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FEDERAL RESERVE BANK
OF M E W YORK
No. 10263 1
[ Circular
October
14, 1988
TRUTH IN LENDING
Proposed Changes in the Official Staff Commentary on Regulation Z
Comment Invited by December 1
To A ll Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
The following statement has been issued by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board has issued proposed revisions to its official staff commentary to Reg
ulation Z, Truth in Lending, that interprets an amendment, issued December 28, 1987, requiring cred
itors to provide consumers with more information regarding closed-end adjustable-rate mortgage loans
(ARMs) secured by the consumer’s principal dwelling.
The Board is publishing proposed interpretations on a limited number of issues affecting ARMs
disclosures in advance of its regular update to the Regulation Z commentary. Additional interpretations,
addressing the ARM disclosure rule and other provisions of Regulation Z, are expected to be proposed
in November.
Printed on the following pages is the text of the Board’s notice in this matter, which has been
reprinted from the Federal Register. Comments thereon may be sent to the Board of Governors,
as specified in the notice, or to our Compliance Examinations Department, by December 1, 1988.
E. G erald Corrigan,
President.
FEDERAL RESERVE SYSTEM
12CFR Fart 22®
[Reg. Z; DoeksS No. R-0S45]
Proposed Update t® Official Staff
Commentary
a g e n c y : Board of Governors of the
Federal Reserve System.
a c t io n : Proposed official staff
interpretation.
summary: The
Board is publishing for
comment proposed changes to the
official staff commentary to Regulation
Z (Truth in Lending). The commentary
applies and interprets the requirements
of Regulation Z and is a substitute for
individual staff interpretations of the
regulation. The proposed revisions offer
additional guidance under the amended
adjustable-rate mortgage (ARM)
disclosure provisions of Regulation Z
with which lenders are required to
comply on October 1,1988. This notice
addresses a limited number of issues
affecting transactions where certain
program features change frequently or
have minor variations The proposed
revisions describe the permissible
disclosures for such transactions, and
will limit the possibility that numerous
disclosure forms would be required to
reflect the program variations.
Additional guidance on other issues
arising under the ARM disclosure rule
and under other provisions of
Regulation Z will be issued in the
regular update to the commentary
expected to be published in November.
d a t e : Comments must be received on or
before December 1,1988.
addresses: Comments should refer to
Docket No. R-0645 and be sent to Mr.
William W. Wiles, Secretary, Board of
Governors of the Federal Reserve
System. Washington, DC 20551. They
may be delivered to Room B-2 2 2 2 of the
Eccles Building between 8:45 am and
5:15 pm weekdays or delivered to the
guard station in the Eccles Building
Courtyard on 20th Street NW. (between
Constitution Avenue and C Street NW.),
any time. All comments received at the
above address will be available for
inspection and copying by any member
of the public in the Freedom of
Information Office, Room B-1 1 2 2 of the
Eccles Building between 9:00 am and
5:00 pm weekdays.
F®R FURTHER INFORMATION ©©NTAOTl
Michael S. Bylsma, Senior Attorney, or
Sharon T. Bowman or Thomas J. Noto,
Staff Attorneys, 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.
Telecommunications Device for the Deaf
(TDD), Eamestine Hill or Dorothea
Thompson at (202 ) 452-3544.
SUPPLEMENTARY 0NF®RMAT!1©N:
(1 ) Background
This proposed official interpretation
addresses four significant issues arising
under the revised disclosure rules for
adjustable-rate mortgages (ARMs) in
Regulation Z. The new ARM disclosure
rules were adopted in final form
effective December 28,1987 (52 FR
48665, December 24,1987). Compliance
with the new rules is mandatory on
October 1,1988, but has been optional
since the effective date. Since the
adoption of the new disclosure rules,
questions have arisen concerning the
impact of compliance with certain
provisions of the rules. The narrow
application of certain disclosure
provisions—especially those relating to
variations in ARM programs—may
cause difficulties in transactions where
program features change frequently or
result in numerous forms reflecting
minor program variations. This notice
addresses certain disclosures involving
program variations under the ARM
disclosure rule, such as rate limitations,
terms to maturity, frequency of
adjustments, and multiple options. With
the revisions, minor program variations
should not result in multiple disclosure
forms, and fluctuations in certain
program features should not result in
frequent changes to those form s. In light
of the importance of these issues to
certain creditors, the Board is publishing
the proposed interpretations in advance
of the regular update to the Regulation Z
commentary. Additional proposed
revisions to the Regulation Z
commentary, addressing both the ARM
disclosure rule and other provisions, are
expected to be published in a
subsequent notice in November.
(2) Explanation of Revisions
The following is a brief description of
the proposed revisions to the
commentary:
Subpart C — Closed-End Credit
Section 226.19 Certain Residential
Mortgage Transactions 19(b) Certain
Variable-Rate Transactions
PRINTED IN NEW YORK, FROM
F E D E R A L R E G IS T E R ,
2
Paragraph 19(b)(2)
Comment 19(b)(2)-! would be
amended to clarify that the disclosure
form for an ARM program in which the
only feature that varies is the term to
maturity may include the applicable
disclosures affected by each term. For
example, disclosures for an ARM
program which is offered for terms of
both 15 and 30 years may contain the
disclosures affected by both the 15- and
30-year terms in a single program
disclosure form. Furthermore, the
comment would be revised to state that
certain options that are program
features may be disclosed in a single
program disclosure form.
Paragraph 19(b)(2)(vi)
Comment 19(b)(2)(vi)-l would be
revised to address the disclosures for
transactions in which the interval
between consummation or closing and
the initial adjustment is not known—for
example, when ARM loans are grouped
together for sale to a secondary
mortgage market purchaser. In such
cases, the comment explains that
lenders may disclose the timing for the
first adjustment as a range of the
minimum and maximum length of time
from consummation or closing until the
first adjustment.
Paragraph 19(b)(2)(vii)
Comment 19(b)(2)(vii)-l would be
revised to address the disclosures for
transactions in which the overall
limitation on rate increases (and
decreases) varies depending on the loan
features the consumer chooses, or upon
fluctuations in the pricing of the loan. In
such cases, the comment explains that
the creditor may disclose the range of
the lowest and highest rate limitations
that may be applicable to the creditor’s
ARM transactions, and must include a
statement that the consumer ask about
the rate limitations that are currently
applicable.
Paragraph 19(b)(2)(viii)
Comment 19(b)(2)(viii)-5 would be
added to allow the creditor to base
disclosures for ARM transactions upon
terms to maturity within certain ranges
specified in the new comment. The
Board requests comment about whether
it should require disclosures to be based
upon specified terms within those
ranges, or whether it should adopt the
proposed comment allowing creditors to
base disclosures upon any term offered
within the ranges. The comment also
VOL. 53, NO. 189, pp. 38018-38020
explains that the creditor would be
required to state the term used in
making the disclosures.
Comment 19(b)(2)(viii)-6 would be
added to explain that a creditor
following the alternative rule for
disclosing overall rate limitations
described in revised comment
19(b)(2)(vii)—
1 must base the historical
example upon the highest rate limitation
disclosed in § 226.19(b)(2)(vii). In
addition, such creditors must state the
overall limitation used in the historical
example.
Comment 19(b)(2)(viii)-7 also would
be added to explain the assumptions
that can be made by a creditor following
the alternative rule for disclosing the
frequency of rate and payment
adjustments described in revised
comment 19(b)(2)(vi)-l. The comment
explains that, in disclosing the historical
example, the creditor may assume that
the first adjustment occurred at the end
of the first year in which the adjustment
could occur.
Paragraph
1 9 (b )(2 )(x )
Comment 19(b)(2)(x)—
2 would be
added to allow creditors to base their
calculations of the initial and maximum
rates and payments upon the ranges for
terms to maturity stated in new
comment 19(b)(2)(viii)-5. The comment
explains that the term the creditor
selects for making disclosures under
§ 226.19(b)(2)(viii) also must be used in
disclosing the initial and maximum
interest rates and payments.
Comment 19(b)(2)(x)-3 would be
added to describe how a creditor
following the alternative rule for
disclosing overall rate limitations
described in revised comment
19(b)(2)(vii)—1 would calculate the
maximum interest rate and payment. In
such cases, the comment explains that
the creditor must base the disclosure of
the maximum rate and payment upon
the highest overall rate limitation
disclosed under § 226.19(b)(2)(vii). The
creditor would be further required to
state the overall rate limitation used in
calculating the maximum rate and
payment.
Comment 19(b)(2)(x)-4 also would be
added to explain how to calculate the
initial and maximum rates and
payments if a creditor follows the
alternative rule for disclosing the timing
of the first rate and payment adjustment
described in revised comment
19(b)(2)(vi)-l. The comment explains
that the creditor must assume that the
first adjustment occurs at the earliest
time disclosed under § 226.19(b)(2)(vi).
List of Subjects in 12 CFK Part 226
Advertising, Banks, Banking,
Consumer protection, Credit, Federal
Reserve System, Finance, Penalties,
Rate limitations, Truth in lending.
To highlight the proposed revisions to
the commentary, new language is shown
inside arrows. 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:
PART 226—[AMENDED]
1 . The authority citation for Part 226
continues to read as follows:
Authority: Sec. 105, Truth in Lending Act,
as amended by sec. 605, Pub. L. 96-221, 94
Stat. 170 (15 U.S.C. 1604 e t
sec. 1204(c),
Competitive Equality Banking Act, Pub. L.
100-86, 101 Stat. 552.
2 . Text of revisions. The commentary
(12 CFR Part 226 Supp. I) is amended by
revising comments 19(b)(2)-l,
19(b)(2)(vi)-l, and 19(b)(2)(vii)-l; and
adding comments 19(b)(2)(viii)-5
through -7 and 19(b)(2)(x)-2 through -4.
Supplement I—Official Staff
Interpretation
* * * * *
Subpart C—Closed-End Credit
*
*
*
*
*
Section 226.19 Certain R esidential
Mortgage Transactions.
*
*
*
*
*
19(b) Certain Variable-Rate Transactions
*
*
*
*
*
Paragraph 19(b)(2)
1. D isclosure for each variable-rate
program. A creditor must provide disclosures
to the consumer that fully and separately
describe each of the creditor’s variable-rate
loan programs in which the consumer
expresses an interest. * 4 * An individual
program disclosure may consist of more than
one page. For example, a creditor may attach
a separate pagd containing the historical
payment example for the particular program.
e> A creditor offering an ARM with different
terms to maturity (or payments based on
different amortizations) may make all of the
applicable disclosures affected by the term of
the loan in a single ARM program disclosure.
(See comments 19(b)(2)(viii}—5 and
19(b)(2)(x)-2 for an explanation of how
different maturities should be reflected in the
program disclosures.) In addition, the creditor
is permitted to include the disclosures for the
following options in a single program
disclosure if the features are available for the
ARM being described: options permitting
3
conversion to a fixed interest rate and options
permitting preferred rates for certain
consumers. The creditor must state that these
options are available and should not reflect
them elsewhere in the disclosures, such as in
the historical example or in the calculation of
the initial and maximum interest rates and
payments.o * * *
*
*
*
*
*
Paragraph 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 disclose
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.
t>In certain ARM transactions, the interval
between loan closing and the initial
adjustment is not known and may be
different from the regular interval for
adjustments. In such cases, the creditor may
disclose the initial adjustment period as a
range of the minimum and maximum amount
of time from consummation or closing. For
example, the creditor might state: “The first
adjustment to your interest rate and payment
may occur no sooner than 6 months and no
later than 18 months after closing.
Subsequent adjustments may occur once
each year after the First adjustment.” (See
comments 19(b){2){viii)—7 and 19(b)(2)(x)-4
for guidance on other disclosures when this
alternative disclosure rule is used.)<i
Paragraph 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. 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.
E>In certain ARM transactions, a creditor
may offer a range of overall limitations on
interest rate changes depending upon a
variety of factors such as the program
features the consumer chooses, the type of
residential property involved, or the amount
of the loan or the downpayment. In other
ARM transactions, the overall limitations on
rate changes offered by creditors may vary
within a certain range depending upon
factors such as fluctuations in initial interest
rates and in margins. In such transactions,
the creditor need not disclose each overall
rate limitation that is currently available.
Instead, the creditor may disclose the range
of the lowest and highest overall rate
limitations that may be applicable to the
creditor's ARM transactions. For example,
the creditor might state: ‘The limitation on
increases to your interest rate over the term
of the loan will be set at an amount in the
following range: between 4 and 7 percentage
points above the initial interest rate." A
creditor using this alternative rule must
include a statement in its program disclosures
suggesting that the consumer ask about the
overall rate limitations currently offered for
the creditor’s ARM programs. (See comments
19(b)(2)(viii)-6 and 19(b)(2)(x}-3 for an
explanation of the additional requirements
for a creditor using this alternative rule for
disclosure of overall rate limitations.)<3
Limitations do not include legal limits in the
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.)
*
*
*
*
★
Paragraph 19(b)(2j( viii)
*
*
*
*
d>5. Term o f the loan.
*
In calculating the
payments and loan balances disclosed in the
historical example, a creditor may assume
that an ARM that would have been
outstanding during any portion of a year
would have been outstanding for the full
year. In addition, a creditor need not base the
disclosures on each term to maturity that it
offers. Instead, disclosures for ARMs with
terms to maturity within the following ranges
may be based on any single term (in full
years) that is offered within the applicable
range: Over 1 year to 5 years; over 5 years to
10 years; over 10 years to 15 years; over 15
years to 20 years; over 20 years to 25 years;
over 25 years to 30 years; over 30 years to 35
years; and over 35 years to 40 years. For
example, disclosures for ARMs offered with
terms from 15 to 30 years may be based on
terms such as 15, 20, 25, and 30 years, or any
other 4 terms within the appropriate ranges
stated above. In addition, the creditor must
state the term used in making the disclosures.
6. O verall rate caps. In certain
transactions, a creditor may use the
alternative rule described in comment
19(b)(2)(vii)-l for disclosure of overall rate
limitations. In such cases, the historical
example must be based upon the highest
overall rate limitation disclosed under
§ 226.19(b)(2)(vii). In addition, the creditor
must state the overall limitation used in the
historical example. (See comment 19(b)(2)(x)3 for an explanation of the use of the highest
rate limitation in other disclosures.)
7. Frequency o f adjustm ents. In certain
transactions, creditors may use the
alternative rule described in comment
19(b)(2)(vi)-l for disclosure of the frequency
of rate and payment adjustments. In such
cases, the creditor may assume for purposes
of the historical example that the first
adjustment occurred at the end of the first full
year in which the adjustment could occur. For
example, in an ARM in which the first
adjustment may occur between 6 and 18
months after closing and annually thereafter,
the creditor may assume that the first
adjustment occurred at the end of the
historical example. (See comment 19(b)(2)(x)4 for an explanation of how to compute the
maximum interest rate and payment when
the initial adjustment period is not know n.)o
*
*
*
*
*
the creditor may follow the rules set out in
comment 19{b)(2)(viii)-5. In calculating the
initial and maximum payment, the terms to
maturity selected for the purpose of making
disclosures under § 226.10(b)(2)(viii) must be
used. In addition, creditors must state the
term used in making the disclosures under
this section.
3. O verall rate caps. In certain
transactions, a creditor may use the
alternative rule for disclosure of overall
interest rate limitations described in
comment 19(b)(21)(vii)-l. In such cases, the
maximum interest rate and payment must be
based upon the highest overall rate limitation
disclosed under § 226.19(b)(2)(vii). In
addition, the creditor must state the overall
rate limitation used in calculating the
maximum interest rate and payment. (See
comment 19(b)(2)(viii)-6 for an explanation of
the use of the highest rate limitation in other
disclosures.)
4. Frequency o f adjustm ents. In certain
transactions, a creditor may use the
alternative rule for disclosure of the
frequency of rate and payment adjustments
described in comment 19(b)(2)(vi)-l. In such
cases, the creditor must base the calculations
of the initial and maximum rates and
payments upon the earliest possible first
adjustments disclosed under
§ 226.19(b)(2){vi). (See comment 19(b)(2)(viii)7 for an explanation of how to disclose the
historical example when the initial
adjustment period is not known.)<3
Paragraph 19(b)(2)(x)
By order of the Board of Governors of the
Federal Reserve System, September 26,1988,
William W. Wiles,
*
*
*
*
*
s>2. Term o f the loan. In calculating the
initial and maximum payments, the creditor
need not base the disclosures on each term to
maturity offered under the program. Instead,
4
S ecretary o f the Board.
[FR Doc. 88-22397 Filed 9-28-88; 8:45 am]
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