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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10611
January 7, 1993
”1
T R U T H IN L EN D IN G
Proposed Changes to the Official Commentary to Regulation Z
Comments Invited by January 29, 1993
To All 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 for public comment proposed revisions to its staff
commentary for Regulation Z, Truth in Lending.
Comment is requested by January 29, 1993.
The proposed interpretations address such issues as disclosure rules on demand features for credit
extended to executive officers of depository institutions and on security interests, especially for
rescindable transactions.
Printed on the following pages is the text of the proposal, which has been reprinted from the
of December 9, 1992. Comments thereon should be submitted by January 2 9 ,1 9 9 3 ,
and may be sent to the Board of Governors, as specified in the Board’s notice, or to our Compliance
Examinations Department.
Federal Register
E.
G
erald
C
o r r ig a n
,
President.
12 CFR Part 226
impaired only, contact Dorothea
Thompson, Telecommunications Device
for the Deaf (TDD), at (202) 452-3544.
[Regulation Z; Docket No. T IL -1 ]
SUPPLEMENTARY INFORMATION: (1 )
FEDERAL RESERVE SYSTEM
how e rescission notice could disclose
the fact that a transaction is secured by
the consumer’s home without any
additional detail about the security
interest.
The proposed comment further states
that the model form for rescission of
refinancings with an original creditor
(model form H-9) which discloses the
retention of a security interest in a
consumer’s principal dwelling, also
adequately discloses the fact of a
security interest where a new security
interest is acquired (and the preexisting
security interest is replaced by the new
one). As stated in the Supplementary
Information to the 1989 commentary
update, comment 2(a)(25)-6 was
intended to clarify “that the disclosure
that an interest is retained, as in form
H-9, is adequate in a refinancing where
a new mortgage if filed and a new
advance is made.” The revision now
being proposed would specifically
incorporate that position into the
commentary.
The proposed commentary revisions
should make clear that the requirements
about disclosure of a security interest in
a rescission notice may be satisfied with
either a generic statement of the fact that
the consumer’s home is security for the
transaction or with a more detailed
disclosure about that security interest. It
would further make clear, as an
alternative to modifying rescission
notices to include more generic
disclosures, that the form H-9 may be
used—without modification—in any
case in which an original creditor
refinances a transaction (whether or not
the refinancing involves keeping in
place an existing security interest for
any period of time or involves taking a
new security interest).
Subpart B—Open-End Credit
Section 226.5b Requirements for
Home-Equity Plans
5b(d) Content of Disclosures
General. The Truth in Lending Act (15
U.S.C. 1601 et seq.) governs consumer
credit transactions and is implemented
by the Board s Regulation Z (12 CFR
AGENCY: Board of Governors of the
part 226). Effective October 13,1981, an
Federal Reserve System.
official staff commentary (TIL-1, Supp.
ACTION: Proposed official staff
I to 12 CFR part 226) was published to
interpretation.
interpret the regulation. The
commentary
is designed to provide
SUMMARY: The Board is publishing for
guidance to creditors in applying the
comment proposed revisions to the
regulation to specific transactions and is
official staff commentary to Regulation
updated periodically to address
Z (Truth in Lending). The commentary
applies and interprets the requirements significant questions that arise. It is
expected that the proposed update will
of Regulation Z. The revisions being
be adopted in final form in March 1993
proposed are limited, and attempt to
with compliance optional until October
address regulatory provisions needing
1,1993, the uniform effective date for
clarification or issues for which there
mandatory compliance.
may be a general need for more
(2)
Form of comments. The Board
guidance. The revisions address the
interplay between the Truth in Lending requests that, when possible, comments
be prepared using a standard typeface
rules on demand features and other
with a type size of 10 or 12 characters
Federal rules dealing with credit
per inch. This will enable the Board to
extended to executive officers of
convert the text into machine-readable
depository institutions. They provide
greater flexibility in complying with the form through electronic scanning, and
will facilitate automated retrieval of
disclosure requirements under
comments for review. Comments may
Regulation Z in these transactions. The
also be submitted on 3 Vi inch or 5V«
disclosure rules for security interests
inch computer diskettes in any IBM(particularly those in rescindable
compatible DOS-based format with a
transactions) also would be clarified.
paper copy of the comment included.
The commentary would offer creditors
13) Proposed revisions. The following
alternative methods of disclosing
is a description of the proposed
security interests in rescindable
revisions to the commentary:
transactions.
Subpart A—General
DATES: Comments m ust be received on
or before January 29.1993.
Section 226.2 Definitions and Buies of
ADORESSES: Comments should refer to
Construction
Docket No. iTL-1 and be mailed to Mr,
2(a)
Definitions
William W. Wiles, Secretary, Board of
Governors of the Federal Reserve
2(aX25) Security interest. The Board
System, Washington, DC 20551. They
has received numerous questions
may also be delivered to the guard
recently about the disclosure of security
station in the Eccles Building courtyard interests—particularly in rescission
on 20th Street, NW. (between
notices—and about the appropriate use
Constitution Avenue and C Street, NW.) of the model rescission form for a
between 8:45 a.m. and 5:15 p.m. on
refinancing with an original creditor.
weekdays. Except as provided in the
Comment 2(a)(25)—6 would be revised to
Board’s rules regarding the availability
clarify that disclosures about collateral
5b(d)(4) Possible actions by creditor—
of information (12 CFR 261.8), all
securing a transaction need not specify
Paragraph 5b(d)(4)(iii). Comment
comments received will be available for how the security interest is taken, for
5b(d)(4)(iii)-l would be revised to
inspection and copying by any member example, by “acquiring” a new security reflect the amendment to § 226.5b(f){2)
of the public in the Freedom of
interest or by "retaining” an existing
adopted by the Beard in August 1992.
Information Office, room B-1122 of the security interest. The proposed revision (57 FR 34676, August 6,1992.) The
Eccles Building, between 9 a.m. and 5
would expand on an interpretation
Board amended the regulation to
p.m. on weekdays.
added in the 1989 commentary update
provide that a depository institution
(54 FR 9417, March 7,1989). It would
FOR FURTHER INFORMATION CONTACT:
may terminate and demand payment of
be added to that comment on the
Michael Bylsma, Leonard Chanin,
the balance on any home equity line of
definition of “security interest” because credit extended to its executive officers
Kyung Clio. Kurt Schumacher, or Mary
of its applicability to the security
Jane Seebech, Attorneys, Division of
to the extent Federal law requires that
interest disclosures under multiple
Consumer and Community Affairs,
the credit shall be due and payable on
sections of the regulation (§§ 226.6,
Board of Governors of the Federal
demand. (See § 226.5b(f)(2)(iv).) For
Reserve System, Washington, DC 29551, 226.15, 226.18 and 226.23). Sample
example. Regulation O contains this
language would be provided to illustrate requirement for state member banks of
at (202) 452-3687. For the hearing
PRINTED IN NEW YORK, FROM FEDERAL REGISTER. VOL. 57, NO. 237, pp. 58159-62
Truth in Lending; Proposed Update to
Official Staff Commentary
2
the Federal Reserve System. (See 12
CFR 215.5.)
In the Supplementary Information
accompanying the amendment, the
Board stated that the regulation requires
that this provision be part of the homeequity agreement, although this feature
is not required to be disclosed with the
preepplication disclosures. The
proposed commentary would restate
this position.
5b(f) Limitations on home equity
plans—Paragraph 5b(f)(2). Comment
5b(f)(2)—1 would be revised to clarify
that a creditor may terminate a plan as
provided in § 226.5b(f)(2)(iv).
Section 226.6 Initial Disclosure
Statement
6(e) Home Equity Plan Information
Comment 6{e)-l would be revised to
add a cross reference to comment
5b(d)(4)(iii)—1. This reflects the position
taken in the Supplementary Information
of the August 6,1992 Federal Register
notice that the termination feature in
§ 226.5b(f)(2)(iv) also need not be
specifically disclosed under § 226.6(e).
Subpart C—Closed-End Credit
Section 226.18 Content of Disclosures
18(i) Demand Feature
Comment 18(i)-2 would be revised to
address how the rule in the Board’s
Regulation O (and other comparable
Federal financial regulatory agency
rules) relates to the disclosure rules for
demand features in closed-end credit
transactions. It parallels the treatment of
such features in open-end credit. The
proposed comment provides that if an
institution retains the ability to demand
payment of a loan in its closed-end
credit agreement with its executive
officers to the extent required by Federal
law, the institution need not provide
demand disclosures. Of course, if an
institution has a demand feature in its
closed-end agreement with its executive
officers that is broader than that
required by Federal law, such a feature
would have to be disclosed under
§226.18(i).
Section 226.19 Certain Residential
Mortgage and Variable-Rate
Transactions
19(b) Certain Variable-Rate Transactions
Paragraph (19)(b)(2)(xi). Demand
features must be disclosed in variable
rate mortgages covered by § 226.19(b).
Since disclosure of a demand feature for
variable-rate mortgages is determined by
reference to § 226.16(1), a cross-reference
would be added to comment
19(b)(2)(xi)~l dealing with demand
features.
List o f Subjects in 12 CFR Part 226
Advertising, Federal Reserve System,
Reporting and recordkeeping
requirements, 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. The
Board is publishing only those sections
of the commentary that would be
affected by the changes.
Text of Proposed Revisions
For the reasons set forth in the
preamble and pursuant to authority
granted in section 105 of the Truth in
Lending Act (15 U.S.C. 1604 as
amended), the Boerd proposes to amend
the official staff commentary to
Regulation Z (12 CFR part 226,
Supplement I) as follows:
PART 2 2 6 -{ AMENDED]
1. The authority citation for part 226
continues to read as follows:
Authority: Truth in Lending Act, 15 U.S.C
1604 and 1637(c)(5); sec. 1204(c),
Competitive Equality Banking Act, 12 U.S.C
3806.
SUPPLEMENT I TO PART 226—
[AMENDED]
2. In Supplement I to part 226, under
the heading “2(a) Definitions”,
comment 2(a)(25)-6 would be amended
by adding three new sentences at the
end to read as follows:
2(a)(25) Security interest.
* * * * *
6. Specificity of disclosure. * * * !In
disclosing the fact that the transaction is
secured by the collateral, the creditor
also need not disclose how the security
interest arose. Thus, a rescission notice
need not specifically state that a new
security interest is “acquired” or an
existing security interest is "retained"
in a transaction. The retention or
acquisition of a security interest in the
consumer’s principal dwelling instead
may be disclosed in a rescission notice
with a general statement such as the
following: “Your home is the security
for the new transaction.” A statement
such as this may be used, for example,
instead of the second sentence in model
form H-9 and could apply both to a
refinancing in which a new security
interest is taken by the original creditor
and one in which an existing security
interest is maintained. (Of course,
because model form H-9 adequately
discloses the fact that the home is
security for the transaction, it may be
used without modification in both a
3
refinancing in which a new security
interest is taken by the original creditor
and one in which an existing security
interest is retained by that creditor.)!
* * * * *
SUPPLEMENT I TO PART 226—
[AMENDED]
3. In Supplement I to part 226, under
the heading “5b(d) Content of
Disclosures”, comment 5b(d)(4)(iii>—
1
would be amended by revising the
fourth sentence and adding a sentence
after the fourth sentence to read as
follows:
Paragraph 5b(d)(4)(iii).
1.
Disclosure of conditions. * * * As
an alternative to disclosing the
conditions in this manner, the creditor
may simply describe the conditions
using the language in §§ 226.5b(f)(2)
K iH iii)*. 226.5b(f)(3)(i) (regarding
freezing the line when the maximum
annual percentage rate is reached), and
226.5b(i)(3)(vi) or language that is
substantially similar. |T he condition
contained in § 226.5b(f)(2)(iv) need not
be stated.! * * *
* * * * *
SUPPLEMENT I TO PART 226—
[AMENDED]
4. In Supplement I to part 223, under
the heading “5b(f) Limitations on Home
Equity Plans”, comment 5b(f)(2)—1
wQuld be amended by revising the
second sentence to read as follows:
Paragraph 5b(f)(2).
1.
Limitations on termination and
acceleration. * * * However, creditors
may take these actions in the [three]
$fourt circumstances specified in
§ 226.5b(f)(2). * * *
* * * * *
SUPPLEMENT i TO PART 226—
[AMENDED]
5. In Supplement I to part 226, under
the heading “6(e) Home Equity Plan
Information”, comment 6(e)-l would be
amended by adding a parenthetical at
the end to read as follows:
1. Additional disclosures required.
* * * Creditors also must disclose a list
of the conditions that permit the
creditor to terminate the plan, freeze or
reduce the credit limit, and implement
specified modifications to the original
terms. !(See comment 5b(d)(4)(iii>—1.)*
* * * * *
SUPPLEMENT I TO PART 226—
[AMENDED]
6. In Supplement I to part 226, under
the heading “18(i) Demand feature”,
comment 18(i)~2 would be amended by
adding a new sentence at the end to
read as follows:
2.
Covered demand features. * * *
|A creditor may, but need not, treat its
contractual right to demand payment of
a loan made to its executive officers as
a demand feature, when such a
provision is required by Federal law.f
*
*
*
*
*
contains a demand feature )as discussed
in § 226.18(i)4, this fact must be
disclosed. * * *
7.
In Supplement I to part 226, under * * * * *
the heading “19(b) Certain variable-rate
Board of Governors of the Federal Reserve
transactions’\ comment i9(b)(2)(xi)-l
System, December 1,1992.
would be amended by revising the first W illiam W . W iles,
sentence to read as follows:
Secretary of the Board.
Paragraph 19(b)(2)(xi).
1.
Demand feature. If a variable-rate [FR Doc. 92-29552 Filed 12-8-92; 8:45 am]
loan subject to § 226.19(b) requirements BILUNO CODE <210-01-M
SUPPLEMENT I TO PART 2 2 S [AM ENDED]
4
@FedFRASER