as app. H-8 through
H-23, adding new comments app. H-5
through app. H-7, and revising newly
redesignated comment app. H-18, to
read as follows:
Sopplemeat I—Official Staff
Interpretation
■' ~ '
a
*
* -
*
*
§ 226.17 —G en era l d isc lo su re requ irem en ts.
17(a) Form o f D isclo su res
P aragraph 17(a)(1)
2.
S egregation o f d isclo su res. The
disclosures may be grouped together and
segregated from other information in a
variety of ways. For example, the disclosures
may appear on a separate sheet of paper or
may be set off from other information on the
contract or other documents:
Q By outlining them in box.
° By bold print dividing lines.
® By a different color background.
° By a different type style.
s>(The general segregation requirement
described in this subparagraph does not
apply to the disclosures required under
§ 226.19(b) and 226.20(c) although the
disclosures must be clear and
conspicuous.) <a
*
*
*
*
*
4
5. D ire c tly rela ted . * * *
[° When a variable-rate feature is
disclosed on other documents " * *.J
*
*
*
*
*
® A brief reference to negative
amortization in variable-rate transactions.
For example, in the variable-rate disclosure,
the creditor may include a short statement
such as “Unpaid interest will be added to
principal.” (See the commentary to
[§ 228.18{f)(3)]!S>226.18(f)(l)(iii)<3.) r
*
*
*
*
*
1 7(b) T im e o f D isclo su res
1 . Consummation. As a general rule,
disclosures must be made before
“consummation” of the transaction. The
disclosures need not be given by any
particular time before consummation, except
in certain mortgage transactions 6 >and
variable-rate transactions secured by the
consumer’s principal dwelling with a term
greater than one year<a under § 226.19. (See
the commentary to §226.2(a))13) regarding the
definition of consummation.)
2 . Converting open-end to closed-end
credit. If an open-end credit account is
converted to a closed-end transaction under
a written agreement with the consumer, the
creditor must provide a set of closed-end
credit disclosures before consummation of
the closed-end transaction. s*>(See the
commentary to § 226.19(b)(2) for the timing
rules for additional disclosures required upon
the conversion to a variable-rate transaction
secured by a consumer’3 principal dwelling
with a term greater than one year.)«a If
consummation of the closed-end transaction
occurs at the same time as the consumer
enters into the open-end agreement, the
closed-end credit disclosures may be given at
the time of conversion. * * *
17(c) B asis o f D isc lo su res a n d U se o f
E stim a te s
Paragraph 17(c)(1)
*
*
*
*
*
2. Modification of obligation. 1 3 0 0
e If the creditor-employer offers a
preferrential employee rate, the disclosures
should reflect the terms of the legal
obligation. (See the commentary to section
[226.18(f)] s> 226.19(b) <3 for an example of a
preferred-rate employee transaction that is a
variable-rate transaction.)
*
*
*
*
*
®>8 . Basis of disclosures in variable-rate
transactions. The disclosures for a variablerate transaction and must be based on the
terms in effect at the time of consummation.
However, in a variable-rate transaction with
either a seller buydown that is reflected in
the credit contract or a consumer buydown,
disclosures should not be based solely on the
initial terms. In those transactions, the
disclosed annual percentage rate should be a
composite rate based on the lower rate for
the buydown period and the rate that is the
basis of the variable-rate feature for the
remainder of the term. (See the commentary
to §226/l7(c) for a discussion of buydown
transactions and the commentary to
§ 226.19(a)(2) for a discussion of the
redisclosure of certain residential mortgage
transactions with a variable-rate feature).
9. Use of estimates in variable-rate
transactions. The variable-rate feature does
not, by itself, make the disclosures estimates.
1 0 . Discounted variable-rate transactions.
In some variable-rate transactions, creditors
may set an initial interest rate that is not
determined by the index or formula used to
make later interest rate adjustments.
Typically, this initial rate charged to
consumers is lower than the rate would be if
it were calculated using the index or formula.
However, in some cases the initial rate may
be higher. In a discounted transaction, for
example, a creditor may calculate interest
rates according to a formula using the sixmonth Treasury bill rate plus a 2 percent
margin. If the Treasury bill rate at
consummation is 1 0 percent, the creditor may
forgo the 2 percent spread and charge only 1 0
percent for a limited time, instead of setting
an initial rate of 1 2 percent.
0 When creditors use an initial interest
rate that is not calculated using the index or
formula for later rate adjustments, the
disclosures should reflect a composite annual
percentage rate based on the initial rate for
as long as it is charged and. for the remainder
of the term, the rate that would have been
applied using the index or formula at the time
of consummation. The rate at consummation
need not be used if a contract provides for a
delay in.the implementation of changes in an
index value. For example, if the contract
specifies that rate changes are based on the
index value in effect 45 days before the
change date, creditors may use the index
value in effect not more than 45 days before ,
consummation in calculating a composite
annual percentage rate.
® The effect of the multiple rates must also
be reflected in the calculation and disclosure
of the finance charge, total, of payments, and
payment schedule.
° If a loan contains a rate or payment cap
that would prevent the initial rate or
payment, at the time of the first adjustment,
from changing to the rate determined by the
index or formula at consummation, the effect
of that rate or payment cap should be
reflected in the disclosures.
° Because these transactions involve
irregular payment amounts, an annual
percentage rate tolerance of Vt of 1 percent
applies, in accordance with § 226.22(a)(3) of
the regulation.
° Examples of discounted variable-rate
transactions include—
—A 30-year loan for $100,000 with no prepaid
finance charges and rates determined by
the Treasury bill rate plus 2 percent. Rate
and payment adjustments are made
annually. Although the Treasury bill rate at
the time of consummation is 1 0 percent, the
creditor sets the interest rate for one year
at 9 percent, instead of 12 percent
according to the formula. The disclosures
should reflect a composite annual
percentage rate of 11.63 percent based on 9
percent for one year and 12 percent for 29
years. Reflecting those two rate levels, the
payment scheduled should show 1 2
payments of $804.62 and 348 payments of
$1,025.31. The finance charge should be
[8 .J s>1 2 «s. G ra d u a ted -p a y m en t a d ju sta b le$226,463.32 and the total of payments
r a te m ortgages. * * *
$366,463.32.
o l3 . G ro w th -eq u ity m ortgages. Also
—Same loan as above, except with a 2
referred to as payment-escalated mortgages,
percent rate cap on periodic adjustments.
these mortgage plans involve scheduled
The disclosures should reflect a composite
payment increases to prematurely amortize
annual percentage rate of 11.53 percent
the loan. The initial payment amount is
based on 9 percent for the first year, 11
percent for the second year, and 1 2 percent determined as for a long-term loan with a
for the remaining 28 years. Reflecting those >fixed interest rate. Payment increases are
scheduled periodically, based on changes in
three rate levels, the payment schedule
an index. The larger payments result in
should show 12 payments of $804.62, 12
accelerated amortization of the loan. In
payments of $950.09, and 336 payments of
disclosing these mortgage plans, creditors
$1,024.34. The finance charge should be
may either:
S265.234.76, and the total of payments
° Estimate the amount of payment
$365,234.76.
increases, based on the best information
—Same loan as above, except with a 7Vz
reasonably available: or
percent cap on payment adjustments. The
° Disclose by analogy to the variable-rate
disclosures should reflect a composite
disclosures in § 226.18(f)(1).
annual percentage rate of 11.64 percent,
(This discussion does not apply to growthbased on 9 percent for one year and 12
equity mortgages in which the amount of
percent for 29 years. Because of the
payment cap, five levels of payment should payment increases can be accurately
determined at the time of disclosure. For
be reflected. The payment schedule should
these mortgages, as for graduated-payment
show 12 payments of $804.62,12 payments
of $864.97,12 payments of $929.86,12
mortgages, disclosures should reflect the
payments of $999.60, and 312 payments of
scheduled increases in payments.)
$1,070.03. The finance charge should be
[9.]d>14.<] M orris Plan tran sa ctio n s.* * *
$277,037.96, and the total of payments
[1 0 .] o l S . o N u m b er o f tra n sa ctio n s.* * *
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$377,037.96.
This paragraph does not apply to variablerate loans in which the initial interest rate is
set according to the index or formula used for
later adjustments but is not set at the value of
the index or formula at consummation. For
example, if a creditor commits to an initial
rate based on the formula on a date prior to
consummation, but the index has moved
during the period between that time and
consummation, a creditor should base its
disclosures on the initial rate.
11.
O th e r v a ria b le -ra te tran saction s.
Examples of variable-rate transactions
include:
0 Renegotiable rate mortgage instruments
that involve a series of short-term loans
secured by a long-term obligation, where the
lender is obligated to renew the short-term
loans at the consumer’s option. At the time of
renewal, the lender has the option of
increasing the interest rate. Disclosures must
be given for the longer term of the obligation,
with all disclosures calculated on the basis of
the rate in effect at the time of consummation
of the transaction.
° “Shared-equity" or “sharedappreciation” mortgages that have a fixed
rate of interest and an appreciation share
based on the consumer's equity in the
mortgaged property. The appreciation share
is payable in a lump sum at a specified time.
Disclosures must be based on the fixed
interest rate. (As discussed in § 226.2, other
types of shared-equity arrangements are not
considered "credit" and are not subject to
Regulation Z.)
° Preferred-rate employee loans where the
terms of the legal obligation provide that the
rate will increase only if the employee leaves
the employ of the creditor and the note
reflects the preferred rate. The disclosures
are to be based on that rate.
Graduated-payment mortgages and step-rate
transactions without a variable-rate feature
are not considered variable-rate
transactions.-^
5
17(f) E arly D isclo su res
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3.
C ontent o f n e w disclo su res. If
redisclosure is required, the creditor has the
option of either providing a complete set of
new disclosures, or providing disclosures of
only the terms that vary from those originally
disclosed. (See the commentary to section
[226.29(b)] o228.19(a)(2)o.)
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Section 226.18—-Content of disclosures.
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18(f) V ariable R a te
l.
C overage. The requirements of § 226.18(f)
apply to all transactions in which the terms
of the legal obligation allow the creditor to
increase the rate originally disclosed to the
consumer. It includes not only increases in
the interest rate but also increases in other
components, such as the rate of required
credit life insurance. The provisions,
however, do not apply to increases resulting
from delinquency (including late payment),
default, assumption, acceleration or transfer
of the collateral. s>Section 226.18(f)(1) applies
to variable-rate transactions that are not
secured by the consumer’s principal dwelling
and to those that are secured by the principal
dwelling but have a term of one year or less.
Section 226.18(f)(2) applies to variable-rate
transactions that are secured by the
consumer’s principal dwelling and have a
term greater than one year. Moreover,
transactions subject to § 226.18(f)(2) are
subject to the special early disclosure
requirements of § 226.19(b). Creditors are
permitted under footnote 43 to substitute in
any variable-rate transaction the disclosures
required under § 226.19(b) for those
disclosures ordinarily required under
§ 226.18(f)(1). Creditors who provide variablerate disclosures under § 226.19(b) must
comply with all of the requirements of that
section including the timing of disclosures,
and must also provide the disclosures
required under § 226.18(f)(2). Creditors
utilizing footnote 43 may, but need not, also
provide disclosures pursuant to § 226.20(c).
(Substitution of disclosures under
§ 226.18(f)(1) in transactions subject to
§ 226.19(b) is not permitted under the
footnote.) <1
[2 . B a sis f o r disclo su res. * * *
[Use o f e s tim a te s * * *
[4.] e>2.< 3 T erm s u sed in d isc lo su re .* * *
[5. O th er va ria b le-ra te regulations. * * *
[6 . E x a m p les o f va ria b le-ra te
tran sa ctio n s.* * *
[7. G row th e q u ity m ortgages. * * *
[8 . D isco u n ted va ria b le-ra te tran saction s.
P aragraph [18(f)(1) ] t>18(f)91)(i )<3
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P aragraph [18(f)(2)] c> 18(f)(1)(H) o
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P aragraph [18(f)(3)] \> 18(f)(l)(iii)< \
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P aragraph [18(f)(4)] t> 1 8 ( f ) ( l) ( iv ) c
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t> P aragraph 18(f)(2)
1.
D isclo su re required. In a variable-rate
transaction that is for a term greater than one
year and is secured by the consumer's
principal dwelling, the creditor must give
special early disclosure under § 226.19(b) in
addition to the later disclosures required
under § 226.18(f)(2). The disclosures under
§ 22.6.18|f)(2) must state that the variable-rale
feature exists and that variable-rate
disclosures have been provided earlier. <a
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S e c tio n 226.19— C ertain R e s id e n tia l
M ortg a g e e> a n d V ariableR a te T ra n sa ctio n s
[19(a) T im e o f D isclo su re]
t> 19(a)(1) T im e o f D is c lo s u r e s
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[19(b) R e d isclo su re R e q u ire d ]
E>19(a)(2) R e d isclo su re R e q u ire d o
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[> C ertain V a ria b le-R a te T ran saction s
1 . C overage. Section 226.19(b) applies to all
closed-end variable-rate transactions that are
secured by the consumer’s principal dwelling
and have a term greater than one year. The
requirements of this section apply not only to
transactions financing the initial acquisition
of the consumer’s principal dwelling, but also
to any other closed-end variable-rate
transactions secured by the principal
dwelling. Closed-end variable-rate
transactions that are not secured by the
principal dwelling, or are secured by the
principal dwelling but have a term of one
year or less are subject to the disclosure
requirements of 1 226.18(f)(1) rather than
those of § 226.19(b). .
2. Tim ing. A creditor must give the
disclosures required under this section at the
time an application form is provided or
before the consumer pays a non-refundable
fee, whichever is earlier. In cases where a
creditor received a written application
through an intermediary agent or broker,
however, footnote 45b provides a substitute
timing rule requiring the creditor to deliver
the disclosures or place them in the mail not
later than three business days after the
creditor receives the consumer’s written
application. This three-day rule also applies
where the creditor takes an application over
the telephone. If, however, the consumer
merely requests an application over the
telephone, the creditor must include the early
disclosures required under this section with
the application that is sent to the consumer.
In cases where the creditor solicits
applications through the mail, the creditor
must also send the disclosures required under
this section if an application form is included
with the solicitation. In cases where an openend credit account is converted to a closedend transaction subject to this section under
a written agreement with the consumer,
disclosures under this section should be given
at the time of conversion. (See the
commentary to § 226.20(a) for information on
the timing requirements for § 226.19(b)(2)
disclosures when a variable-rate feature is
later added to a transaction.)
O th e r v a ria b le -ra te regulation s.
Transactions in which the creditor is required
to comply with and has complied with the
disclosure requirements of the variable-rate
regulations of other federal agencies are
exempt from the requirements of § 226.19(b),
by virtue of footnote 45a. Those variable-rate
regulations include the regulations issued by
the Federal Home Loan Bank Board and
those issued by the Department of Housing
and Urban Development. The exception in
footnote 45a is also available to creditors that
are required by state law to comply with the
federal variable-rate regulations noted above
and to creditors that are authorized by title
VIII of the Depository Institutions Act of 1982
( 1 2 U.S.C. 3801 e t seq.) to make loans in
accordance with those regulations. Creditors
using this exception should comply with the
timing requirements of those regulations, if
they differ, rather than the timing
requirements of Regulation Z in making the
variable-rate disclosures.
4.
E xam ples o f v a ria b le -ra te tran saction s.
The following transactions, if they are for a
term greater than one year and are secured
by the consumer’s principal dwelling,
constitute variable-rat transactions subject to
the disclosure requirements of § 226.19(b). (If
these variable-rate transactions either are not
secured by the consumer's principal dwelling,
or have a term of one year or less,
§ 226.18(f)(1) applies rather than § 226.19(b).)
° Renegotiate rate mortgage instruments
that involve a series of short-term loans
secured by a long-term obligation, where the
lender is obligated to renew the short-term
loans at the consumer’s option. At the time of
renewal, the lender has the option of
increasing the interest rate.
® “Shared-equity” or "sharedappreciation" mortgages that have a fixed
rate of interest and an appreciation share
based on the consumer's equity in the
mortgage property. The appreciation share is
payable in a lump sum at a specified time.
The requirements of § 226.19(b)(2) (iv). (v),
(viii), (ix), (x) and (xii) do not apply to
6
shared-equity mortgages, however. (As
discussed in § 226.2, other types of sharedequity arrangements are not considered
"credit" and are not subject to Regulation Z.)
° Preferred-rate employee loans where the
terms of legal obligation provide that the
initial underlying rate is fixed, but will
increase if the employee leaves the employ of
the creditor, and the note reflects the
preferred rate. The disclosures under
§ 226.19(b)(2) (v), (viii), (ix), (x), (xii), and
(xiii) do not apply to such loans.
Graduated-payment mortgages and step-rate
transactions without a variable-rate feature
are not considered variable-rate transactions.
P aragraph 19(b)(1)
1 . S u b stitu tes. Creditors who wish to use
publications other than the C on su m er
H an dbook on A d ju sta b le R a te M o rtg a g es
must make a good faith determination that
their brochures are suitable substitutes to the
C onsum er H andbook. A substitute is suitable
if it is, at a minimum, comparable to the
C onsum er H an dbook in substance and
comprehensiveness. Creditors are permitted
to provide more detailed information than is
contained in the C on su m er H an dbook.
Paragraph 19(b)(2)
1 . D isclosu re f o r ea ch v a ria b le -ra te
program . In variable-rate transactions subject
to § 226.19(b) requirements, a creditor must
provide disclosures that fully describe each
of the creditor’s variable-rate loan programs
in which the consumer expresses an interest
at the time an application form is provided or
before the consumer pays a non-refundable
fee, whichever is earlier. Moreover, if a
consumer requests disclosures for other
closed-end variable-rate programs subject to
§ 226.19(b), a creditor must provide
disclosures for as many other of its programs
as the consumer requests. The creditor, of
course, is permitted to give the consumer
information about all of its programs subject
to § 226.19(b) initially. In addition, these
disclosures may be inserted in the C on su m er
H an dbook (or a suitable substitute) as long
as they are identified as the creditor’s loan
program disclosures.
2 . V ariable-rate loan p ro g ra m defin ed. If
the identification, the presence or absence, or
the exact value of a loan feature must be
disclosed under this section, variable-rate
loans that differ as to such features constitute
separate loan programs. For example,
separate loan program disclosures would be
required based on differences in any of the
following loan features:
° The index or other formula used to
calculate interest rate adjustments
0 The rules relating to changes in the
index, interest rate, payments, and loan
balance
° The presence or absence of, and the
amount of, rate or payment caps
° The presence of a balloon or a demand
feature
° The possibility of negative amortization
° The possibility of interest rate carryover
a The frequency of interest rate and
payment adjustments
0 The presence of a discount feature
In addition, if a loan feature must be taken
into account in preparing the disclosure
required by § 226.19{b)(2)(ix), variable-rate
loans that differ as to that feature constitute
separate programs and require separate loan
program disclosures under § 226.19(b)(2). If,
however, a representative value may be
given for a loan for a loan feature or the
feature need not be disclosed under
§ 226.19(b)(2). variable-rate loans that differ
as to such features do not constitute separate
loan programs. For example, separate
program disclosures would not be required
based on differences in the following loan
features:
° The amount of a discount
° The amount of a margin
3. /Is a p p lica b le. The disclosures required
by this section need only be made as
applicable. Any disclosure not relevant to a
particular transaction may be eliminated. For
example, if the transaction does not contain a
demand feature, the disclosure required
under § 226.19(b)(2)(xii) need not be given.
4. R evisio n s. A creditor must revise the
disclosures required under this section once a
year when the new index value-becomes
available. A change in the loan program,
however, would require new disclosures.
P aragraph 19(b)(2)(i)
1 . Change in in terest rate, p a y m e n t, o r
term. A creditor must disclose the fact that
the terms of the legal obligation permit the
creditor, after consummation of the
transaction, to increase (or decrease) the
interest rate, payment, or term of the loan
initially disclosed to the consumer. For
example, the disclosures for a variable-rate
program in which the interest rate and
payment (but not loan term) can change
might read, "Your interest rate and payment
can change yearly."
Paragraph 19(b)(2)(H)
1 . Id en tification o f in dex o r form u la. If a
creditor ties interest rate changes to a
particular index, this fact must be disclosed,
along with a source of information about the
index. For example, if a creditor uses the
weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity as
its index, the disclosure might read, "Your
index is the weekly average yield on U.S.
Treasury Securities adjusted to a constant
maturity of one year published weekly in the
Wall Street Journal." If no particular index is
used, the creditor must briefly describe the
formula used to calculate interest rate
changes.
2 . Changes a t cred ito r's discretio n . If
interest rate changes are at the creditor's
discretion, this fact must be disclosed. If an
index is internally defined, such as by a
creditor's prime rate, the creditor should
either briefly describe that index or state that
interest rate changes are at the creditor’s
discretion.
Paragraph 19(b)(2))iii)
1 . D eterm in ation o f in te r e s t ra te a n d
p a ym en t. This provision requires an
explanation of how the creditor will
determine the consumer’s interest rate and
payment. In cases where a creditor bases its
interest rate on a specific index and adjusts
the index through the addition of a margin,
for example, the disclosure might read. "Your
interest rate is based on the index plus a
margin, and your payment will be based on
the interest rate, loan balance, and remaining
loan term."
P aragraph 19(b)(2)(iv)
1 . C u rren t m argin valu e a n d in te r e s t rate.
Because the disclosures can be prepared in
advance, the interest rate and margin may be
several months old when the disclosures are
delivered. A statement, therefore, is required
alerting consumers to the fact that they
should inquire about the current margin value
applied to the index and the current interest
rate. For example, the disclosure might state.
"You should ask us for our current interest
rate and margin.”
P aragraph 19(b){2)(v)
1 . D isc o u n te d in te r e s t rate. In some
variable-rate transactions, creditors may set
an initial interest rate that is not determined
by the index or formula used to make later
interst rate adjustments. Typically, this initial
rate charged to consumers is lower than the
rate would be if it were calculated using the
index or formula. However, in some cases the
initial rate may be higher. If the initial
interest rate contains a discount feature,
creditors must alert the consumer to this fact.
For example, if a creditor discounted a
consumer’s initial rate, the disclosure might
state, “Your initial interst rate is not based on
the index used to make later adjustments.”
(See the commentary to § 226.17(c)(1) for a
further discussion of discounted variable-rate
transactions.) In addition, the disclosure must
suggest that consumers inquire about the
amount that the program is currently
discounted. For example, the disclosure might
state, “Ask us for the amount our Adjustable
Rate Mortgages are currently discounted."
(See the commentary to § 226.19(b)(2)(viii) for
a discussion of how to reflect the discount in
the historical example.)
P aragraph 19(b)(2)(vi)
1 . F requency. The frequency of interest rate
and payment adjustments must be disclosed.
If interest rate changes will be imposed more
frequently or at different intervals than
payment changes, a creditor must reveal the
frequency and timing of both types of
changes. For example, in a variable-rate
transaction where interest rate changes are
made monthly, but payment changes occur on
an annual basis, this fact must be disclosed.
P aragraph 19(b)(2)(vii)
1 . R a te a n d p a y m e n t caps. The creditor
must disclose limits on changes (increases or
decreases) in the interest rate or payment,
although the absence of such limits need not
be stated. If an initial discount is not taken
into account in applying overall or periodic
rate limitations, that fact must be disclosed. If
separate overall or periodic limitations apply
to interest rate increases resulting from other
events, such as the exercise of a fixed-rate
conversion option or leaving the creditor's
employ, those limitations must also be stated.
Limitations do not include legal limits in the
7
nature of usury or rate ceilings under state or
federal statutes or regulations. (See | 226.30
for the rule requiring that a maximum interest
rate be included in certain variable-rate
transactions.)
2 . N e g a tiv e a m o rtiza tio n a n d in te r e s t ra te
ca rryo ver. A creditor must disclose, where
applicable, the possibility of negative
amortization. For example, the disclosure
might state, “If any of your payments is not
sufficient to cover the interest due, the
difference will be added to your loan
amount.” In addition, the creditor must
disclose the existence of any interest rate
carryover provisions. Interest rate carryover
exists when a change in the index rate that is
not imposed at the time of an adjustment
because, for example, it exceeds an
adjustment limitation, is carried over and
incorporated into the calculation of future
rate adjustments. For example, if the index
rates 3 percentage points during the year, the
loan contains a 2 percentage point cap on
annual changes (increases or decreases) in
the interest rate, and the creditor may impose
the additional percentage point the following
year, the creditor must disclose the fact that
changes in the index will be carried over to
subsequent interest rate adjustment rates.
The disclosure might state, "Changes in the
index not passed on as changes in the
interest rate will be carried over to
subsequent interest rate adjustment dates.”
3. C on version option. If a loan program
permits consumers to convert their variablerate loans to fixed-rate loans, the creditor
must disclose that the interest rate may
increase if the consumer converts the loan to
a fixed-rate loan. The creditor must also
disclose the rules relating to the conversion
feature, such as the period during which the
loan may be converted; any fee that may be
charged at conversion; and how the fixed rate
will be determined. The creditor should
identify any index used and state the margin
to be added to determine the fixed rate. (In
disclosing the period during which the loan
may be converted, the margin, and any fees
to be charged at conversion, the creditor may
use information applicable to the conversion
feature during the six months preceding
preparation of the disclosures. That
information may be used until the program
disclosures are otherwise updated.) Although
the rules relating to the conversion option
must be disclosed, the effect of exercising the
option should not be reflected elsewhere in
the disclosures, such as in the historical
example or in the calculation of the initial
and maximum interest rate and payments.
4. P referred-rate e m p lo y ee loans. Section
226.19(b) applies to preferred-rate employee
loans, where the rate will increase if the
employee leaves the creditor’s employ,
whether or not the underlying rate is fixed or
variable. In these transactions, the creditor
must disclose that the rate may increase if
the employee leaves the creditor's employ.
The creditor must also disclose the rules
relating to termination of the employee's
preferred-rate, such as any fees that may be
charged when the rate is changed and how
the new rate will be determined.
P aragraph 19(b)(2)(viii)
1 . In dex
m o v e m e n t This section requires a
creditor to provide an historical example,
based on a $1 0 ,MO loan amount originating in
1977, showing how interest rate changes
implemented According to the terms of the
loan program would have affected payments
and the loan balance at the end of each year
during a 15-year period. (In all cases, the
creditor need only calculate the payments
and loan balance for the term of the loan. For
example, in a fsve-year loan, a creditor would
show the payments and loan balance for the
five-year term, from 1977 to 1981 with a zero
loan balance reflected for 1981. For the
remaining ten years, 1982-1991, the creditor
need only show the remaining index values.)
Pursuant to this section, the creditor must
provide a history of index values for the
preceding 15 years. Initially, the disclosures
would give the index values from 1977 to the
present. Each year thereafter, the revised
program disclosures should include an
additional year of index values until 15 years
of values are shown. If the values for an index have not been available for 15 years, a
creditor need only go back as far as the
values are available in giving a history and
payment example. In all cases, only one
index value per year need be shown. Thus, in
transactions where interest rate adjustments
are implemented more frequently than once
per year, a creditor may assume that the
interest rate and payment resulting from the
index value chosen will stay in effect for the
entire year for purposes of calculating the
loan balance as of the end of the year and for
reflecting other loan program terms. If a
creditor rases an average of index values or
any other index formula, the history given
should reflect those values. The creditor
should select one date or, when an average of
single values is used as an index, one period
and should base the example on index values
measured as of that same date or period for
each year shown in the history. In cases
where interest rate changes are at the
creditor's discretion (see the commentary to
§ 226.19(b)(2)(ii)), the creditor must provide a
history of the rates imposed for the preceding
period, beginning with the initial history of
rates starting in 1977. In giving this history,
the creditor need only go back as far as as
the creditor’s rates can reasonably be
determined.
2 . Selection of margin. For purposes of the
disclosure required under § 226.19(b)(2)(viii),
a creditor may select a margin that has been
used during the six months preceding
preparation of the disclosures, and should
disclose that the margin is one that the
creditor has used recently. The margin
selected may be used until a creditor updates
the disclosure form to reflect the most recent
index values.
3. Amount of discount. For purposes of the
disclosure required under § 226.19(b)(2)(viii),
a creditor may select a discount (amount and
term) that has been used during the six.
months preceding preparation of the
disclosures, and should disclose that the
discount is one that the creditor has used
recently. The discount should be reflected in
the historical example for as long as the
discount is in effect. A creditor may assume
that a discount has been in effect for a full
year for purposes of reflecting the discount in
the historical example.
P aragraph 19(b)(2)(ix)
1 . Calculation of payments. A creditor is
required to include a statement on the
disclosure form that explains how a
consumer may calculate his or her actual
monthly payments for a loan amount other
than $10,000. The example should be based
upon the most recent payment shown to-the
historical example. The credfior„ however, is
not required to calculate the consumer's
payments- (See the model clauses in
Appendix H-4(Cj.J
P aragraph lS tb f(2 jjx )
1. I n itia l a n d m axim & m in te r e s t ra te a n d
p a y m e n t The disclosure form swot slate the
initial and Rsextoisim fete?e®? rates end
payments- for s STSjeO; teas ©rigtooted at the
most recent interest rets- (fetdex veto© plus
margin) show s to the. histories) example, to
caieuLsttog the maximum:
usds?
this paragraph. m creditor should assume ttet.
the interest rate toareases ss. t m
possible under the fajsss progress,, and the
maximum payment disclosed should reflect
the amoefiz&fioa ©I the Iba®
this
period. Thus, to s kss© with 2 percentage
point aiM®aI (arad 5 percentage p®tot overall)
interest rate limstettosss os "sapg," fcfee
maximum totorest rat© would be 5 percentage
points higher than the moat recent rate showa
in the historical example. Moreover, the lo®a-.
would not reodta tbs. Haa-xim-asa interest rate
until the fourth, year because of the 2 .
percentage point aasuai rata UmMsttons, m A
the maximum payment disclosed would
reflect the amortisation. ©£ tbs loan- during
this period. If the k>aa program includes a
discounted initial interest rate, the most
recent rate shown to the historical example
should be discounted by the amount of the
discount reflected elsewhere to. the disclosure
for purposes o f calculating the initial and
maximum interest rates and payments. If a
discount is reflected, the disclosure o f the
initial and maximum rates and payments
should state the amount by which the most
recent rate has been discounted. (See
comment £§(b)£Zj{viii>-g regarding disclosure
of the amount of a discount.)
P a ra g ra p h m (b){2¥>ni}
1.
D e m a n d featu re. If a variable-rate foaw
subject to 122©.58ffey requirements’contains a
demand feature, this fscf must be disclosed,
(pursuant to § 2 2 &2 ifr), creditors would algo
disclose th© demand featore fe the- standard
discloses© gyvsn, teier.)
P a ra g ra p h lS {h j(2}{xii)
t . A d ju s tm e n t n otices. h creditor must
disclose to the
fee type of
information that will be contained to
subsequent notices o i adjustments and w h ss
such notices will be provided. (See- § 2 2 &2 0 (c)
regarding masses ©5 adjustments..} For
example, to tean&ssttoa© povidtog, that
payment adpstiaes?-t6 mey &gs®§§psmy each
interest rata adjsotessit, the digcfesuge might
state, “You will, t e notified feast 25, but n©
moss than 1 2 0 , days. before the dae date of ©
payment at a new leveL This notice will
contain information about the index and
interest rates, payment amount, and loan
balance." to trasssctioas where these may be
8
interest rate adjustments without
accompanying payment adjustments in a
year, the disclosure might remdlcT®gwittfe®
notified ©®ca each. yeas during which, totetest
rate adjustments. hut a©, payment
adjustments, have been made to, your loan.
This notice will contain, information about the
Index a®d interest rates, payment amount,
and ban balance."
P aragraph 19(hM2)(xiiij
1. M u ltip le b a n program s. A esdfts® that
offers multiple variable-rate leans p?ograras to
required te have dkdesurss for esdfe
variafeb-ratefcjss props® sebjcct to
| 22S-.lSfb)£2). The creditor Esu&t insfsns the
cen su ses that other closed-esdi variable-rat©
programs exist, and that (feclosure forms are
available fee these additional ban progress.
For exampfe, ths shedosure i w m might slats.
“Inforrsstfea o s other Adjestsbte la t e
Mortipge pesgrmss is available upon
request.” o
-
Section
requirem ent
Subsequent disclosure
2 0 fa ) R efin an cin gs
3.
V a ria b le rate. Ff a variabfe-rate feature
was properly disclosed under the regulation,
a rate change hr accord with those
disclosures is not a refinancing. For example,
a renegotiate rate mortgage that was
disclosed! as a variable-rate transection Is not
subject to sew dfecloswe requirements when
the VBffeMe-rate feature is invoked.
However, even If if is no? accomplished by
the cancsifatibn of the old obligation- and
substrtofiofj o f a new one, s new tra-nsactios
subject to new disclosures' results if the
creditor either.
® Increases- the rate based &n e variablerate feature that was no? p tm i& m iy
dfedbaed, os’
© Adds © vartebfe-rate feefsje to the
E>If either of these two events occurs fn a
variable-rate transaction secured by a
principal dwelling with a term longer than
one year, the disclosures required’under
1 22©.f9fb]f2) also mas? be given a t that
time.<a
*
*
*
<?
<3»
*
2 0 fb f A ssu m p tio n s
6
©
^
0. Disclosures. For transactions that are
assumptions within, this provision, the
creditor must make disclosures based on the
“remaining obligation." For example:
a
<•
«
I£ g, transaction involves address or discount
finance charges, the creditor may make
abbreviated disclosures, as sradtoed in
I 226.20(b)(1 J through (5), e> Creditors
providing disci®susas pursuant to this section
for assumptions of variable-rate transactions,
secured by the consumer's principal dwelling
with a tens. longer thass one yeas need not
provide new disclosures undeE
1228J8(f)(2)(ii) os § 225.18(b) or periodic
notices Bader |22tL20(c). Altematively. a
creditor may disclose the variabfe-sate
feature of such a transaction solely in
accordance with § 228.1Sff){1),«®
t>SGfc}! V ariable-R ate A b a s e m e n ts ’
1. Timing, and content o f adjustment
notices. This section requires a creditor to
provid® osrtais disclosure* is cases where a s
adjustment to the interest rate is made in a
variable-rate transaction subject to
| 228.19(b). There are two timing rules,
depending on whether payment changes may
accompany interest rate changes. In
transactions where the interest rate may be
adjusted more frequently than the payment, a
creditor is required to send at least one
notice each year during which interest rate
adjustments have occurred without
accompanying payment adjustments. In
transactions providing Tor payment
adjustments to accompany interest rate
adjustments, a creditor must deliver or place
in the mail notices to borrowers at least 25,
but not more than 1 2 0 . calendar days before ©
payment at a new level is due. In all cases,
the disclosure must include, as applicable,
the new payment amount, the current and
prior interest and index rates aed the tears
balance,, and must notify the cousam a of the
extent to which any increase in the interest
rate has been foregone; The disclosure mast
also state the payment that wtrnM foe
required to felly amortise the tears If this
amount hr different from fee payment already
disclosed, (fas esses where asa opes-esd
account is converted t® a transaction subject
to § 223,1 Sfb),. fee fecpsrersmta of this sesttae
do not apply iratel adjsetaeBte as© s a d ®1
following COTverstea)
2. Exceptions, Ssetk® ^©-20fc) Sag®m 8
apply t@shared-equity bmm a®di prefesredrate employee leans, with sjs under-tying fixed
rate.^r
*
i?
&
©
S
Appendix t t —<
€ lawd-End Model Foots
Clauses
*
.*
&
&
©
4. M
o
d
e
l
9*54 *
5. v> M o d ef
This model sh m se
illustrates the variable rate disclosure
required under f 2 2 Q.l@fT)f2 J, which would
alert consumers to the fact that the
transaction contains a vssiafote-r&te feste©
and that earlier disclosures were provided
under g 22S.I9{b). in cases where the variablerate transaction is secured by the consumer's
principal dwelling with a term, greater than
one year. <3
6 . t>M o d e l H-4(CJ. This model clause
illustrates the early disclosures required
generally under § 226.19(bj when the
variable-rate transaction ia secured by the
consumer’s principal dwelling and is for a
term greater than on year, ft includes
information on how the om aum eria interest
rate is determined and how it can: change
over the term of the loan, and; explains
changes that, may occur is the borrower's
monthly payment The modal clause also
contains a s example of how to disci®se
historical c h a n ts is the index or formula
values used to compute interest rates for the
preceding 15 years, ks addition, the model
clause iUusteatsa the. disclosure of the initial
and maximum interest rates aad. payments
for a loan, originated at the most recent rata
shown in. the historical example.<3.
7. &>M o d e l H - 4 ( D f This modeL clause
illustrates tbs adjustment notice required
under § 228-20(e}, and provides examples of
-payment change notices and annual notices
of interest rate changes,<a
[5.] v>Q.<iM odei H -5 . 4 4 4
[6 4 i> 9 .< a A iodelHr^," 4 4
[74E >m oj M & deiH -7.° 4 4
(8.) E>ll.<zM odsl& H -& an dH -Q ," 0
[9.] &>12^<sSampie f<arm&.t' 4 4
0
[10.] £ > 1 3 .0 S a m p le H -10.* 4 4
Jll.j 0 14.oSa/np/e H-ll.4 44
[12.]
e>
1 5 . <$Sam ple H -12 . 4 4 4
[13. j e> 1 6 . o S a m p le H -1 3 through H 4 4
'
(14.J E>17.<aSampIe H -13 . 4 4 4
I 8 . 0 S a m p le H -14K . This sample disclosure
form illustrates the disclosures under
§ 226.19(b) for a variable-rate transaction
secured by the consumer’s principal dwelling
with a term greater than one year. The
sample form shows a creditor how to adapt
the model clauses in Appendix H-4{C) to the
creditor's own particular variable-rate
program. The sample disclosure form
describes the features of a specific variablerate mortgage program and alerts the
consumer to the fact that information on the
creditor’s other closed-end variable-rate
programs is available upon request. It
includes information on how the interest rate
is determined and how it can change over
time, and explains how the monthly payment
can change based on a $1 0 , 0 0 0 loan amount,
payable in 360 monthly installments, based
15. ‘
9
on historical changes in the values of the
weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity of
one year. Index values are measured as of the
first week ending in July for the years 1977
through 1987. This reflects the requirement
that the index history be based on values for
the same date or period each year beginning
with index values for 1977. The index history
in 1988 would contain fewer than 15 years of
index values. In making these disclosures in
1992, however, a creditor would need to show
a full 15-year index history. In 1993, the index
history would cover the years 1978 through
1992. The sample disclosure also illustrates
the requirement under | 226.19(b)(2)(x) that
the initial and the maximum interest rates
and payments be shown for a $1 0 , 0 0 0 loan
originated at the most recent rate shown in
the historical example. In the sample, the
loan is assumed to have an initial interest
rate of 9.71% (which was the interest rate in
1987 for the example shown) and to have 2
percentage point annual (and 5 percentage
point overall) interest rate limitations or caps.
Thus, the maximum amount that the interest
rate could rise under this program is 5
percentage points higher than the 9.71% initial
rate to 14.71%, and the monthly payment
could rise from $85.02 to a maximum of
$123.31. The loan would not reach the
maximum interest rate until its fourth year
because of the 2 percentage point annual rate
limitations, and the maximum payment
disclosed would reflect the amortization of
the loan during that period. The sample form
also illustrates how to provide consumers
with a method of calculating their actual
monthly payment for a loan amount other
than $1 0 ,0 0 0 .< 3
(18.) 01 9 . ^ S a m p le H -15 . 4 4 4
[17.jo20 .<@ H R SA-500-l 9-8 2 .* 4 4
[18.]o21 .^ H R S A -5 0 0 -2 9 -82.* 4 4
[19.] o 'l2 .< r i! R S A -5 0 2 -l 9 -82 . 4 4 4
[20.) o 23. o .H R S A -5 0 2 -2 9-32. 4 4 4
6
A
6
*
☆
Board of Governors of the Federal Reserve
System, December 21,1987.
William W. Wiles,
S e c r e ta r y o f th e Board.
[FR Doc. 87-29557 Filed 12-23-87; 8:45 am]
SIUJM6 COS2 0210-01-aa
@FedFRASER