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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 10634 1 A pril 16, 1993 T R U T H IN LE N D IN G Amendments to the Official Commentary on Regulation Z To All Depository Institutions in the Second Federal Reserve District, and Others Concerned: The following is from the text of a statement issued by the Board of G overnors of the Federal Reserve System: T h e F ed eral R e se r v e B oard has p u b lish ed r e v isio n s to its s ta ff co m m en ta ry to R eg u la tio n Z (Truth in L en d in g ). T h e ru les are e ffe c tiv e im m ed iately, but c o m p lia n c e is o p tio n a l u n til O cto b er 1, 1 9 9 3 . T h e r e v isio n s ad d ress th e interplay b e tw e e n th e Truth in L en d in g ru les on d em a n d featu res and o th er F ed eral ru les d e a lin g w ith cred it e x ten d ed to e x e c u tiv e o ffic e r s o f d e p o sito r y in stitu tio n s, p rovid in g greater fle x ib ility in c o m p ly in g w ith d isc lo su r e requirem ents. T h e r e v isio n s a lso o ffe r cred itors a ltern a tiv e m e th o d s o f d is c lo sin g secu rity in terests in rescin d a b le tran saction s. E nclosed, for depository institutions and others who m aintain sets of the B oard’s regulations, is a copy of the am endm ents to the official staff com m entary for Regulation Z , as published in the Federal Register of A pril 1. Additional, single copies may be obtained at this Bank (3 3 Liberty Street) from the Issues Division on the first floor, or by contacting the Circulars Division (Tel. No. 2 1 2 -7 2 0 -5 2 1 5 or 5216 ). E. G e r a l d C o r r i g a n , President. BO A R D O F G O V ER N O RS O F T H E F E D E R A L R E SER V E SY STEM T R U T H IN LEN D IN G A M E N D M E N T S T O T H E O F FIC IA L STA FF CO M M EN TA RY ON RE G U L A TIO N Z (Effective April 1, 1993) Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, DC 29551, at (202) 452-3667. For the hearing impaired only, contact Dorothea Thompson, Telecommunications Device for the Deaf (TDD), at (202) 452-3544. FEDERAL RESERVE SYSTEM 12 CFR Part 226 [Regulation Z; Docket No. T IL -1 ] Truth in Lending; Update to Official Staff Commentary AGENCY: Board of Governors of die Federal Reserve System. ACTION: Final rule; o ffic ia l staff in terp retatio n . SUMMARY: The Board is revising the official staff commentary to Regulation Z (Truth in Lending). The commentary applies and interprets the requirements of Regulation Z. The revisions are limited, and address regulatory provisions needing clarification or issues for which there may be a general need for more guidance. The revisions address the interplay between the Truth in Lending rules on demand features and other federal rules dealing with credit extended to executive officers of depository institutions. They provide greater flexibility in complying with the disclosure requirements under Regulation Z in these transactions. The disclosure rules for security interests (particularly those in rescindable transactions) are also clarified. The commentary offers creditors alternative methods of disclosing security interests in rescindable transactions. OATES: Effective April 1 ,1 9 9 3 ; but compliance is optional until October 1, 1993. FOR FURTHER i t FORMATION CONTACT: Kyung Cho, Jane Cell or Kurt Schumacher, Attorneys, Division of (2) Revisions The following is a description of the revisions to the commentary: Subpart A—General Section 226.2 Definitions and Buies of Construction Section 2(a) Definitions SUPPLEMENTARY INFORMATION: Section 2(aJ(25J Security Interest The Board received numerous (1) General The Truth in Lending Act (15 U.S.C. questions about the disclosure of security interests—particularly in 1601 et seq.) governs consumer credit transactions and is implemented by the rescission notices—and about the Board’s Regulation Z (12 CFR part 226). appropriate use of the model rescission form for a refinancing with an original Effective October 13,1981, an official staff commentary (TIL-1, Supp. I to 12 creditor. Comment 2(a)(25)-6 is revised to clarify that disclosures about CFR part 226) was published to collateral securing an open-end or interpret the regulation. The dosed-end credit transaction need not commentary is designed to provide specify how the security interest is guidance to creditors in applying the regulation to specific transactions and is taken, for example, by "acquiring” a new security interest or by "retaining” updated periodically to address an existing security interest The significant questions that arise. revision expands on an interpretation The Board published proposed added in the 1 9 8 9 commentary update revisions to the official staff commentary to Regulation Z (Truth in (54 FR 9417, March 7,1989). Lending) on December 9,1992 (57 FR Commentary to the definition of "security interest” is revised because of 58159). The Board received 44 its applicability to the security interest comments on the proposal relating to demand features in credit transactions disclosures under multiple sections of to executive officers and disclosure of a the regulation (§§ 226.6, 226.15, 226.18 security interest in rescindable and 226.23). Sample language is transactions. Commanters generally provided to illustrate how a rescission supported the proposal. Based on a notice could disclose the fact that a review of the comments and further transaction is secured by the consumer's analysis, the Board is adopting the home without any additional detail commentary update which, except for about the security interest. minor editorial changes, is virtually The comment refers to the model form identical to the proposed commentary for rescission of refinancings with an language. Compliance with the original creditor (model form H-9) to commentary revision is optional until illustrate that it adequately discloses the October 1,1993. fact of a security interest where a new PRINTED IN NEW YORK, FROM FEDERAL REGISTER , VOL. 58, NO. 61, pp. 17083-17085 For this Commentary to be com plete, retain: 1) Commentary pamphlet dated April 1, 1990. 2) A m endm ents to Commentary effective April 1, 1991. 3) This slip sheet. [Enc. Cir. No. 10634] 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 is filed and a new advance is made/' Hie revision specifically incorporates that position into the commentary. The commentary revisions 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 further makes 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 Section 5b(d) Content of Disclosures Section 5b(dU4) Possible Actions by Creditor—Paragraph 5b(d)(4Miul Comment 5b(d)(4)(ifi)-l is revised to reflect the amendment to $ 226.5b(fH2) adopted by the Board in August 1992. (57 FR 34676. August 6,1992.) The Board amended the regulation to provide that a depository institution may terminate and demand payment of the balance on any home equity line of credit extended to its executive officers to the extent federal law requires that the credit shall be due and payable on demand. (See § 226.5b(f)(2)(iv).) For example, Regulation O contains this requirement for state member banks of 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 preapplication disclosures. The commentary restates this position. Section 5b(f) Limitations on Home Equity Plans—Paragraph 5b(f)(2) Comment 5b(f)(2)-l is revised to clarify that a creditor may terminate a plan as provided in § 226.5b(f)(2)(iv). Section 226.6 Initial Disclosure Statement Section 6(e) Home Equity Plan Information Comment 6 (e)-l is 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). Appendix G Open-End Model Forms and Clauses Comment 4 to Appendix G is revised to add a cross reference to comment 226.2(a)(25) regarding the specificity of the security interest disclosure for model form G-7. Subpart C—Closed-End Credit Section 226.18 Content of Disclosures Section 18(i) Demand Feature Comment 18(i)—2 is revised to address how the rule in die 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 revised 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 Section 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 § 226.18(i). a cross-reference is added to comment 19(b)(2)(xi)-l dealing with demand features. Appendix H Closed-End Model Forms and Clauses Comment 11 to Appendix H is revised 2 to add a cross reference to comment 226.2(a)(25) regarding the specificity of the security interest disclosure for model form H-9. List of Subjects in 12 CFR Part 226 Advertising, Reporting and recordkeeping requirements, Truth in Lending. Text of Revisions For the reasons set forth in the preamble, the Board is amending the official staff commentary to 12 CFR part 226. Supplement I as follows: PART 226— [AMENDED] 1. The authority citation for part 226 is revised to read as follows: Authority: 1 2 U .S .C 3 8 0 6 , 15 U.S.C. 1 6 0 4 and 1 6 3 7 (c )(5 ); sec. 1 2 0 4 (c ). Supplement I to Part 226—[Amended] 2. In S u p p lem en t I to part 2 2 6 , u n d er the h ead in g " 2 ( a ) D e f in it io n s ,” com m en t 2 (a )(2 5 )—6 is am en d ed b y a d d in g fiv e n ew se n ten ces at th e en d to read as follow s: 2 (a )(2 5 ) S e c u r it y interest. * * * * * 6. S p e c if ic it y o f d is c lo s u re . * * * In d isc lo sin g the fact that th e transaction is secu red b y th e collateral, the cred itor a lso n eed n ot d isc lo s e h o w the secu rity in terest arose. For exam p le, in a closed -en d cred it transaction, a r escissio n n o tic e n e e d n ot sp e c ific a lly state that a n e w secu rity interest is “ acq u ired ” or an ex istin g secu rity interest is “ retain ed ” in the transaction. T h e a cq u isition or reten tion o f a secu rity in terest in the co n su m er’s p rin cip a l d w e llin g in stead m ay b e d isc lo se d in a r escissio n n o tic e w ith a general statem ent su ch as the follow in g: “Y our h o m e is th e secu rity for the n e w tran saction .” A statem ent su ch as th is m ay b e u sed , for exam p le, in stead o f the se co n d se n ten ce in m o d e l form H - 9 an d c o u ld a p p ly both to a refin an cing in w h ic h a n e w secu rity in terest is taken b y the origin al cred itor to rep lace a p reex istin g secu rity in terest and o n e in w h ic h an ex istin g secu rity in terest is m aintain ed . O f co u rse, b eca u se m o d el form H - 9 ad eq u ately d isc lo s e s th e fact that th e h o m e is secu rity for the transaction, it m ay b e u sed w ith o u t m o d ifica tio n in b oth a refin an cin g in w h ich a n ew secu rity in terest is taken b y the origin al creditor to rep lace a p reex istin g secu rity interest and o n e in w h ic h an existin g secu rity interest is retain ed b y that creditor. * * * * * 3. In S u p p lem en t I to part 2 2 6 , un d er the h ead in g ” 5 b ( d ) C o n te n t o f D is c lo s u re s ”, com m en t 5 b (d )(4 )(iii)—1 is am en d ed by rev isin g the fourth se n ten ce and ad d in g a se n ten ce after th e fourth se n ten ce to read as follow s: P a r a g r a p h 5 b (d )(4 )(iii) . 1. D is c lo s u re o f c o n d itio n s . * * * A s an altern ative to d isc lo s in g th e c o n d itio n s in th is m anner, the cred itor m ay sim p ly describe the conditions using the language in term in ate th e plan, freeze or red u ce the credit §§ 226.5b(f)(2)(i)— (iii), 226.5b(f)(3)(i) lim it, an d im p lem en t sp e c ifie d m od ification s (regarding freezing the line when the to th e origin al term s. (S e e com m en t maximum annual percentage rate is reached), 5 b (d )(4 )(iii)—1.) ft ft ft ft ft and 226.5b(f)(3)(vi) or language that is substantially similar. The condition 6. In S u p p lem en t I to part 2 2 6 , u n d er the contained in § 226.5b{f)(2)(iv) need not be h ead in g " 1 8 (i ) D e m a n d f e a t u r e ," com m ent stated. * * * 1 8 ( i) - 2 is am en d ed b y a d d in g a n ew sen ten ce * * * * ft at th e en d to read as follow s: 4. In Supplement I to part 226, under the 2. C o v e re d d e m a n d fe a tu re s . * * * A heading “5b(f) Limitations on Home Equity cred itor m ay, b ut n eed not, treat its Plans", comment 5b(f)(2)-l is amended by contractual right to d em a n d p aym ent o f a revising the second sentence to read as loan m ade to its e x e c u tiv e officers as a follows: d em an d feature to the ex ten t that the con tractual right is required b y R egulation O Paragraph 5b(f)(2). (1 2 CFR 2 1 5 .5 ) or o th er federal law. 1. Limitations on termination and * * * * * acceleration. * * * However, creditors may 7. In S u p p lem en t I to part 2 2 6 , u n d er the take these actions in the four circumstances h ea d in g " 1 9 (b ) C e r ta in v a r ia b le -r a te specified in § 226.5b(f)(2). * * * t r a n s a c t io n s ," c o m m e n t 1 9 (b )(2 )(x i)—1 is ft ft ft ft ft a m en d ed b y rev isin g th e first se n ten ce to 5. In Supplement I to part 226, under the read as follow s: heading "6(e) Home Equity Plan Information", comment 6(e)-l is amended by P a r a g r a p h 1 9 (b )(2 )(x i). adding a parenthetical at the end to read as 1. D e m a n d fe a tu re . If a variable-rate loan follows (and the last sentence is reprinted for subject to $ 2 2 6 .1 9 (b ) req u irem en ts con tains the convenience of the reader): a d em and feature as d isc u s se d in the 1. Additional disclosures required. * * * com m entary to § 2 2 6 .1 8 (i), th is fact m ust be Creditors also must disclose a list of the d isclo sed . * * * conditions that permit the creditor to ft ft ft ft ft 3 8. In S u p p lem en t I to part 2 2 6 , u n d er the h ead in g " A p p e n d i x G — -O p e n -e n d m o d e l f o r m s a n d c la u s e s ," com m en t 4 to A p p en d ix G is a m en d ed b y a d d in g a n e w se n ten ce at the en d to read as follow s: 4. M o d e ls G - 5 t h r o u g h G - 9 . * * * S ee the com m entary to se ctio n 2 2 6 .2 (a )(2 5 ) regarding the sp ec ificity o f th e secu rity in terest d isclo su re for m o d e l form G -7. ft ft ft ft ft 9. In S u p p lem en t I to part 2 2 6 , u n d er the h ead in g " A p p e n d i x H — C lo s e d -e n d m o d e l f o r m s a n d c la u s e s ," co m m en t 1 1 to A p p en d ix H is a m en d ed b y a d d in g a n e w sen ten ce at th e en d to read as follow s: 11. M o d e ls H - 8 th r o u g h H - 9 . * * * S ee the com m entary to se ctio n 2 2 6 .2 (a )(2 5 ) regarding th e sp ec ificity o f th e secu rity in terest d isclo su re for m o d e l form H -9. * * * * * Board o f G overnors o f the F ederal R eserve S ystem , M arch 2 6 , 1 9 9 3 . William W. Wiles, S e c re ta ry o f th e B o a r d . (FR Doc. 9 3 - 7 6 4 6 F iled 3 - 3 1 - 9 3 ; 8 :45 am i BILLING CODE 6210-01-P