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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 10562 August 13, 1992 "1 REGULATION Z — TRUTH IN LENDING — Retention of Current Rules on Disclosure of Home Equity “Teaser” Rates and Payment Examples — Final Rule on Home Equity Credit Lines for Lenders’ Executive Officers To All Depository Institutions, and Others Concerned, in the Second Federal Reserve District: Our Circular No. 10508, dated January 13, 1992, contained a request by the Board of Gov ernors of the Federal Reserve System for public comment on (a) whether to change its rules regarding the disclosure of any discounted initial rate and the payment examples for home equity lines of credit, and (b) whether to adopt a proposed rule regarding home equity credit lines for bank executive of ficers. Following consideration of the comments received, the Board of Governors has announced its decision to adopt the proposal on home equity credit lines for bank executive officers, but not to change the other rules. Enclosed — for depository institutions and for others who maintain sets of the Board’s reg ulations — is the text of the Board’s official notice in this matter, as published in the Federal Register of August 6. Note that the effective date of the amendment is July 29, 1992, but that compliance is optional until October 1, 1993. Additional copies of the enclosure may be obtained at this Bank (33 Liberty Street) from the Issues Division on the first floor, or by calling our Circulars Division (Tel. No. 212-720-5215 or 5216). Questions may be directed to our Compliance Examinations Department (Tel. No. 212-720-5914). E. G e r a l d C o r r ig a n , President. L Thursday August 6, 1992 Vol. 57, No. 152 Pp. 34676-34681 Amendment to Regulation Z Docket No. R-0743 Home equity disclosure rules Effective July 29, 1992 [Enc. Cir. No. 10562] (54 FR 3063) and on June 9,1989, adopted a final rule (54 FR 24670). 12 CFR Part 226 Compliance with the regulation was mandatory as of November 7,1989. [Regulation Z; Docket No. R-0743J On November 1,1989, Consumers Union filed suit against the Board Truth in Lending; Home Equity challenging certain aspects of the Disclosure Rules regulation.1 The U.S. District Court for AGENCY: Board of Governors of the the District of Columbia issued a Federal Reserve System. decision in favor of the Board on several ACTION: Final rule. aspects of the lawsuit in May 1990. Consumers Union v. Federal Reserve SUMMARY: The Board is amending Board (736 F. Supp. 337). Consumers Regulation Z (Truth in Lending) to provide that depository institutions may Union appealed that decision to the U.S. retain the right to demand payment of a Court of Appeals for the District of home equity line of credit extended to Columbia Circuit. In July 1991, the Court of Appeals issued its opinion, deciding their own executive officers when in favor of the Board on four of the required by federal law; and not changing the rules in Regulation Z that issues presented on appeal, and remanding to the Board for further set forth the way creditors disclose consideration two other issues. discounted initial rates and certain Consumers Union v. Federal Reserve payment examples for home equity lines. The rules in question relate to the Board (938 F.2d 266). The two issues Home Equity Loan Consumer Protection deal with how creditors disclose a Act of 1388, which requires creditors to “teaser" or initial discounted rate, and provide consumers with information for the payment examples that must be provided in the preapplication open-end credit plans secured by the consumer’s dwelling, and places certain disclosures. On December 30,1991, the Board published a proposed rule seeking substantive limitations on the way in comment on whether the regulation which those lines may be structured. should be amended (56 FR 67233). The With regard to the amendment, Board also requested comment on a depository institutions that currently third Issue, unrelated to the litigation, include such a provision in their executive officer’s contracts will not be concerning the conflict between section 22 of the Federal Reserve Act, which affected by this amendment. The regulates member bank loans to approach adopted by-the Board for disclosure of the discounted initial rate executive officers, and the substantive and certain payment examples has been rules contained in the home equity examined by the U.S. Court of Appeals statute. The Board received 84 comments on for the District of Columbia Circuit in the proposal. Based on a review of the recent litigation, and remanded to the comments and further analysis the Board for further consideration. After Board is revising the regulation relating such reconsideration and analysis of the to credit extended to executive officers, comment letters, the Board has decided but Is leaving unchanged the provisions to retain the existing rules. dealing with discounted rates and the EFFECTIVE DATE: July 29,1992, but payment examples. compliance optional until October 1. Section 105(d) of the Truth in Lending 1993. Act provides that amendments to Regulation Z shall have an effective FOR FURTHER INFORMATION CONTACT: date of October 1, and must be Leonard Chartin, Senior Attorney, Division of Consumer and Community promulgated at least six months before that date. Thus, in the present case the Affairs, at (202) 452-3667 or (202) 452Board believes an October 1,1993 2412; for the hearing impaired only, effective date is required by the statute. contact Dorothea Thompson, Telecommunications Device for the (2) Amendments to Regulation Z Deaf, at (202) 452-3544, Board of (i) Teaser rate provision. The home Governors of the Federal Reserve equity statute provides that creditors System, Washington, DC 20551. must state any initial “teaser" or SUPPLEMENTARY INFORMATION: discounted rate in the preapplication disclosures. Specifically, the statute (1) Background states [IJf an initial annual percentage The Home Equity Loan Consumer rate is offered which is not based on an Protection Act was enacted in index— November 1988. On January 23,1989, the (i) A statement of such rate and the Board published for comment a period of time such initial rate will be in proposed rule to implement the statute effect. FEDERAL RESERVE SYSTEM 2 In the final regulations implementing the statute, the Board did not require that the exact amount of the discounted rate be stated. Instead, creditors were required to disclose the fact that the initial rate is discounted, state the period of time the rate will be in effect, and alert consumers to “ask about" the current discounted rate. In its briefs to the District Court and the Court of Appeals, the Board stated that the regulation diverged from the statutory language in reliance on the Board’s “exception" authority. The Truth in Lending Act grants the Board broad authority in implementing the statute. Section 105 of the act provides that implementing regulations may contain such classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of [the Truth in Lending Act), to prevent circumvention or evasion thereof, or to facilitate compliance therewith. (Emphasis added.) The Court of Appeals noted that the issue of the Board's exception authority had been raised for the first time during the course of the litigation, and had not been passed upon in the first instance by the Board itself. The Court thus remanded this portion of the regulation to the Board, to allow it to identify the scope of its exception authority under the Truth in Lending Act, to decide how broad the “class of transactions" can be that is exempted, and to decide whether an exception was necessary or appropriate in the case of the teaser rate provision. In December 1991, the Board solicited comment on the teaser rate disclosure and whether the regulation should be amended to require disclosure of the exact teaser rate in the early disclosures. The Board also requested comment on whether an exception is necessary or appropriate in the case of the discounted initial rate disclosure. 1 Among other issues. Consumer Union challenged the provision in the regulation permitting creditors to suspend advances of credit during any period the rate cap is reached. Consumers Union also challenged the part of the regulation permitting creditors to give disclosures about any “repayment" period—that is. when advances are no longer made and the consumer is paying off the amount borrowed—at the time the repayment period begins, rather than at the time of application. In March 1990 the Board published a proposed rule to amend the regulation relating to the rate cap and delayed timing issues. (56 FR 10485. March 21.1990) In September 1990 the Board adopted a Final rule (55 FK 38310. September 18.1990) (correction notice at 55 FR 39538. September 27, 1990) on these two issues. l O i G 'U * believes this approach would provide The Board asked commenters to explain is, the fact that the initial rate is discounted, the temporary nature of the limited value to consumers, and is not why stating the amount of time any adopting it. discount is in effect (which is required discount, and a reminder to ask for (ii) Payment examples issue.The current rates). The Board believes this by the regulation) does not raise the statute requires three types of payment same problems as requiring the amount approach fulfills Congress’ intent to examples to be provided for home of the discount to be stated. The Board ensure that applicants know the most also solicited comment on whether the important features of home equity lines, equity plans: (1) An example showing the minimum periodic payment and and is an appropriate case for making use of ranges to state the discount an adjustment to the statutory provision. amount of time needed to repay the line, would be desirable based on a $10,000 balance and a recent Of the sixty-seven commenters who The Board believes that requiring annual percentage rate (the “minimum discussed the discount issue, fifty-seven creditors to state the exact amount of payment” example); (2) a statement of stated the Board should not change the any initial discounted rate in the preapplication disclosures could cause the minimum periodic payment based on rules dealing with initial discounted a $10,000 balance when the maximum rates. A number of commenters stated consumers to suffer adverse annual percentage rate is in effect (the that if creditors were required to state consequences. “worst case” example); and (3) an The Board believes if creditors were the exact amount of the discount in the early disclosures they might discontinue required to state the exact amount of the historical table, based on a $10,000 offering such a feature, due to the need discount, many creditors might eliminate extension of credit, showing how annual percentage rates and payments would this feature from their plans, thus to frequently update forms. Several reducing choices (particularly lower-cost have been affected by index value commenters stated that reprinting changes over the most recent 15 year alternatives) available to consumers. disclosures every time a discount period (the "historical example”). The For those that continued to offer changed would impose significant costs, substantially increase the potential for discounted plans, the Board believes the statute provides that the worst case example and the historical example errors in printing and distributing new costs incurred in complying (which must be stated for “each repayment would ultimately be paid by the forms, and raise additional liability option" under the plan. consumer) would vastly exceed the risks. In implementing the statute, the Board benefits consumers derive from the Several commenters noted that in a chose to allow creditors to provide disclosure. rapidly changing rate environment representative examples of the various The Board notes that the regulation creditors would have to update the requires creditors to inform consumers payment options offered, rather than preprinted forms on a frequent basis, that the rate is temporary and the length requiring separate examples for each imposing significant printing, payment option. (See comments of time it is in effect with the early administrative, and distribution costs 5b(d)(5)(iii)-(2), 5b(d)(12)(x)-l, and preprinted disclosures. In addition, that would be passed on to consumers. 5b(d)(12)(xi}-7 of the Official Staff Commenters stated that these increased creditors must disclose to consumers the Commentary.) Under this rule, no matter exact amount of any discounted initial costs greatly outweighed any benefits how many payment options were consumers might derive from receiving rate with other information given prior offered, creditors would never have to to consummation, under § 226.6 of the the specific discount. Commenters also disclose more than three minimum regulation. Finally, lenders have an noted practical problems that would payment examples, three worst case incentive to let the consumer know the arise if the exact amount of the discount examples, and three historical amount of the discount since the had to be stated. Commenters stated examples. In its briefs to the District purpose of a discounted rate program is that it could take months to prepare the to encourage consumers to open a home Court and Court of Appeals the Board preprinted disclosures and. if the noted that requiring a worst case equity line. discount had to be preprinted, the example and historical example for As mentioned earlier, the Board asked institution might want to change the every payment option offered would commenters to explain why stating the discount by the time the new forms were amount of the discount raised a problem result in "information overload” and ready for distribution. would likely lead lenders to reduce the when creditors must state the time a Ten commenters stated that the Board discount is in effect. Several options offered to consumers. The briefs should change its rule, and require argued that the Board adopted its rule commenters stated that providing the creditors to state the exact amount of pursuant to its exception authority. time a discount is in effect was not a the discount in the preapplication Again, the Court of Appeals remanded problem since programs are typically disclosures. In general, these this issue to the Board because the issue offered for a standard period of time, commenters felt consumers needed to of the Board’s exception authority under such as six months or one year. know the precise amount of the discount Commenters distinguished this the Truth in Lending Act had not been at this early stage to be able to developed in the rulemaking record, but requirement from stating the exact accurately compare accounts. These discount since the latter figure could and was raised only in litigation. commenters stated that without this In its December 1991 proposal, the often did change frequently. figure consumers could not determine The Board also solicited comment on Board solicited comment on whether the which of two (or more) plans offers the whether consumers would benefit by payment example rule should be revised better deal. to require an example for each payment having the discount stated as a range. Based on a review of the comment option. Sixty-four commenters Commenters stated that providing a letters and further analysis the Board is range for a discount might be more addressed this issue. Sixty of them retaining the current rule in the workable for creditors than stating the stated that Board should not amend the regulation dealing with initial exact amount of the discount, but would regulation to require payment examples discounted rates. The Board believes the be of little benefit to the consumer, since for all payment options offered. Four current approach provides the the consumer would have to contact the commenters stated that the Board information that is most useful to should require such examples and creditor anyway to find out the exact consumers about discounted rates (that amount of the discount. The Board argued that consumers needed such 3 information to make informed decisions about home equity plans. Based on a review of comment letters and further analysis, the Board is retaining the payment example rules as written. The Board believes the approach adopted provides consumers with the information needed to compare accounts. The use of representative examples, when coupled with a complete description of the minimum payment requirements and other disclosures, provides consumers with the most useful information. The Board believes if creditors were required to provide a 15-year historical example and “worst case” example for every payment option offered, many creditors would eliminate choices of payment plans provided to consumers. A number of commenters stated that they would reduce options available if they had to provide a 15-year historical example, minimum payment example and worst case example for every option, due to the expense, risk of error, and potential liability involved in providing such information. For example, one commenter stated it permits consumers to make payments of interest and a fixed amount of principal—with the consumer deciding how much principal to pay. If this creditor had to provide three payment examples for each option given to the consumer, this could require hundreds of examples. For those creditors that choose to provide numerous payment choices, the Board believes providing three examples for each option would produce an overwhelming amount of information. Several commenters pointed out this fact. The Board believes in such cases consumers may be overwhelmed with the sheer amount of information, and not read the disclosures, or not read the most important pieces of information, such as the index used to make rate adjustments. Such a result would be antithetical to the Congress’ purpose in enacting the law. Therefore, the Board believes this is an appropriate case for the exercise of its authority to make an exception to the statutory requirements. The Board recognizes that examples, by their nature, cannot capture precisely what a particular consumer’s payments under a particular plan will be. The examples are based on an assumed $10,000 extension of credit. Obviously, if a consumer’s line of credit is greater than that, the payment examples will not reflect his or her actual payments, regardless of how many examples are provided. Examples are illustrative, and providing a huge number of examples will not necessarily assist consumers in choosing a plan. The Board also notes that the regulation requires creditors to narratively describe every payment option given to consumers, and this ensures that consumers have a full description of the choices offered. This information describing the payment provisions is given a second time to consumers before they open the plan. (See § 226.6(e)(2).) (iii) Use of Exception Authority. As mentioned earlier, section 105 of the Truth in Lending Act grants the Board broad authority in implementing the statute. The Supreme Court has recognized this broad delegation of authority to the Board. The Court has stated: “(bjecause of their complexity and variety * * * credit transactions defy exhaustive regulation by a single statute. Congress therefore delegated expansive authority to the Federal Reserve Board to elaborate and expand the legal framework governing commerce in credit."2 The Board is using its “exception authority” to address three circumstances: disclosure of information about an initial discounted rate, disclosure of a historical example for payment options, and disclosure of the “worst case" example for payment options. The Board believes these exceptions are necessary and proper to accomplish the purposes of the act and facilitate compliance and fall within the limits on its authority to make exceptions. The Board believes that, while its authority to make exceptions is broad, the authority does have limits. The Board does not take the view that it is permitted to radically undermine the Congress’ purpose in enacting key elements of a statutory scheme, even if the Board strongly disagreed with the wisdom of the Congress’ decision. The Board does believe it is authorized to fashion rules that are faithful to the essential purposes of the law and that take account of the needs and capacity of both consumers and creditors. The home equity statute and implementing regulation require creditors to provide a significant amount of information to consumers about the home equity line offered by the creditor. Depending on the type of features of a specific creditor’s plan (such as multiple payment options and variable rate provisions) over 50 facts may be required to be disclosed to consumers (in addition to a 15-year historical example which shows index values, annual percentage rates and payments). The Board believes that use of its exception authority is warranted in the case of the discount issue for several reasons. First, if the exact discount were required to be disclosed, the Board believes many creditors would stop offering discounted plans. Due to the critical compliance problems—the inability to provide updated rate information with the preprinted disclosures to respond to market and competitive conditions—a result of such a requirement would likely be fewer choices to consumers and, in particular, the loss to consumers of lower rate alternatives. The Board believes some creditors would eliminate this option from their plans due to the increased risk of error and liability. Second, consumers might be misled if they rely on a discounted rate that turned out to be effective for only a short time after the disclosures were provided.3 If an exact figure were given, a consumer would receive information that is accurate when provided, but the discount could change if the consumer did not apply for the plan soon after receiving the disclosures.4 Third, the Board believes the key information the consumer needs is not the initial rate, but the fact that it is only temporary. Placing too much emphasis on the initial rate could diminish the fact that such a rate cannot be relied on for the long term. Finally, costs of complying with such a rule would be significant. Forms might have to be frequently changed at great expense to creditors. For those that continued to offer such plans the Board believes the costs of complying with such rules would greatly exceed any consumer * While disclosures must be accurate when provided, creditors are not required to guarantee any terms for the plan, as is reflected by the disclosure in $ 226.5b(d)(2)(i) concerning terms subject to change. 4 In this case, consumers would likely have to call the institution to ensure that the rate is still available. Alternatively, an institution could be required to guarantee the rate and include a date identifying how long it is available. Since discounted rates are a function of competitive and other factors, however, it might be very difficult for * Ford Motor Credit Co. v. MilhoIJin. 444 U.S. 555. an institution to accurately predict how long a rate 559-00 (1980). The Court also noted that: “(t}he will be made available to the public. This could lead concept of 'meaningful disclosure' that animates institutions to commit to only a short time period, in TILA * * * cannot be applied in the abstract order to retain the option of offering a less favorable Meaningful disclosure does not mean more discount in light of competitive or market disclosure. Rather, it describes a balance between conditions. Consumers would derive little benefit ‘competing consideration of complete disclosure from having a discounted rate disclosed if they * * * and the need to avoid * * * (information ultimately had to call institutions to verify the overload].' "Id at 568 (emphasis in original). current rate anyway. 4 benefits. are intended to limit the risks of insider offices. The home equity statute With regard to the rule dealing with provides that a creditor may not lending and to implement important payment examples, the Board is making terminate and demand payment of a line safety and soundness policies. an adjustment for two categories of If the home equity statute and section of credit except in three specified payment options.6 For that class of 22(g) of the Federal Reserve Act (and circumstances: Fraud, failure of the transactions that permit payment of a consumer to make payments, and action section 306 of FDICIA) were given full fixed percentage or fixed fraction of the by the consumer that impairs the effect, they could be read as effectively outstanding balance, the Board is not prohibiting home equity lines by security for the plan. The regulation requiring a 15-year historical example implementing this provision provides member banks, savings associations and and worst case example for every insured nonmember banks to their that a creditor may not include in its possible payment choice within that executive officers. The home equity contract a provision permitting it to category, but just one representative statute prohibits calling a loan except in terminate and accelerate the balance example. Similarly, for that class of the circumstances specifically set forth due except for these situations. (See in the statute. Section 22(g) of the transactions that permit payment of, for $ 220.5b(f)(2) and the accompanying example, a specified dollar amount plus Official Staff Commentary.) Federal Reserve Act (and section 306 of accrued finance charges, the Board is Section 22(g) of the Federal Reserve FDICIA) prohibits member banks, not requiring a 15-year historical Act establishes rules relating to loans to savings associations and insured example and worst case example for nonmember banks from making loans to executive officers by member banks. every possible payment choice within The law provides that a member bank executive officers unless the institutions that category. may extend credit to its own executive retain the ability to demand payment of The Board believes use of its officers provided "it is on condition that the loan in certain circumstances. The home equity statute does not recognize exception authority is warranted in the it shall become due and payable on the condition as a permissible reason to demand of the bank" any time the case of the 15-year historical example person is Indebted to any other bank in call a line of credit. Thus, if both laws and worst case example for several reasons. First, the Board believes that if an amount in excess of that prescribed were given full effect, member banks and savings associations could not offer creditors were required to provide these by the appropriate federal banking home equity lines to their executive examples for every payment option agency. Shortly after the Board officers. offered, the result would be that many considered the current proposal (but The Board requested comment on lenders would reduce the payment prior to publication in the Federal choices provided to consumers. Due to Register), the Federal Deposit Insurance whether the home equity regulation the complexity and costs in complying, Corporation Improvement Act (FDIC1A) should be amended to permit banks to include a call feature in their contracts and the increased risk of error and of 1991 was enacted. Section 306 of liability, many creditors would eliminate FDICLA provides that the provisions in for home equity lines for executive choices currently offered to consumers. section 22(g) of the Federal Reserve Act officers, and exercise that feature as provided in section 22 of the Federal Second, the Board believes providing a apply to savings associations and Reserve Act and implementing multitude of examples would likely nonmember insured banks. Thus, obscure important information, such as member banks, savings associations and Regulation O. Based on a review of the nonmember insured banks that extend comment letters and further analysis, the index used for the plan, and for the Board is modifying the regulation to those creditors that choose to continue credit to their executive officers must retain the ability to call the loan in the permit depository institutions to include offering multiple payment options, circumstances set out in section 22(g) of a demand provision in home equity lines consumers might not read the to executive officers, as provided in the the Federal Reserve Act.7 voluminous disclosures or might miss Regulation O (12 CFR part 215), which Federal Reserve Act and FDICIA. The the most important terms of the plan Board believes that the Congress, in The Board believes providing multiple implements the Federal Reserve Act, enacting the home equity statute, did not provides that a member bank making payment examples, beyond those intend to override the provisions in the loans to any of its executive officers already required by the regulation, shall retain the right to call the loan any Federal Reserve Act dealing with would overload the consumer with information.® Third, the Board believes time the officer is indebted to any other demand provisions in loans made to executive officers. This idea is the costs of complying with such a rule bank in excess of 2.5% of the member bank’s capital and unimpaired surplus buttressed by the fact that the Congress would be tremendous and greatly exceed any consumer benefits. This is or $25,000 (whichever is higher), but in recently enacted FDICIA which extended the important safety and especially true since the examples are all cases any amount over $100,000.® not intended to demonstrate the exact The statute and implementing regulation* soundness policies contained in section 22(g) of the Federal Reserve Act to payment that will be made by the T On March 4,1992, the Federal Deposit Insurance savings associations and insured consumer under the plan, but rather to Corporation amended its rules to provide that, with provide a general sense of the impact of certain exceptions, the rules in Regulation O apply nonmember banks. There is no rate changes on the minimum payments. to insured nonmember banks (57 FR 7647). On April suggestion in the legislative history of the Office of Thrift Supervision proposed a the home equity statute that the (iv) Home equity lines and executive 9,1992, rule to implement the provision in FDIC1A dealing Congress intended to repeal section with loans to executive officers of savings 22(g) of the Federal Reserve Act and associations (57 FR 12232). * The Board i» not exempting that class of prohibit banks from offering home * Subsequent to publication of the proposal to payment plans that permit payment of only accrued amend Regulation Z, the Board proposed to amend equity lines to their executive officers. finance charges (“interest-only" transactions) Regulation O to implement amendments to FDICLA. Indeed, enactment of section 306 of the On May 28,1992, the Board published a final rule * It is worth noting that the information required amending Regulation O. (57 FR 22417.) Among other FDICIA supports the idea that the by Regulation Z is in addition to Information a Congress intended for this provision to creditor includes in its contract with the consumer, changes, a technical revision was made to S215.5(d)(4) to clarify that member banks must “in continue in full force in spite of the deed accompanying the transaction, any state writing" provide for the ability to call a loan to an law-mandated disclosures, and other federal enactment of the home equity statute. executive officer. disclosures. 5 A number of persons commented on whether the home equity provisions should override the policies contained in section 22(g) of the Federal Reserve Act. All commenters but one believed the policies in the Federal Reserve Act, dealing with safety and soundness, should take precedence over the home equity protections. Those commenters stated that they favored a narrow exception to the home equity rules for executive officers, and that an exception was necessary and appropriate to effectuate the policies of the Federal Reserve Act. The one commenter opposing the Board's action stated that this was an inappropriate action to be taken by the Board, and that the Congress itself should make this determination. The Board is modifying the home equity rules to provide that member banks, savings institutions and insured nonmember banks can include a provisions in their credit contracts with executive officers granting the right to call a home equity line of credit to the extent required by section 22 of the Federal Reserve Act and section 306 of FDICIA. The final regulation permits, as did the proposal, all depository institutions, and not solely member banks, to use the exception regarding a demand feature. While current federal law (in the Federal Reserve Act and FDICIA) is limited to member banks, savings associations and insured nonmember banks, the Board has used the broader category of depository institutions for ease of reference, and in the event any other federal law or regulation is enacted that requires other institutions to retain the ability to call credit extended to executive officers. The home equity rules will ensure that the same rules apply equally to all depository institutions. The creation of an exception to the home equity rules accommodates the express terms of section 22(g) of the Federal Reserve Act and section 306 of FDICIA. This approach gives effect to the policies contained in the Federal Reserve Act, and at the same time creates a very limited exception to the home equity statute. The Board also believes its exception authority under the Truth in Lending Act is consistent with this modification of the home equity rules to permit depository institutions to include a demand feature in lines of credit made to executive officers. Without this modification, the Board believes some institutions may not make lines available to their executive officers. By clarifying that institutions may make such lines available to their executive officers, the Board believes it is ensuring some consumers access to such credit, which may not have been offered previously to them. The regulation reflects the fact that institutions that wish to offer home equity lines to their executive officers must include such a provision in their home equity agreements with those officers. The Board has added specific language to the regulation to expressly require this condition in the credit contract.9 Of course, an institution may only have a demand feature as broad as that required by the Federal Reserve Act, FDICIA and their implementing regulations in its home equity lines with executive officers. A broader demand provision is prohibited under Regulation Z. The Board solicited comment on whether a specific disclosure should be provided to executive officers if the home equity rules were interpreted to permit inclusion of this demand provision. The Board requested comment on whether a contractual provision setting forth this provision would provide adequate information if the provision is not also specifically disclosed in the preapplication disclosures. After reviewing the comment letters and for the reasons set forth below, the Board is requiring only that this provision be in the home equity contract, rather than requiring it to be separately disclosed with the preapplication disclosures. The vast majority of commenters opposed requiring a separate disclosure referencing this call provision. Commenters stated that including this provision in the contract with the executive officer was sufficient to notify the person of the right of the institution. Commenters also noted that executive officers are already likely to be aware of the limitations contained in Regulation O. The Board believes inclusion of this provision in the contract will notify executive officers of this condition. Commenters stated that including such a notice on disclosure forms given to all consumers would be very confusing to consumers, since the provision would be inapplicable to the vast majority of consumers. Many • While Regulation O requires that this provision must be "in writing." in order to implement provisions in the Home Equity Loan Consumer Protection Act that prohibit “unilateral" changes to a home equity plan, the Board believes that institutions must include such a provision in the home equity agreement entered into by the executive officer. 6 commenters also stated that having a separate disclosure form solely for executive officers, or requiring the use of an insert or attachment highlighting this feature would be unnecessary, and would increase the likelihood of error (in distributing the wrong form). The Board also will be permissive on whether this condition is separately disclosed under § 226.6(e)(1) of the regulation. (Section 226.6(e) generally requires creditors to provide again to consumers many of the preapplication disclosures at the time the account is opened.) The Board believes that the inclusion of this feature in the home equity agreement provides sufficient notice to executive officers of this feature. In addition, since these later disclosures are generally combined with contractual provisions, the Board believes that requiring a specific disclosure of such a feature, in most cases, would not provide the borrower with any additional information. Furthermore, requiring a disclosure under 5 226.6(e), but not requiring a disclosure under § 226.5b(d)(4), would likely create a more complicated rule and could increase compliance problems, with little, if any, additional benefit provided to the executive officer. Commenters requested that the Board address how this call feature relates to the closed-end disclosure rules. Specifically, commenters asked whether a demand disclosure is required under SS 226.18(i) and 226.19(b)(2)(xi), if a closed-end loan to an executive officer contains a call provision. The Board believes that when an institution has a narrow demand feature in its closed-end credit agreement to the extend required by section 22(g) of the Federal Reserve Act and 306 of FDICIA, institutions should be permitted to provide or not to provide demand disclosures. For consistency and to minimize compliance burdens, the Board believes it is important to treat these features similarly under the disclosure rules for open-end and closed-end credit. Of course, if an institution has a demand feature in its closed-end agreement that is broader than that required by the Federal Reserve Act and FDICIA, such a feature would have to be disclosed under § 228.18(i) and, in the case of variable-rate mortgages. § 226.19(b). The Board expects to propose technical conforming amendments to the official staff commentary in the fall, under the normal schedule for commentary revisions, reflecting these positions concerning § § 226.5b(d)(4), 226.6(e)(1), 228.18(i), and 228.19(b)(2)(xi). U frC Z L (3) Economic Impact Statement PART 226— 1AM ENDED] The change to the regulation is likely 1. The authority citation for part 226 to have an insignificant impact on continues to read as follows: creditors' costs, including those of small Authority: Truth in Lending Act. 15 U.S.C entities. 1604 and 1637(c)(5): sec. 1204(c), Competitive Equality Banking Act, 12 U.S.C. 3806. (4) Text of Revisions Pursuant to authority granted in section 105 of the Truth in Lending Act (15 U.S.C. 1604 as amended), the Board is amending Regulation Z, 12 CFR part 226, by modifying § § 226.5b(f)(2)(ii) and 226.5b(f)(2)(iii) and by adding § 226.5b(f)(2)(iv). List of Subjects in 12 CFR Part 226 Subpart B— Open-End Credit 2.12 CFR 226.5b is amended by revising paragraphs (f)(2)(ii) and (f)(2)(iii), and by adding paragraph (f)(2)(iv) to read as follows: 9 226.5b Requirements for home equity plans. Advertising, Federal Reserve System, * * a * a Reporting and recordkeeping (Q* • * requirements, Truth in lending. ( 2) * * ‘ For the reasons set out in the (ii) The consumer fails to meet the preamble, 12 CFR part 226 is amended repayment terms of the agreement for as follows: any outstanding balance; 7 (iii) Any action or inaction by the consumer adversely affects the creditor’s security for the plan, or any right of the creditor in such security; or (iv) Federal law dealing with credit extended by a depository institution to its executive officers specifically requires that as a condition of the plan the credit shall become due and payable on demand, provided that the creditor includes such a provision in the initial agreement. * * * * * By order of the Board of Governors of the Federal Reserve System. July 30.1992. William W. Wiles, Secretary of the Board. [FR Doc. 92-18468 Filed 8-5-02; 8:45 am) BILLING CODE >210-01-41
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