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FEDERAL RESERVE BAIMK
OF MEW YORK
[
Circular No. 10275
December 19, 1988
]
CONSUMER CREDIT PROTECTION REGULATIONS
Proposed Changes in Official Staff Commentaries on Regulations E and Z
Comment Invited by February 39 1989
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
Following is the text o f a statement issued by the Board of Governors o f the Federal Reserve
System:
The Federal Reserve Board has issued for public comment proposed revisions to the official staff
commentary for two of its consumer credit protection regulations — Regulation E (Electronic Fund
Transfers) and Regulation Z (Truth in Lending).
The proposed revisions to the staff commentary for Regulation E clarify the disclosure require
ments applicable when consumers pre-authorize direct deposit of social security benefits.
Proposed revisions to the Regulation Z staff commentary address disclosure questions raised by
the emergence of reverse mortgages and questions concerning when a third party fee may be a finance
charge in a credit transaction. Additional proposed commentary is included which interprets the Board’s
uniform rule for disclosures about adjustable-rate mortgages.
Printed on the following pages is the text o f the Board’s notice, which has been reprinted from
the F e d e r a l R e g is te r o f December 5. Comments thereon may be sent to the Board o f Governors,
as specified in the notice, or to our Compliance Examinations Department, by February 3, 1989.
E.
G
erald
C
o r r ig a n
,
P re sid e n t.
FEDERAL RESERVE SYSTEM
12<gFR Part SOS
CPt@s. E; EFT-2]
[SS©€tr®nS@ Fyntdl Transfers; Pr®(p®@©d]
Ifpdtet© $© OWS©8®0 Steffi Commentary
A©iKl©v: Board of Governors of the
Federal Reserve System.
ACTION: Proposed official staff
interpretation.
SUMMARY: The Board is publishing for
comment proposed changes to the
official staff commentary to Regulation
E (Electronic Fund Transfers). The
commentary applies and interprets the
requirements of Regulation E and is a
substitute for individual staff
interpretations of the regulation. The
proposed revision addresses questions
that have arisen about the disclosure
requirements of the regulation.
©ATie: Comments must be received on
or before February 3,1089.
ADDRESSES: Comments should refer to
Docket No. EFT- 2 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 a.m. and
5:15 p.m. weekdays or delivered to the
guard station in the Eccles Building
Courtyard on 20 th 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 a.m. and
5:00 p.m. weekdays.
FURTHER INFORMATION ©©KTFAigY:
Sharon Bowman or Kathleen S. Brueger,
Staff Attorneys, Division of Consumer
Affairs, at (202 ) 452-3637 or (202 ) 4522412. For the hearing-impaired only,
E rnestine Hill or Dorothea Thompson,
Telecommunications Device for the
Deaf, at (202 ) 452-3544, Board of
Governors of the Federal Reserve
System, Washington, DC 20551.
SUPPLEMENTARY INFORMATION: (1)
General. The Electronic Fund Transfer
Act (15 U.S.C. 1693 et seq.) governs any
transfer of funds that is electronically
initiated and that debits or credits a
consumer’s account. This statute is
implemented by the Board’s Regulation
E (12 CFR Part 205).
The Board has published an official
staff commentary (Supp. II to 12 CFR
Part 205) to interpret the regulation. The
commentary is designed to provide
guidance to financial institutions and
others in applying the regulation to
specific situations. The commentary is
updated periodically to address
significant questions that arise. This
notice contains the proposed seventh
update, which the Board expects to
adopt in final form in March 1989.
(2 ) Proposed revisions. Following is a
brief description of the proposed
revisions to the commentary:
Section 205.7—Initial Disclosure of
Terms and Conditions
Question 7-1
Question 7-1 addresses the situation
where a financial institution provides
EFT disclosures when a consumer opens
an account. The question is revised to
clarify that the regulation does not
impose a time limit by which a
consumer must sign up for an EFT
service with a third party in order for
the disclosures originally provided by
the account holding institution to satisfy
the regulation’s requirements.
Question 7-2
Question 7-2 is revised to clarify that,
in cases where a financial institution
does not receive notice that a consumer
has signed up for direct deposit of Social
Security payments (because there has
been no prenotification and no Form
1199A has been completed by the
consumer and the financial institution),
the financial institution must provide the
necessary disclosures as soon as
possible after the first electronic fund
transfer has been made. In cases where
the financial institution does receive
prior notice of the consumer’s
enrollment in the direct deposit program,
the financial institution must provide
disclosures before the first EFT occurs.
The institution has the option, of course,
of providing disclosures to customers
when an account is opened, as
described in Question 7-1.
List of Subjects in 12 CFR Part 2©5
Banks, Banking, Consumer protection,
Electronic fund transfers, Federal
Reserve System, Penalties.
Certain conventions have been used
to highlight the revisions. New language
is shown inside bold-faced arrows while
language to be removed is set off with
brackets.
(3) Text of proposed revisions.
Pursuant to authority granted in section
904 of the Electronic Fund Transfer Act,
15 U.S.C. 1693b, the Board proposes to
amend the official staff commentary to
Regulation E (12 CFR Part 205, Supp. II)
as follows:
1 . The authority citation for Part 205
2
continues to read:
Authority: Pub. L. 95-630, 92 Stat. 3730 (15
U.S.C. 1693b).
2. The official staff commentary on
Regulation E, Supp. II to 12 CFR Part
205, is amended by revising Q and A 7-1
and 7-2 for § 205.7 to read as follows:
S upplem em t II— O fficial S taff
Interpretations
*
*
*
ft
ft
Section 205.7—Initial disclosure of
terms and conditions.
Q 7-1: Timing of disclosures—early
disclosure. An institution is required to give
initial disclosures either (1) when the
consumer contracts for an EFT service or (2)
before the first electronic fund transfer to or
from the consumer's account If an institution
provides initial disclosures when a consumer
opens a checking account and the consumer
does not sign up for an EFT service until [11
months later,] o& later time, < 3 has the
institution satisfied the disclosure
requirements?
A: Yes, if the EFT contract is between the
consumer and a third party for preauthorised
electronic transfers to be initiated by the
third party to or from the consumer’s account
In this case, the financial institution need not
repeat disclosures previously given unless the
terms and conditions required to be disclosed
are different from those that were given.
If, on the other hand, the EFT contract is
directly between the consumer and the
financial institution—for the issuance of an
access device, or for a telephone bill-payment
plan, for example,—the institution should
provide the disclosures at the time of
contracting. Disclosures given before the time
of contracting will satisfy the regulation only
if they occurred in close proximity thereto.
(§ 205.7(a)).
Q 7-2: Timing of disclosures—Social
Security direct deposits. In the case of Social
Security direct deposits, (the financial
institution receives n® prenotification. How]
o h o w o can the o financial o institution
comply with the disclosure requirements t>.
absent prenotification, in case3 where a Form
1199A is no longer used by the Social
Security Administration o?
A: Before direct deposit of Social Security
payments o ta k e s place, u suallyo [can
occur, both] the consumer and the institution
o b o t h o must complete a Form 1199 [.
The] d>A, and the<a institution can make
disclosures at that time. oH ow ever, if a
Form 1199A is not used and there is no
prenotification, the institution should provide
the required disclosures as soon as possible
after the first direct deposit is received
(unless the institution has previously given
the disclosures: see question 7-1). < 3
(§ 205.7(a))
*'
*
ft
ft
ft
Board of Governors of the Federal Reserve
System, November 29,1988.
William W. Wiles,
Secretary of the Board.
[FR Doc. 88-27857 Filed 12-2-88: 8:45 am]
BILLING CODE ©210-01-63
12
SFgfS 226
[Reg. I ; TIL-11
Toty/tani tns Lsndjng; Proposed Update
@ M o O S tiff Comm entary
t©
Board of Governors of the
Federal Reserve System.
ACTION: Proposed official staff
interpretation.
AGENCY:
SUMMARY: The
Board is publishing for
comment proposed revisions to ft®
official staff commentary t® 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
address a variety of questions that have
arisen about the regulation, and include
new material and changes in existing
material. The proposed comments
address, for example, disclosure
questions raised by the emergence of
reverse mortgage products, questions
concerning the amendments to
Regulation Z affecting disclosures for
adjustable-rate mortgages, and
questions concerning when a third party
fee may be a finance charge in a credit
transaction.
©AYES: Comments must be received on
or before February 3,1989.
Comments should refer to
Docket No. TlL-l 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-2222 of the
Eccles Building between 0:45 a.m. and
5:15 p.m. weekdays or delivered to the
guard station in the Eccles Building
Courtyard on 20th Street, NW. (between
Constitution Avenue and C Street, NW.J
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-1122 of the
Eccles Building between 9:00 a.m. and
5:00 p.m. weekdays.
FURTHER flKJF©C3QQiY0®Kl @©KT?A©T:
The following attorneys in the Division
of Consumer and Community Affairs, at
(202) 452=3087 or (202] 452-2412: Sharon
Bowman, Michael Bylsma, Leonard
Chanin, Adrienn© IHtarti Thomas Noto, or
Linda Vespersny.
For ft© hearing impaired only,
Telecoamiumcatioias Device for ft© Deaf
(TDD), la m s s fe s Mil or Ooroft©®
Thompson, at (202) 452=3544, Board of
Governors of ft© Federal l@i©rv®
System, WsoMmgto®, DC 20551.
m nsm A rm s: (i)
General. Th© Truth m Leading Act (15
U.S.C. 1E01 seg.} governs consumer
credit transactions and is implemented
by the Board’s Regulation Z (12 CFR
Part 22®). Effective October S3,1981, an
official staff eom m estey (T1L-1L Supp. 2
to 12 CFR Part 22S) was published to
interpret ft© regulation, The
commentary is designed to provide
guidance to creditors in applying ft©
regulation to specific tofmsactioas and is
updated periodically to address
significant qpsstiosss that arise. There
have been seven general updates and
one limited update eo'fasv Thao notice
contains ft© proposed ©ighft general
update. It is expected that it will be
adopted in final form in March 1989 with
optional compliance until the uniform
effective date of October 1 for
mandatory compliance.
(2) Proposed revisions. The following
is a brief description of the proposed
revisions to the commentary:
Subpart A=Cen©iral
Section 226.4—Finance Charge
4(a) Definition
Comment 4(a}-3 would be revised to
clarify that charges imposed on the
consumer by someone other than the
creditor are finance charges if the
creditor requires the services of the third
party. For example, if a consumer
cannot obtain the same credit terms
from the creditor without using a loan
broker, any fee imposed by the broker is
a finance charge.
4(b) Examples of Finance Charges
Paragraphs 4(b) (7) and (8)
Comment 4(b) (7) and (8)—2 would be
revised to clarify that insurar.ee "written
in connection with a credit transaction”
includes insurance sold to a consumer at
any time during an open-end credit plan.
Thus, premiums for property msurance
or credit life insurance sold to a
consumer in an open-end credit plan
would be finance charges unless
excluded under § 220.4(d).
Subpart C=Offigsd~En:dl Crsftt
Section 226.17—General Disclosure
Requirements
17(a) Form ©f Disclosures
Paragraph 17(a)(1). Comment 17(a)(1)5 would be revised to provide that
creditors with variable-rat© transaction
subject to 8 SS.10(f](2) may also
provide ft© information set forth in
§ 228.10(f)(1) oo information directly
related to ft® required disclosures.
17(c) Basis of Disclosures and Use of
Estimates
Paragraph 17(c)(1). Comment 17(c)(1)B would b© revised to clarify the basis of
3
disclosures for variable-rate
transactions with n® initial discounted
or pramMEs sate. Tha comment explains
feat creditors should bass© their
disclosures only on ft© initial rate and
not on ©my poteatisi rat© increase®.
Coamsaeats 17{c)(l>*14 and 17(e)(l}=15
would be rtnumterod m 17(c)(l>=15 and
17(g}(1|=-18, reigsotivoSy. New comment
17(c)(l]HM would fes added tedarify
how leaders should provide disclosures
for reverse mortgages. These mortgages,
also known as rovers® annuity or home
equity conversion mortgages, typically
involve the disbursement of monthly or
other periodic advances to the consumer
for a fixed period or until the occurrence
of an event such as the sale of the house
by the consumer. Repayment of the loan
may be required at the end of the
disbursement period or at a later time:
both accrued interest and principal are
often payable in one payment.
Some reverse "term" mortgages have
a fixed term for the disbursement of
funds to the consumer, but provide that
the consumer does not have to repay the
loan until a later time, such as when the
consumer sells the house. The proposed
comment provides that the creditor
should assume repayment is required on
the date that disbursements to the
consumer are scheduled to end even if
repayment is due upon the occurrence of
a future event that might follow the final
disbursement.
The new comment would also provide
guidance on how creditors should make
disclosures when both the period for
advances and the date for repayment
are determined solely by a future event,
such as when the consumer moves cut
of the house. In such cases, the creditor
would be required to base all of the
disclosures on the assumption that both
the advances will end and repayment
will be required at the time of the event
most likely to occur first. For example, if
disbursements cease and repayment is
required either upon the sale of ft© "
house or the death of the consumer, all
disclosures would be based on the event
the creditor estimates is most likely to
occur first. Alternatively, if ft© creditor
is unable to estimate which event is
most likely to occur first, it may base the
disclosures on the consumer’s lif®
expectancy (such as by using actuarial
tables).
The proposed comment also
addresses ft® disclosure of ©haredappreciation fsatar©® associated with
reverse mortgages. The commemtery
provides that the appreciation feature
should be disclosed in accordance with
either %220.18(f)(1) or § 228.19(b), a®
appropriate.
Paragraph m(b}(2}(wjL Cosaaeat
19{b)(2)(&iM wsaasM fes revised to clarify
that, iro loasao feat <sol for a Sisal ba!B@®a
Section 228. lB=Con ten t o f Disclosures
payment aS ths ©utotanfe® fe&lsuas®, th©
18(f) Variable Rate
creditor must daodaas that
but rosed
not refesfi t e lb©!®©® payment ® f e
histories! cssanapic or fe
disclosure of
the initial and E&asdmffiEa rotes and
payments,
P m ^raph tB(b}{2)$v)' Ctoassoffit
I 9 (b)(2 )(v>-1
fee reriosd to skrify
that. conoras? buydowns ©rod tta&-
Paragraph 18(f)(2). Comment 18(f)(2}=
1 would be revised by adding a crossreference to the commentary to
| 228.17(aXl) regarding the disclosure of
additional variable-rate information as
directly related information.
Section 228.29=Certain Residential
Mortgage Transactions
19(b) Certain Variable-Rate
Transactions
Comment 19(b)—1 would be revised to
clarify the disclosure of construction
loans that may be permanently
financed. Under the current rules in
§ 226.17(c)(6), a creditor may disclose
the construction and permanent
financing arrangements, under § 226.18,
as a single transaction or as separate
transactions. Under the proposed
revision to comment 19(b)—
1, a creditor
would be permitted to apply a similar
analysis in determining the applicability
of § 226.19(b). Under the proposed
revision, the creditor could treat the
construction phase as a separate
transaction and, if the term is one year
or less, disclosures under § 226.19(b)
would not be required for the
construction phase. Furthermore, the
revised comment would make clear that
a creditor could treat the construction
and permanent phases as distinct
transactions for purposes of determining
coverage under § 226.19(b), yet still
provide a single § 226.18 disclosure in
accordance with the rules in
I 226.17(c)(6).
Comment 19(b)-! also would be
amended to address the disclosure
requirements for non-creditor holders
who permit new consumers to assume
variable-rate transactions secured by
the consumer's principal dwelling with a
term longer than one year. The comment
explains that such holders, like creditors
in assumptions, should provide
disclosures under §§ 220.18{f){2Xi) and
228.20(c), but need not provide
disclosures under §§ 22 @.10 (£)(2 }pi) or
226.19(b).
Paragraph 19(b)(2). Comment
19(b)(2)”! would be revised to clarify
the timing requirement© for disclosure©
provided In response to a subsequent
expression of interest by the consumer.
The comment wouM also make clear
that if the esnsamer and creditor ©gpee
on a program difepeaf than that esfc
forth in £1® diedlssures that were
already provided, dieslosareo for the
new progress
b® provided
party buydowns that are reSosted m ths
legal obligation should be disclosed in
accordance with the rules for discounted
variable-rate transactions. The revised
comment would also make clear that no
additional disclosures relating to the
buydown need be provided on the
program disclosure.
Paragraph 19(b)(2)(viii). Comment
19(b)(2)(viii)-l would be amended to
clarify that, in transactions that end
before the last year in the historical
example, the example must illustrate all
significant loan program terms such as
rate limitations that would have affected
the interest rate for the remaining years
shown in the example.
Paragraph 19(b)(2)(ix). Comment
I9(b)(2)(ix}-1 would be revised to clarify
that, in transactions where the latest
payment shown in the historical
example is not for the latest year of
index values shown, a creditor may
base the disclosure of how to calculate
the consumer’s actual payments on the
initial or maximum payment disclosed
under § 22@.19{b)(2)(x}.
Section 226.%)—Subsequent Disclosure
Requirements
20 (b)
Assumptions
Comment 20(b)-9 would be amended
to add a cross reference to § 228.19(b)
concerning the disclosure requirements
for non-creditor holders of variable-rate
transactiono secured by the consumer’s
principal dwelling with a term longer
than on® year.
20 (c)
Variable-Rate Adjustments
Paragraph 20(c)(4). Comment 20 (c)(4 )1 would be revised to clarify that the
provisions of this paragraph apply to
balloon payment transactions. The
comment explains that the creditor
should disclose any change in a balloon
payment that results from an interest
rat® adjustment
Paragraph 20(c)(5). Comment 20 {c}(§}-=
1 would be amended to clarify that th®
provisions of this paragraph apply only
when ssgaMv© smariigaMQs ©emars m a
transaction, and not merely because a
payment is a non-amortizing or partially
amortizing payment
4
Section 226.23—Right of Rescission
23(b) Notice of Right to Rescind
©omragsri
wooH fe®revised to
clarify the requirement© %rs
disclosure ®f security interests ©a
rescission notices. Recently, there has
been some dispute over the specificity
required in such a disclosure. The
revised, ©ammemi would mil® dear that
whoso es<5Sr% interests feaksa is
conas^foB with pakos tefflsaddoroo
r@E2dai Bssssd sad a new ©scurity
interest is taken, the rescission notice
need not detail each interest that the
creditor may hold in the property.
Rather, a simple disclosure of the fact
that the transaction is secured by the
consumer’s principal dwelling is
sufficient.
Section 226.24—Advertising
24(b) Advertisement of Rate of Finance
Charge
Although not reprinted in this notice,
comment 24(b)—
5 would be revised to
change the references to comment 18(f)—
8 to be 17(c)(l}-10. No substantive
change is intended.
Subpart D—Miscellaneous
Section 226,25—Record Retention
25(a) General Rule
Comment 25(a)-3 would be added to
address the record retention
requirements for variable-rate
transactions that are subject to the
disclosure requirements of | 226.19(b).
The comment explains that maintaining
written procedures for compliance with
the disclosure provisions as well as
retaining a sample disclosure form for
each loan program will be adequate
evidence of compliance.
Section 226.30—Limitation on Rates
Comment 30-8 would be revised to
clarify that this paragraph applies to the
manner of stating the maximum interest
rate in the credit contract only. This
paragraph does not govern how interest
rate ceilings should be stated in Truth in
Lending disclosures. The disclosures are
governed by provisions found elsewhere
in the regulation and commentary.
Comment 39-13, concerning footnote
50, would be revised to clarify the
requirements of the regulation after
October 1,1988. For purposes of
| 226.30, the rate must be stated in the
credit contract ©s prescribed in
comment 30-8. The disclosure
requirements for limitations of rate
increases are described elsewhere ia the
regulation and commentary.
Appsffi<fc B=Mu!i&pl®"Advaffl<s®
Construction L®asns
Although not reprinted in this notice,
the first sentence of comment app. B- 2
would be revised to delete the word
"most” and to change the reference to
§ 22&18{p(4) to be § 22&18(f)(l)(iv). No.
substantive change is intended by either
revisions
List of Subjects in CFE Fsurt §§©
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 bold-faced
arrows, while language that would be
deleted is set off with brackets.
Text of proposed revisions
Pursuant to authority granted in
section 105 of the Truth in Lending Act
(15 U.S.C. 1604 as amended) and section
1204 of the Comprehensive Equality
Banking Act, Pub. L 100 - 8 6 ,1 0 1 Stat.
552, the Board proposes to amend the
official staff commentary to Regulation
Z (12 CFR Part 220 Supp. I) as follows:
parenthetical material at the end of
comment 20(b)-S; adding a sentence
after the second sentence in comment
20(c)(4)—1; revising comment 20(c)(5)-l;
adding tews esafeences after the second
semtos® in coamnsent 2J(b}-3; changing
the references to “ornament
in
the first sentence and in the first bullet
paragraph of comment 24(b}-5 to
"comment 17(c)(l}-10M; adding comment
25(a)—3; revising the first sentence of
comment 30-8; revising the last sentence
in comment 30-13; removing the word
“most” and changing the reference to
"§ 226.18(f)(<ljMm comment app. D-2t©
" | 223.1i3{iF)(llfivr to read as fioilowosSufopart A— G eneral
*
6
*
*
6
Section 2264—Finance Charge
4(a) Definition.
*
*
*
*
*
3. Charges b y third parties. * 4 *£>In
contrast changes imposed on the consumer
by someone other than the creditor are
finance charges if the creditor requires the
services of the third party. For example:
° Any fee charged by a loan broker if the
consumer cannot obtain the same credit
terms from the creditor without using a
broker. <j
6
6
6
6
P A R T S — [AM ENDED]
*
1 . The authority citation for Part 228
continues to read:
4(b) Examples o f Finance Charges
Authority: Sec. 105, Truth in Lending Act,
as amended by sec. 605, Pub. L 93-221, 95
Stat. 170 (15 U.S.C. 1605 e t seq.f, sec. 1204(c),
Competitive Equality Banking Act, Pub. L
100-86,101 Stat. 552.
Paragraph 4(b) (7) and (8)
2 . The proposed revisions amend the
commentary (TIL-1 , 12 CFR Part 22 ®
Supp. I) by adding a sentence and a
bullet paragraph at the end of comment
4(a)-3; revising the heading and adding
a sentence at the end of comment 4(b)
(7) and (8 )—2; adding a bullet paragraph
at the end of comment 17(a)(1)—
5; adding
two sentences and parenthetical
material after the second sentence in
comment 17(c)(l}-8; redesignating
comments 17(c)(l)-M and -15 to be
comments 17(c)(l}-15 and -KS,
respectively; adding comment I7(e)(1l]h
14; adding parenthetical material at the
end of comment 18(f)(2)—
1; adding three
sentences at the end of comment 19(b)1 ; revising the fourth sentence of
comment !S(b)(2 )-l; adding a sentence
after the second sentence in comment
19(b)(2)(iii)-l; adding a new sentence
before the parenthetical material at the
end ®f comment 19(bM2)(v)~l; revising
the third ssntemcs in the parenthetical
material after die first sentence in
comment 19{b)(2){viii}-l; adding a
sentence after the second sentence in
comment I9(b)(2)(ix}-1; adding
“w ritten in connection with a credit
transaction” includes insurance so ld a t any
tim e during the existen ce o f the plan.<\
*
*
6
6
*
6
*
*
6
6
2. Insurance written [after consum mation.]
d>in connection with a transaction. <\ " * °
c>In open-end credit plans, insurance
6
6
6
6
6
Sufepart C —C losed-E nd Credit
Section 228.17—G eneral Disclosure
Requirem ents
17(a) Form o f D isclosures
Paragraph 17(a)(1)
6
0
0
6
6
8.
D irectly related. 0 0 0
c>° Tka diaclosrafea e®4 forth under
§ 226.18(f)(1) for variable-rate tranoactiona
subject to § 223.18(f)(2). o
17(c) Basis o f D isclosures an d Use o f
E stim ates Paragraph 17(c)(1)
6
6
6
6
6
8.
B asis o f d isclo su res in variable-rate
transactions. *
*
oC reditors should base the disclosures
only on the initial rate and should not assume
that this rate will increase. For example, in a
loan irith an ini teal rate of 10 percent and a 5
percentage points rate cap, creditors should
b a se the disclosures on the initial rate and
should not assume that this rate will increase
5 percentage points. (See, however, the
commentary to § 223.17 concerning
5
disclosures for discounted and premium
variable-rate transactions.) <3 0 4 0
l>14. R everse mortgages. Reverse
mortgages, also known as reverse annuity or
home equity conversion mortgages, typically
involve the disbursement of monthly
advances to the consumer for a fixed period
or until the occurrence of an event such as
the consumer's selling or moving out of the
home. Repayment of the loan (generally a
single payment of principal and accrued
interest) may Ik required to be made at the
end of file disbursements or, for example, at
the time the consumer moves out of the home.
In disclosing these transactions, creditors
must apply file following rules, as applicable:
o M the reverse mortgage has a specified
period for advances, but repayment is due
only upon the occurrence of a future event
such as the sale of the house by the consumer
(which could occur after the last
disbursement), the creditor must assume
repayment will occur on the date
disbursements to the consumer will end. This
assumption should be used even if repayment
might not occur when the disbursements end.
In such cases, the creditor may include a
statement such as “The disclosures assume
that repayment will be required at the time
our payments to you end. As provided in your
agreement, your repayment may be required
at a different time.”
° If the reverse mortgage has neither a
specified period for advances nor a specified
repayment date and these terms will be
determined solely by reference to future
events, the creditor must base the disclosures
on the event estimated to be most likely to
occur first. For example, if the plan provides
that repayment will occur either upon the
sale of the home or the death of the
consumer, the creditor must base the
disclosures on the creditor’s estimate of the
date the home will be sole, if the sale of the
house is determined to be more likely to
occur before the death of the consumer. If the
creditor is unable to estimate which event is
most likely to occur first, the disclosures may
be based on the consumer’s life expectancy
(6uch as by using actuarial tables).
° In making the disclosures, creditors must
assume that all disbursements and accrued
interest must be paid by the consumer. For
example, if the note has a nonrecourse
provision providing that the consumer is not
obligated for an amount greater than the
value of the house, the creditor will
nonetheless assume that the full amount to be
disbursed will be repaid. In this case,
however, the creditor may include a
statement such as “The disclosures assume
full repayment of the debt, although the
amount you may be required to pay is limited
by your agreement."
° Some reverse mortgages provide that
some or all of the appreciation in the value of
the property will be shared between the
consumer and the creditor. Such loans are
considered variable-rate mortgages, as
described in comment 17(c)(l)-ll, and the
appreciation feature must be disclosed in
accordance with § 226.18(f)(1). If the reverse
mortgage has a variable interest rate, is
written for a term greater than one year, and
is secured by the consumer’s principal
dwelling, the shared appreciation feature
must be described under § 226.19(b)(2)(vii).<]
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Section 226.18—Content o f Disclosures
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18(f) Variable Rate
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Paragraph 18(f)(2)
1. Disclosure required. 4 0 4 o (S e e the
commentary to 0 226.17(a)(1) regarding the
disclosure of certain directly related
information in addition to the variable-rate
disclosures required under § 226.18(f)(2).) <3
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Section 226.19— Certain Residential
Mortgage Transactions
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19(b) Certain Variable-Rate Transactions
1. Coverage. 4 4 4 o I n determining
whether a construction loan that may be
permanently financed by the same creditor is
covered under this section, the creditor may
treat the construction and the permanent
phases as separate transactions with distinct
terms to maturity or as a signle transaction.
For purposes of the disclosures required
under § 226.18, the creditor may nevertheless
treat the two phases either as a signle
transaction or as a combined transaction in
accordance with § 226.17(c)(6). Finally, in
cases where a subsequent holder permits a
new consumer to assume a variable-rate
transaction secured by the consumer’s
principal dwelling with a term greater than
one year, the holder, like a creditor, need not
provide new disclosures under
§ 226.18(f)(2)(ii) or 226.19(b), but must provide
the disclosures required under
§§ 226.18(f)(2j(i) and 226.20(c). <3
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Paragraph 19(b)(2)
1. Disclosure for each variable-rate
program. 4 4 4
If the consumer subsequently expresses an
interest in other available variable-rate
programs subject to § 226.19(b)(2), the
creditor must provide disclosures for such
additional programs o a s soon as reasonably
possible after the subsequent expression of
interest. In addition, if the creditor and
consumer agree upon program terms for
which the consumer has not received
disclosures, the appropriate program
disclosures must be provided as soon as
reasonably possible after the
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Paragraph 10(b)(2)(v)
1. Discounted and premium interest
rate. * 4 °
o ln a transaction with .a consumer
buydown or w ith a third-party buydown that
w ill be incorporated in the legal obligation,
the creditor should disclose the program as a
discounted variable-rate transaction, but
need not disclose additional information
regarding the buydown in its program
disclosures. <j 0 0 4
Paragraph 18(b)(2)(viii)
1. Index movement 4 4 4 For the
remaining ten years, 1982-1991, the creditor
need only show the remaining index values,
margin and interest rate ([.]] oand must
continue to reflect all significant loan
program terms such as rate limitations
affecting them. <3 4 4 4
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Paragraph 19(b)(2)(ix)
1. Calculation of paym ents. 444
e>However, in transactions in which the
latest payment shown in the historical
example is not for the latest year of index
values shown (such as in a five-year loan), a
creditor may base the disclosure required
under this paragraph on the initial or
maximum payment disclosed under
§ 226.19(b)(x).<i 4 4 4
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Section 226.20— Subsequent Disclosure
Requirements
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Section 226.23— Right of Rescission
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23(b) Notice of Right to Rescind
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3. Content. 4 4 4 > In disclosing the
retention or acquisition of a security interest,
a creditor need not separately disclose
multiple security interests that it may hold in
the property. The creditor need only disclose
that the transaction is secured by the
consumer’s principal dwelling, even when
security interests from prior transactions
remain of record and a new security interest
is taken in connection with the
transaction. <3 4 4 4
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Subpart B—Miscellaneous
Section 226.25— Record Retention
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Paragraph 20(c)(4)
1.
. 4 4 4 o ln balloon payment
transactions, if an effect of the adjustment
w ill be to change the balloon payment, the
amount of the adjusted ballon payment must
be disclosed. <3 4 4 4
Contractual effects of the
adjustment
Paragraph 20(c)(5)
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Certain variable-rate transactions. In
03.
variable-rate transactions that are subject to
the disclosure requirements of 0 226.19(b),
written procedures for compliance with those
requirements as well as a sample disclosure
form for each loan program represent
adequate evidence of compliance, o
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1. Fully-amortizing payment. ([A disclosure
is required if the payment disclosed in
Paragraph 19(b)(2)(iii)
§ 228.20(c)(4) is not sufficient to pay off the
loan balance (including capitalized interest)
1. Determ ination o f interest rate and
in the remaining term of the loan at the
payment. 4 4 * o ln transactions that call
for a final balloon payment of the outstanding adjusted interest rate. In such cases, the]]
balance, the creditor must disclose this fact. oThis paragraph requires a disclosure only
when negative amortization occurs as a
For example, the disclosure might read, “At
the end of the loan term, a single payment of result of the adjustment. A disclosure is not
required simply because a loan calls for nonthe entire outstanding balance w ill be
amortizing or partially amortizing payments.
required.” The ©editor, however, need not
For example, to a five-year balloon loan with
reflect the balloon payment in the historical
example or in the disclosure of the initial and payments based on a longer amortization
maximum rates and payments. <3 0 0 4
schedule, the creditor would not have to
disclose the payment necessary to fully
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20(c) Variable-Rate Adjustm ents
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0. Disclosures. 4 4 4 o(See the commentary
to § 226.19(b) for the disclosure requirements
for non-creditor holders of variable-rate
transactions secured by the consumer’s
principal dwelling with a term greater than
one year.) o
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25(a) General Rule
20(b) Assumptions
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amortize the loan in the remainder of the
five-year term. A disclosure is required,
however, if the payment disclosed under
§ 228.20(c)(4) is not sufficient to prevent
negative amortization in the loan. The <3
adjustment notice must state the payment
required to ([fully amortize the loan over the
remainder of the term.]] oprevent negative
amortization o . (This paragraph does not
apply if the new payment disclosed in
§ 226.20(c)(4) is fffully amortizing]]
o sufficient to prevent negative amortization
in the ipano but the final payment w ill be a
different amount due to rounding.)
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Section 226.30— Limitation on Rates
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8. M anner o f stating the maximum interest
The maximum interest rate must be
stated o in the credit contracts either as a
specific amount or in any other manner that
would allow the consumer to easily ascertain,
at the time of entering into the obligation,
what the rate ceiling w ill be over die term of
the obligation. 4 4 4
rate.
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13. Transition rules. 4 0 4 On or after that
date, creditors must have the maximum rate
set forth in their credit contracts and, where
applicable, as part of their teafh in lending
disclosures £.jj o in the manner prescribed in
the applicable sections of the regulation.<i
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Board of Governors of the Federal Reserve
System, November 2D, IS^S,
W iffira W . W iles,
Secretary of the Board.
[FR Doc. 68-27833 Filed 12-2-88; &46 am]
BtLUMG COOS 8210-01-0
@FedFRASER