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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 10823 January 2,1996 TRUTH IN LENDING Proposed Changes to the Official Staff Commentary to Regulation Z Comments Invited by February 2 ToAll Depository Institutions in the Second Federal Reserve District, and Others Concerned: 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 the official staff commentary to its Regulation Z, Truth In Lending. Comment is requested by February 2,1996. The proposed update provides guidance mainly on issues related to reverse mortgages and mort gages bearing rates above a certain percentage or fees above a certain amount. (Reverse mortgage trans actions provide advances primarily to elderly homeowners and rely principally on the home’s value for repayment triggered by a permanent move from the home, death or the sale of the home.) The revisions also address issues of general interest, such as the treatment of debt cancellation contracts and a card issuer’s responsibilities when a cardholder asserts a claim or defense relating to a merchant dispute. Printed on the following pages is the text of the proposal to the Regulation Z Commentary, which has been published in the Federal Register. Comments thereon should be submitted by February 2,1996, and may be sent to the Board of Governors, as specified in the Board’s notice, or to our Compliance Examinations Department. W il l ia m J. M cD o n o u g h , President. V *•♦ * 62764 Proposed Rules Federal Register * Vol. 60, No. 235 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. > r T * i Thursday, December 7, 1995 * ■ FEDERAL RESERVE SYSTEM * 12 CFR Part 226 [Regulation Z; Docket No. R-0903] and mortgages bearing rates or fees above a certain percentage or amount), Jane Ahrens, Senior Attorney, or Kyung Cho-Miller, Kurt Schumacher, or Manley Williams, Staff Attorneys, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, at (202) 4523667 or 452-2412. For users of Telecommunications Device for the Deaf (TDD) only, please contact Dorthea Thompson, at (202) 452-3544. SUPPLEMENTARY INFORMATION: ►V V A * < * 4 X 4 Truth in Lending 4 ¥ V ♦ * *-r 4 4 I* ¥ I. Background The purpose of the Truth in Lending Act (TILA; 15 U.S.C. 1601 et seq.) is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. The act requires SUMMARY: The Board is publishing for creditors to disclose credit terms and comment proposed revisions to the the cost of credit as an annual official staff commentary to Regulation percentage rate (APR). The act requires Z (Truth in Lending). The commentary additional disclosures for loans secured applies and interprets the requirements by a consumer’s home, and permits of Regulation Z. The proposed update consumers to cancel certain transactions provides guidance mainly on issues that involve their principal dwelling. It relating to reverse mortgages and also imposes limitations on some credit mortgages bearing rates above a certain transactions secured by a consumer’s percentage or fees above a certain principal dwelling. The act is amount. It also addresses issues of implemented by the Board’s Regulation general interest, such as the treatment of Z (12 CFR part 226). The Board also has debt cancellation contracts and a card an official staff commentary (12 CFR issuer’s responsibilities when a part 226 (Supp. I)) that interprets the cardholder asserts a claim or defense regulation, and provides guidance to relating to a merchant dispute. creditors in applying the regulation to DATES: Comments must be received on specific transactions. It is updated or before February 2,1996. periodically to address significant ADDRESSES: Comments should refer to questions that arise, and is a substitute Docket No. R-0903, and may be mailed for individual staff interpretations. The to William W. Wiles, Secretary, Board o f Board expects to adopt amendments in Governors of the Federal Reserve final form in March 1996 with System, 20th Street and Constitution compliance optional until October 1, Avenue, N.W., Washington, DC 20551. 1996, the effective date for mandatory Comments also may be delivered to compliance. Room B-2222 of the Eccles Building On March 24, 1995, the Board between 8:45 a.m. and 5:15 p.m. published amendments to Regulation Z weekdays, or to the guard station in the implementing the Home Ownership and Eccles Building courtyard on 20th Equity Protection Act of 1994, contained Street, N.W. (between Constitution in the Riegle Community Development Avenue and C Street) at any time. and Regulatory Improvement Act of Comments may be inspected in Room 1994, Public Law 103-325,108 Stat. MP-500 of the Martin Building between 2160 (60 FR 15463). These amendments, 9:00 a.m. and 5:00 p.m. weekdays, which became effective on October 1, except as provided in 12 CFR 261.8 of impose new disclosure requirements the Board’s rules regarding the and substantive limitations on certain availability of information. closed-end mortgage loans bearing rates or fees above a certain percentage or FOR FURTHER INFORMATION CONTACT: For amount. The amendments also impose Subparts A and B (open-end credit), Jane Jensen Gell or Obrea O. Poindexter, new disclosure requirements for reverse Staff Attorneys; for Subparts A, C and E mortgage transactions, which provide advances primarily to elderly (closed-end credit, reverse mortgages, Board of Governors of the Federal Reserve System. ACTION: Proposed rule; official staff interpretation. AGENCY: homeowners and rely principally on the home’s value for repayment. In large measure, the proposed commentary incorporates the supplementary information accompanying that rulemaking, and addresses other issues that have arisen since the publication of the final rule. The Congress recently amended TILA provisions concerning finance charge disclosures for home mortgage loans. The Truth in Lending Act Amendments of 1995 (“1995 Act,” Public Law 10429,109 Stat. 271) clarify the treatment of several fees typically associated with real estate-related lending, and revise tolerances for finance charge calculations for loans secured by real estate or dwellings. The statutory amendments, which were enacted in response to a number of lawsuits, also address consumer remedies for creditors’ past and future disclosure violations. The 1995 Act became effective immediately for provisions relating to tolerances, past and future liability, and the exclusion of certain closing costs from the finance charge calculation. The statutory amendments that exclude certain real estate related closing costs from the finance charge generally codify interpretations previously issued by the Board, and no further revisions to the commentary are contemplated at this time. Another statutory provision categorizes all brokers fees paid by the consumer to the broker (or to the creditor for delivery to the broker) as finance charges; this provision will become effective 60 days after the Board issues a final rule or no later than 12 months after enactment of the amendments to the act. It is anticipated that the Board will issue a proposed amendment to Regulation Z addressing brokers fees during the first quarter of 1996, and will make any changes to the commentary relating to the treatment of brokers fees as part of that rulemaking. II. Proposed Commentary Subpart A—General Section 226.4—Finance Charge 4(a) Definition Proposed comment 4(a)-8 addresses the treatment of fees charged in connection with debt cancellation agreements. In the case of motor vehicle loans, debt cancellation agreements (sometimes referred to as “gap” ►* 62765 Subpart B—Open-end Credit Section 226.6—Initial Disclosure Statement 6(b) Other Charges Comment 6(b)— would be revised to 1 state that a membership fee to join an organization is an “other charge” if the primary benefit of membership is the opportunity to apply for a credit card and other benefits are incidental. For example, if an organization offers, in addition to the opportunity for a credit card account, only minor benefits such as a newsletter and a member information hotline, a fee to join the organization should be disclosed as an “other charge.” Section 226.12—Special Credit Card Rules 12(c) Right of Cardholder to Assert C laim s o r D efen ses A g a in st C ard Issu er 12(c)(2) Adverse Credit Reports Prohibited Proposed comment 12(c)(2)-2 provides guidance on when a card issuer may consider a dispute settled for purposes of reporting an amount in dispute as delinquent. Until the card issuer conducts a reasonable investigation, the disputed amount may not be collected or reported as delinquent. Section 226.14—Determination of Annual Percentage Rate 14(c) Annual Percentage Rate for Periodic Statements Comment 14(c)-10 would provide guidance on calculating the APR on periodic statements when a transaction occurs at the end of one cycle, but is posted to the account in a subsequent cycle, such as when a cardholder obtains a cash advance (for which there is a transaction fee) on the last day of Section 17—General Disclosure Requirements 17(c) Basis of Disclosure and Use of Estimates Paragraph 17(c)(1) * ♦ - * r 4 r 4 * Subpart C—Closed-end Credit A a billing cycle and the transaction is posted to the cardholder’s account on the second day of the following cycle. The transaction (and fee, if applicable) are included on the statement reflecting the cycle in which the transaction posted, and the proposed comment clarifies how creditors calculate the APR to reflect the delay in posting. i 4(d) Insurance Comment 4(d)— would be revised to 5 clarify that insurance is deemed to be required—and the premiums treated and disclosed as finance charges—when a consumer has several alternatives to fulfill a condition to a credit extension, one of which is to purchase insurance from the creditor and the consumer elects that option. For example, where, as a condition to obtaining a credit card, a consumer must purchase a life insurance policy from the creditor, assign an existing policy, or pledge another form of security, such as a certificate of deposit, if the consumer purchases the insurance from the creditor, the premiums are finance charges. A agreements) offer protection to consumers in the event the vehicle is stolen or destroyed and the motor vehicle insurance proceeds are insufficient to extinguish the debt. Under these agreements, in return for a fee paid, the consumer is not held liable for the remaining balance due on the loan. Other types of agreements may provide for debt cancellation if the borrower dies or becomes disabled. In some states, debt cancellation agreements may be regulated as or otherwise considered insurance contracts. The Board has received questions from creditors about the proper treatment of fees for debt cancellation agreements. Section 226.4(d) allows a creditor to exclude optional credit life and certain property insurance premiums from the finance charge if the creditor meets certain conditions, including disclosure of the premium. Some creditors believe that debt cancellation fees should uniformly be treated as § 226.4(d) insurance premiums under the regulation. These creditors generally believe that the fees for optional debt cancellation contracts should be excluded from the finance charge. An alternative view is that the fees may be treated as insurance premiums only if the contract is considered insurance under state law. Proposed comment 4(a)-8 follows the state law analysis. The proposed comment provides that if a debt cancellation agreement is regulated as or considered insurance under state law, the fee may be excludable from the finance charge in accordance with the rules in § 226.4(d). That is, under the proposed comment the fee may be excludable if the insurance is properly characterized as credit life, accident, health or loss-of-income insurance as specified in § 226.4(d)(1), or as insurance against loss of or damage to property, or against liability arising out of the ownership or use of property as specified in § 226.4(d)(2). Insurance protecting the creditor against credit loss is a finance charge. (See § 226.4(b)(5) and accompanying commentary.) If state law does not regulate or consider the agreement to be insurance, then the general rules in § 226.4(a) apply. Under § 226.4(a), debt cancellation fees paid to a creditor are treated as finance charges because they are charged by the creditor as an incident to the extension of credit and, although optional, the fees are not of a type payable in a comparable cash transaction. * > Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules Comment 17(c)(1)— would be 10 revised to clarify that if a contract for a variable rate transaction provides for a delay in the implementation of changes to an index value, the creditor may use any index value in effect during the delay period. For example, if a contract specifies that rate changes are based on the index value in effect 45 days before the change date, the creditor may use any index value in effect within that 45day delay period. Proposed comment 17(c)(1)— 18 addresses pawn transactions. There has been some confusion about the coverage and compliance of pawn transactions under the TILA. The comment clarifies how some of the items required to be disclosed under § 226.18 such as the amount financed, the finance charge, and the percentage should be disclosed. Disclosure of these transactions under the open-end credit provisions is not addressed based on the belief that typically pawn transactions are not open-end credit transactions. v ► * ■ -4 Section 18—Content of Disclosures 18(c) Itemization o f Amount Financed Paragraph 18(c)(1)(iii) Proposed comment 18(c)(l)(iii)-2 concerns the treatment of certain charges known as “upcharges” that creditors may sometimes add to a fee charged by a third party for services such as maintenance and service contracts on automobiles. The comment, which only applies in cases where a creditor charges the same amount of an upcharge in both cash and credit transactions, offers flexibility in how creditors can choose to itemize and disclose the amount charged for the service (including the amount of the upcharge). The treatment of these fees for purposes of disclosures under the TILA does not govern the imposition or amount of such upcharges. * V -v r~ v 'h 62766 Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules > ► Section 226.20—Subsequent Disclosure Requirements ► 20(a) Refinancings The Board has been asked whether certain actions constitute adding a variable-rate feature for purposes of this section. Comment 20(a)-3 would be revised to clarify that changing the index on a variable-rate transaction is not adding a variable-rate feature, nor is substituting an index for one that no longer exists. » ♦ V *< + + 4 i.* ►v * ^ < x * * y r * A 1 y ■ y 4 * liability for failing to provide the threeday waiting period. 31(c)(2) Disclosures for Reverse Mortgages Proposed comment 31(c)(2)— clarifies 1 the definition of “business day” for purposes of providing reverse mortgage disclosures to consumers. 31(d) Basis of Disclosures and Use of Estimates Section 226.31(d) mirrors the provisions in § 226.5(c) and § 226.17(c), Subpart E—Special Rules for Certain and allows the use of estimates when Home Mortgage Transactions information necessary for an accurate disclosure is unknown to the creditor, Section 226.31—General Rules provided that the disclosure is clearly 31(c) Timing of Disclosures identified as an estimate. Proposed 31(c)(1) Disclosures for Certain Closed- comment 31(d)-l clarifies that when a disclosure required by § 226.32 is end Home Mortgages marked as an estimate and becomes Numerous creditors have suggested inaccurate due to a change in terms that that the rule for furnishing disclosures occurs before consummation, new should be deemed to. be satisfied as long disclosures must be provided. as the creditor places the disclosures in Section 226.32—Requirements for the mail three days prior to consummation. The word “furnish” for Certain Closed-end Home Mortgages purposes of § 226.32 disclosures has the 32(a) Coverage same meaning as “deliver” for the other disclosure requirements of Regulation Z. Paragraph 32(a)(l)(i) Accordingly, proposed comment Proposed comment 32(a)(l)(i)-l 31(c)(1)— clarifies that disclosures are 1 clarifies when an application is furnished, or delivered, when received received, for purposes of determining by the consumer, not when mailed by which Treasury securities yield should the creditor. be used to compare the APR. Proposed Proposed comment 31(c)(1)— clarifies comment 32(a)(l)(i)— provides 2 2 that creditors may rely on the definition guidance on comparing loan maturities of “business days” in comment 2(a)(6)— to yields on Treasury securities, for 2 for purposes of complying with the purposes of determining whether a timing requirements for furnishing mortgage loan is covered by § 226.32. disclosures under this section. Proposed comment 32(a)(l)(i)-3 clarifies rules for calculating the APR for 31(c)(l)(i) Change in Terms variable-rate, discount, premium, or Proposed comment 31(c)(l)(i)-l stepped-rate loans. clarifies that a creditor must provide Proposed comment 32(a)(l)(i)-4 new § 226.32(c) disclosures if a change clarifies which Treasury security to use in terms (whether in the formal written for the APR test, and where the yields agreement or otherwise, such as an oral on these securities can be found. agreement affecting the amount of a fee Creditors may request the Board required to be paid at closing) makes the statistical release H-15 by calling (202) previously provided disclosures 452-3245. Treasury security yields are inaccurate. also available from the Federal Reserve Bank of New York by calling (212) 72031(c)( 1)(iii) Consumer’s Waiver of 6619. Waiting Period Before Consummation Paragraph 32(a)( 1)(ii) Proposed comment 31(c)(l)(iii)-l Creditors must follow the rules in provides guidance on circumstances in § 226.32 if, in part, the total points and which the consumer may modify or fees payable by the consumer at or waive the right to the three-day waiting before loan closing exceed the greater of period to meet bona fide personal $400 or 8 percent of the total loan financial emergencies. Generally, amount. The Board is required to adjust whether a bona fide personal financial the $400 amount, based on the annual emergency exists is a matter to be percentage change in the Consumer decided between the parties. The Price Index as reported on June 1, provisions in comments 23(e)-l and effective January 1 of the following year. 34(e)-2 apply to this section. For The Board anticipates that adjustments example, a consumer’s waiver does not automatically insulate the creditor from to the $400 dollar figure will be published each yearend and incorporated into the commentary the following spring. Paragraph 32(b)( 1) Paragraph 32(b)(l)(i) Comment 32(b)(l)(i)-l clarifies the scope of items defined as finance charges under § 226.4 that are considered “points and fees.” Paragraph 32(b)(1)(H) Proposed comment 32(b)(l)(ii)— 1 addresses the treatment of mortgage brokers fees. Section 226.32(b)(1) defines “points and fees” to include all finance charges (except interest or the time-price differential), as well as all compensation paid to mortgage brokers. Accordingly, compensation paid to a mortgage broker must be included as “points and fees” even if the amount is not disclosed as a finance charge. Section 32(b)(l)(ii) at the time it was issued was interpreted to include all mortgage broker fees that are required to be disclosed under the Real Estate Settlement Procedures Act. Under that interpretation, amounts paid by creditors to mortgage brokers would be included, as are amounts paid by consumers. Upon further analysis, a narrower interpretation is being proposed. Proposed comment 32(b)(l)(ii)-l states that for purposes of the “points and fees” test, only mortgage broker fees paid by the consumer are included in the calculation. The comment further clarifies that mortgage broker fees should not be double counted; that is, where such fees are included in the finance charge, they are already included as “points and fees” under § 226.32(b)(l)(i) and should not be counted again under § 226.32(b)(l)(ii). 32(c)(3) Regular payment Proposed comment 32(c)(3)-l clarifies that the regulation contemplates the disclosure of monthly or other regularly scheduled periodic payments, such as bimonthy or quarterly. The comment also clarifies that there must be at least two payments, and they must be in an amount and occur at such intervals that the payments fully amortize the loan. For the amount of the payment, proposed comment 32(c)(3)— clarifies 2 that creditors may rely on § 226.18(g) for guidance. 32(c)(4) Variable-rate Proposed comment 32(c)(4)-l provides additional guidance on calculating “worst-case” payment examples when the transaction has more than one payment stream. Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules 32(d) Limitations 32(d)(1)(i) Balloon Payment The statute and regulation prohibit the use of balloon payments for mortgages covered by § 226.32 that have a term of less than five years. For such loans, the repayment schedule must fully amortize the outstanding principal balance through “regular periodic payments.” The proposed comment provides guidance on the definition of “regular periodic payments.” 32(d)(2) Negative Amortization Proposed comment 32(d)(2)— 1 clarifies that the prohibition against including negative amortization in a mortgage covered by § 226.32 does not extend to increases in the principal balance unrelated to the payment schedule, such as an increase related to the purchase of force-placed insurance. 32(d)(4) Increased Interest Rate Proposed comment 32(d)(4)— 1 clarifies that a rate increase in a variable-rate transaction is not prohibited by the act or regulation, even if the rate increases after the consumer has defaulted on the obligation. 32(d)(5) Rebates Section 226.32(d)(5) restricts how creditors may calculate refunds of interest when a mortgage loan subject to this section is accelerated due to a consumer’s default. The proposed comment clarifies that this restriction applies to refunds of interest only, and not to refunds of other items such as origination fees or points. In addition, the proposed comment clarifies that the refund calculation in c lu d e s odd-days interest, regardless of when it is paid. 32(d)(7) Prepayment Penalty Exception Proposed comment 32(d)(7)— 1 provides guidance on calculating a consumer’s debt-to-income ratio. Proposed comment 32(d)(7)— clarifies 2 that verification of employment satisfies the regulation’s requirement that the creditor obtain “payment records for employment income.” 32(e) Prohibited Acts and Practices 32(e)(1) Repayment Ability For mortgage loans subject to § 226.32, the regulation prohibits creditors from engaging in a pattern or practice of extending such credit based on the consumer’s collateral without regard to the consumer’s repayment ability, including the consumer’s current and expected income, current obligations, and employment. Proposed comment 32(e)(1)-! provides guidance on determining the consumer’s repayment ability. The comment clarifies that creditors may rely on the same information provided by the consumer in connection with § 226.32(d)(7), or other information, including information about unverified income. Section 226.33—Requirements for Reverse Mortgages The U.S. Department of Housing and Urban Development (HUD) has modified its software regarding reverse mortgages originated under the Home Equity Conversion Mortgage (HECM) program to conform with the requirements and the terminology used for reverse mortgages under Regulation Z and the appendices to the regulation. (The HECM program has been temporarily suspended, pending the reauthorization of funding by the Congress.) For example, HUD’s software now allows creditors to use the initial interest rate, rather than the “expected interest rate,” in calculating the total annual loan cost rate for a variable-rate transaction. Although creditors may find HUD’s software helpful in meeting the disclosure requirements under Regulation Z, they should first take steps to verify the accuracy of the software, including any instructions, before using it. Neither HUD nor the Board provides a “safe harbor” to creditors regarding use of this software. 33(a) Definition Proposed comment 33(a)-l addresses an implication relative to the definition of a reverse mortgage transaction under the regulation. If a transaction structured as a reverse mortgage loan is a recourse transaction (that is, one that imposes personal liability on the consumer for the difference between the loan balance at maturity and the value of the property), it is not a reverse mortgage under § 226.33. Thus, if the transaction is also closed-end, and the annual percentage rate or the points and fees assessed in the transaction exceed those specified in § 226.32(a)(1), the transaction is covered by § 226.32. Such transactions may not generally contain a balloon payment or negative amortization (both of which are found in reverse mortgages by definition). Open-end credit plans are exempt from the provisions of § 226.32(a). 33(c)(2) Payments to Consumer Proposed comment 33(c)(2)— 1 provides guidance where the legal obligation of a reverse mortgage transaction includes a benefit, such as a “death benefit,” in which a payment to the consumer’s estate (or a credit to the 62767 outstanding loan balance) will be made upon the occurrence of an event (for example, the consumer’s death within a certain period of time). III. Form of Comment Letters Comment letters should refer to Docket No. R-0903, and, when possible, should use a standard courier typeface with a type size of 10 or 12 characters per inch. This will enable the Board to convert the text to machine-readable form through electronic scanning, and will facilitate automated retrieval of comments for review. Also, along with an original document in paper form, commenters are encouraged to submit their comments on 3V2 inch or 5 V* inch computer diskettes in any IBMcompatible DOS-based format. List of Subjects in 12 CFR Part 226 Advertising, Banks, Banking, Consumer protection, Credit, Federal Reserve System, Mortgages, Reporting and recordkeeping requirements, Truth in lending. Certain conventions have been used to highlight the proposed revisions to the regulation. New language is shown inside bold-faced arrows, while language that would be deleted is set off with bold-faced brackets. Comments are numbered to comply with new Federal Register publication rules. For the reasons set forth in the preamble, the Board proposes to amend 12 CFR part 226 as follows: PART 226—TRUTH IN LENDING (REGULATION Z) 1. The authority citation for part 226 continues to read as follows: Authority: 12 U.S.C. 3806,15 U.S.C. 1604 and 1637(c)(5). 2. In supplement I to Part 226, under section 226.4—Finance Charge, the following amendments would be made: 1. Under 4(a) D efin ition., a new paragraph 8. would be added; and 2. Under 4(d) Insurance., paragraph 5. would be revised. The additions and revisions read as follows: Supplement I—Official Staff Interpretations * * * * * Subpart A—General * * * * * Section 226.4—Finance Charge 4(a) Definition. •k it i t k f t ►8. Treatment o f Debt Cancellation Agreements. Some creditors may require debt cancellation agreements while others may offer them as an option. In the case of motor | *. A 62768 Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules > > » I * # > * 'l' ♦ -T V A . * y y v v 4 I 4 * y v- ; * A - * vehicle loans, these agreements, sometimes referred to as “gap” agreements, offer protection to consumers if the vehicle is stolen or destroyed and the motor vehicle insurance proceeds are insufficient to extinguish the debt. In return for a fee, the consumer will not be held liable for the * remaining balance due on the loan. Other types of agreements provide for debt cancellation if the borrower dies or becomes disabled. In some states these agreements are regulated as or otherwise considered insurance under state law. i. Insurance. If the agreement is regulated as or considered insurance under state law, the fee paid by the consumer may be excludable from the finance charge if it meets the requirements in § 226.4(d). Insurance protecting the creditor against credit loss, however, is a finance charge under § 226.4(b)(5). ii. Other. If the agreement is not considered insurance under state law, debt cancellation fees paid to the creditor, whether required or optional, are incident to the extension of credit"and must be disclosed as a finance charge. An optional debt cancellation fee paid to a third-party is a finance charge only to the extent that the third-party shares the fee with the creditor. If a creditor cannot determine whether state law considers the agreement insurance, the fees must be treated as if the agreement is not insurance.-^ * * * * * | * * * v. A membership or participation fee for a package of services that includes an openend credit feature, unless the fee is required whether or not the open-end credit feature is included. For example, a membership fee to join a credit union is not an “other charge,” even if membership is required to apply for credit. ►For the fee to be excluded from disclosure as an “other charge,” however, the package of services must have some substantive purpose other than access to the credit feature. For example, if the primary benefit of membership in an organization is the opportunity to apply for a credit card, and the other benefits offered are incidental to the credit feature, the membership fee is an “other charge.”*^ * * * * * i. The denominator shall be calculated as if the transaction occurred on the first day of the billing cycle, and ii. The numerator shall include the amount of the transaction charge plus all finance charges derived from the application of the periodic rate to the amount of the transaction (including all charges from a prior cycle).*^ * * * * * 6. In Supplement I to Part 226, under Section 226.17—General Disclosure Requirements, under Paragraph 17(c)(1)., paragraph 10. would be revised and a new paragraph 18. would be added to read as follows: * * * * * Subpart C—Closed-End Credit Section 226.17—General Disclosure Requirements * * * * * 17(c) Basis o f disclosures and use of estimates. Paragraph 17(c)(1). * * * * * * * * * * 10. Discounted and premium variable-rate transactions. In some variable-rate Section 226.12—Special Credit Card transactions, creditors may set an initial Provisions interest rate that is not determined by the * * * * * index or formula used to make later interest rate adjustments. Typically, this initial rate 12(c)(2) Adverse credit reports prohibited. charged to consumers is lower than the rate * * * * * would be if it were calculated using the ►2. Settlement o f dispute. A card issuer Paragraph 4(d). * * * * * may not consider a dispute settled and report index or formula. However, in some cases the initial rate may be higher. In a discounted 5. Required credit life insurance. Credit an amount disputed as delinquent or begin transaction, for example, a creditor may collection of the disputed amount until it has life, accident, health, or loss-of-income calculate interest rates according to a formula completed a reasonable investigation of the insurance must be voluntary in order for the using the six-month Treasury bill rate plus a cardholder’s claim. In conducting an premium or charges to be excluded from the 2 percent margin. If the Treasury bill rate at investigation, the card issuer may reasonably finance charge. Whether the insurance is in consummation is 10 percent, the creditor fact required or optional is a factual question. request the cardholder’s cooperation. The may forgo the 2 percent spread and charge card issuer may not automatically consider a If the insurance is required, the premiums only 10 percent for a limited time, instead of dispute settled due to the cardholder’s failure setting an initial rate of 12 percent. must be included in die finance charge, or refusal to comply with a particular whether the insurance is purchased from the ► i.-^ When creditors use an initial request.-^ creditor or from a third party. If the interest rate that is not calculated using the * * * * * ►consumer is required to elect one of index or formula for later rate adjustments, several options—such as-^ [only option the a 5. In supplement I to Part 226, under the disclosures should reflect oncomposite creditor gives the consumer is] to purchase annual percentage rate based the initial Section 226.14—Determination of credit life insurance from the cred itoi^ ,-^ rate for as long as it is charged and, for the Annual Percentage Rate, under 14(c) [or to] assign an existing life insurance remainder of the term, the rate that would Annual percentage rate for periodic policy, ► or pledge security such as a have been applied using the index or formula certificate of deposit,-^ and the consumer statements., a new paragraph 10. would at the time of consummation. The rate at purchases the credit life insurance, the consummation need not be used if a contract be added to read as follows: premium must be included in the finance provides for a delay in the implementation of * * * * * charge. (If the consumer assigns a preexisting changes in an index value. For example, if policy instead, no premium is included in the contract specifies that rate changes are Section 226.14—Determination of Annual the finance charge. ►The security interest based on the index value in effect 45 days Percentage Rate would be disclosed under § 226.6(c) or before the change date, creditors may use * * * * * § 226.18(m).*^ See the commentary to ►any*^ [the] index value in effect ►during 14(c) Annual percentage rate for periodic §226.(4)(b) (7) and (8).) the 45 day period-^ [not more than 45 days] statements. * * * * * before consummation in calculating a * * * * * composite annual percentage rate. 3. In supplement I to part 226, under ►10. Transactions at end of billing cycle. ► ii.*^ The effect of the multiple rates section 226.6—Initial Disclosure The annual percentage rate reflects must also be reflected in the calculation and Statement, under 6(b) Other charges., transactions and charges imposed during the disclosure of the finance charge, total of paragraph l.v. would be revised to read billing cycle. However, a transaction that payments, and payment schedule. as follows: occurs at the end of a billing cycle may be ► iii.-^ If a loan contains a rate or payment * * * * * impracticable to post until the following cap that would prevent the initial rate or cycle, such as a cash advance that occurs on payment, at the time of the first adjustment, Subpart B—Open-End Credit the last day of a billing cycle. The transaction from changing to the rate determined by the * * * * * is posted to the account in the following index or formula at consummation, the effect cycle. In this case, the annual percentage rate of that rate or payment cap should be Section 226.6—Initial Disclosure Statement shall be calculate as follows for the billing reflected in the disclosures. * * * * * cycle in which the transaction and charges ► iv.-^ Because these transactions involve 6(b) Other charges. are posted: irregular payment amounts, an annual ♦ 4. In supplement I to part 226, under Section 226.12—Special Credit Card Provisions, under 12(c)(2) Adverse credit reports prohibited., new paragraph 2. would be added to read as follows: Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules percentage rate tolerance of V* of 1 percent applies, in accordance with § 226.22(a)(3) of the regulation. ► v.-^ Examples of discounted variablerate transactions include: ► A .-* A 30-year loan for $100,000 with no prepaid finance charges and rates determined by the Treasury bill rate plus 2 percent. Rate and payment adjustments are made annually. Although the Treasury bill rate at the time of consummation is 10 percent, the creditor sets the interest rate for one year at 9 percent, instead of 12 percent according to the formula. The disclosures should reflect a composite annual percentage rate of 11.63 percent based on 9 percent for one year and 12 percent for 29 years. Reflecting those two rate levels, the payment schedule should show 12 payments of $804.62 and 348 payments of $1,025.31. The finance charge should be $266,463.32 and the total of payments $366,463.32. Same loan as above, except with a 2 percent rate cap on periodic adjustments. The disclosures should reflect a composite annual percentage rate of 11.53 percent based on 9 percent for the first year, 11 percent for the second year, and 12 percent for the remaining 28 years. Reflecting those three rate levels, the payment schedule should show 12 payments of $804.62,12 payments of $950.09, and 336 payments of $1,024.34. The finance charge should be $265,234.76 and the total of payments $365,234.76. ► C.-^ Same loan as above, except with a 7V.2 percent cap on payment adjustments. The disclosures should reflect a composite annual percentage rate of 11.64 percent, based on 9 percent for one year and 12 percent for 29 years. Because of the payment cap, five levels of payments should be reflected. The payment schedule should show 12 payments of $804.62, 12 payments of $864.97,12 payments of $929.84,12 payments of $999.58, and 312 payments of $1,070.04. The finance charge should be $277,040.60, and the total of payments $377,040.60. ► D .-^ This paragraph does not apply to variable-rate loans in which the initial interest rate is set according to the index or formula used for later adjustments but is not set at the value of the index or formula at consummation. For example, if a creditor commits to an initial rate based on the formula on a date prior to consummation, but the index has moved during the period between that time and consummation, a creditor should base its disclosures on the initial rate. * * * * * ►18. Pawn Transactions. For a transaction in which a consumer pledges or sells an item to a creditor in return for a sum of money, and retains the right to redeem the item for a greater sum (the redemption price) within a specified period of time: i. The amount financed is the initial sum paid to the consumer. ii. The finance charge is the difference between the initial sum paid to the consumer and the redemption price. iii. The term of the transaction, for calculating the annual percentage rate, is the 62769 specified period of time agreed to by the creditor and the consumer.-^ * * * * * one year, the disclosures required under § 226.19(b) also must be given at that time. * * * * * 7. In Supplement I to Part 226, under Section 226.18—Content of Disclosures, under Paragraph 18(c)(l)(iii)., a new paragraph 2. would be added to read as follows: 9. In Supplement I to Part 226, a new Subpart E—Special Rules for Certain Home Mortgage Transactions would be added as follows: * * * * * Section 226.18—Content o f Disclosures * * * * * Paragra ph 18(c)(l)(iii). * * * * * ►2. Creditor-imposed charges added to amounts paid to others. A creditor that offers an item for sale in both cash and credit transactions sometimes adds an amount (often referred to as an “upcharge”) to a fee charged to a consumer by a third party for a service (such as for a maintenance or service contract) that is payable in an equal amount in both types of transactions, and retains that amount. At its option, the creditor may list the total charge (including the portion retained by it) as an amount paid to others, or it may choose to reflect the amounts in the manner in which they were actually paid to or retained by the appropriate parties."^ * * * * * 8. In Supplement I to Part 226, under Section 226.20 Subsequent Disclosure Requirements, under Paragraph 20(a) Refinancings., paragraph 3. would be revised to read as follows: * * * * * Section 226.20—Subsequent Disclosure Requirements Paragraph 20(a) Refinancings. * * * * * 3. Variable-rate. ►i."^ If a variable-rate feature was properly disclosed under the regulation, a rate change in accord with those disclosures is not a refinancing. ►For example, no new disclosures are required when the variablerate feature is invoked on a renewable balloon-payment mortgage that was previously disclosed as a variable-rate transaction.-^ [For example, a renewable balloon-payment mortgage that was disclosed as a variable-rate transaction is not subject to new disclosure requirements when the variable-rate feature is invoked. However, even] ►ii. Even-^ if it is not accomplished by the cancellation of the old obligation and substitution of a new one, a new transaction subject to new disclosures results if the creditor either: ►A."^ Increases the rate based on a variable-rate feature that was not previously disclosed, or ►B."^ Adds a variable-rate feature to the obligation. ►A creditor does not add a variable-rate feature by changing the index of a variable-rate transaction or substituting a new index for one that no longer exists. iii."^ If either of ► the above-^ [these] two events occur in a transaction secured by a principal dwelling with a term longer than * * * * * ►Subpart E—Special Rules for Certain Home Mortgage Transactions Section 226.31—General Rules 31(c) Timing of disclosure. Paragraph 31(c)(1) Disclosures for certain closed-end home mortgages. 1. Furnishing disclosures. Disclosures are considered furnished when received by the consumer. 2. Pre-consummation waiting period. A creditor must furnish the special disclosures at least three business days prior to consummation. For purposes of § 226.32, “business day” means every calendar day except Sundays and federal legal holidays. For example, if disclosures are provided on Friday, consummation could occur any time on Tuesday, the third business day following receipt of disclosures. Paragraph 31(c)(l)(i) Change in terms. 1. Redisclosure required. Creditors must provide new disclosures if the regular payment or any other disclosure required by § 226.32(c) becomes inaccurate. Paragraph 3l(c)(l)(ii) Telephone disclosures. 1. Telephone disclosures. Disclosures by telephone must be furnished at least three calendar days prior to consummation. Paragraph 31(c)(l)(iii) Consumer’s waiver of waiting period before consummation. 1. Modification or waiver. A consumer may modify or waive the right to the three-day waiting period only after receiving the disclosures required by § 226.32 and only if the circumstances meet the criteria for establishing a bona fide personal financial emergency in § 226.23(e). Whether these criteria are met are determined by the facts surrounding individual situations. The impending sale of the consumer’s home at foreclosure is one example of a bona fide personal financial emergency. Each consumer entitled to the three-day waiting period must sign a written statement for the waiver to be effective. Paragraph 31(c)(2) Disclosures for reverse mortgages. 1. Business days. For purposes of providing reverse mortgage disclosures, “business day” means a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions. 2. Open-end plans. Disclosures for openend reverse mortgages must be provided three business days before the first transaction under the plan (see § 226.5(b)(1)). 31(d) Basis of disclosures and use of estimates. 1. Redisclosure. When a disclosure required by § 226.32 is based on and labeled as an estimate and becomes inaccurate due to a change in terms that occurs before consummation, new disclosures must be provided. 62770 Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules Section 226.32—Requirements for Certain Closed-End Home Mortgages 32(a) Coverage. Paragraph 32(a)(l)(i). 1. Application date. An application is deemed received when it reaches the creditor in any of the ways applications are normally transmitted. (See § 226.19(a).) For example, if a borrower applies for a 10-year loan on September 30 and the creditor counteroffers with a 7-year loan on October 10, the creditor must measure the annual percentage rate against the appropriate Treasury security yield as of August 15. An application transmitted through an intermediary agent or broker is received when it reaches the creditor, rather than when it reaches the agent or broker. 2. When fifteenth not a business day. If the 15th day of the month immediately preceding the application date is not a business day, the creditor must use the yield as of the business day immediately preceding the 15 th. 3. Calculating annual percentage rates for variable-rate loans and discount loans. Creditors must use the rules set out in the commentary to § 226.17(c)(1) in calculating the annual percentage rate for variable-rate loans (assume the rate in effect at the time of disclosure remains unchanged) and for discount, premium, and stepped-rate transactions (which must reflect composite annual percentage rates). 4. Treasury securities. To determine the yield on a Treasury security for the annual percentage rate test, creditors may use the Board’s Selected Interest Rates (statistical release H-15) or the actual auction results. Treasury auctions are held at regular intervals for the different types of securities. These figures are published by major financial and metropolitan newspapers, and are also available from Federal Reserve Banks. Creditors must use the yield on the security that has the nearest maturity at issuance to the loan’s maturity. For example, if a creditor must compare the annual percentage rate to Treasury securities with either seven-year or ten-year maturities, the annual percentage rate for an eight-year loan is compared with securities that have a seven-year maturity; the annual percentage rate for a nine-year loan is compared with securities that have a ten-year maturity. If the loan maturity is exactly halfway between, the annual percentage rate is compared with the Treasury security that has the lower yield. For example, if the loan has a maturity of 20 years and comparable securities have maturities of 10 years with a yield of 6.501 percent and 30 years with a yield of 6.906 percent, the annual percentage rate is compared with 10 percentage points over the yield of 6.501 percent, the lower of the two yields. Paragraph 32(a)(1)(H). 1. Total loan amount. For purposes of the “points and fees” test, the total loan amount is calculated by taking the amount financed, as determined according to § 226.18(b), and deducting any cost listed in § 226.32(b)(l)(iii) that is both included as points and fees under § 226.32(b)(1) and financed by the creditor. For example, if a consumer borrows $10,000, finances a $300 fee for a creditor-conducted fully amortize the amount owed. If the loan appraisal, and pays $400 in points at closing, the amount financed according to § 226.18(b) has two payment streams, the regular is $9,900 ($10,000 plus the $300 appraisal fee payment for each must be disclosed. 2. Discount and premium rates. In that is financed by the creditor, less $400 in disclosing the regular payment, creditors may prepaid finance charges). The $300 appraisal rely on the rules set forth in § 226.18(g). In fee paid to the creditor is added to other discounted or premium variable rate points and fees under § 226.32(b)(l)(iii). It is transactions where the creditor sets the deducted from the amount financed under initial interest rate and later rate adjustments § 226.18(b) ($9,900) to derive a total loan are determined by an index or formula, the amount of $9,600. If the $300 appraisal fee is paid in cash at closing, the $300 is creditor must disclose both the payment included in the points and fees calculation. based on the discount or premium and the However, because it is not financed by the payment that will be in effect thereafter. creditor, the $300 fee is not part of the Additional explanatory material which does amount financed under § 226.18(b) ($10,000, not detract from the required disclosures may in this case). The total loan amount is $9,600 accompany the disclosed amounts. For example, if a monthly payment is $250 for ($10,000, less $400 in prepaid finance charges). the first six months and then increases based 32(b) Definitions. on an index and margin, the creditor could use language such as the following: “Your Paragraph 32(b)(l)(i). 1. General. Items defined as finance regular monthly payment will be $250 for six months. After six months your regular charges under § 226.4(a) and 226.(4)(b) are monthly payment will be based on an index included under this paragraph as a and margin, which currently would make component of the total “points and fees.” Items excluded from the finance charge your payment $350. Your actual payment at that time may be higher or lower." under other provisions of § 226.4 are not Paragraph 32(c)(4) Variable-rate. included in the calculation under this paragraph 32(b)(l)(i), although the fee may be 1. Calculating “worst-case” payment included in “points and fees” under example. Creditors may rely on instructions in § 226.19(b)(2)(x) for calculating the paragraphs 32(b)(l)(ii) and 32(b)(l)(iii). Paragraph 32(b)(1)(H). maximum possible increases in rates in the 1. Mortgage broker fees. In determining shortest possible timeframe, based on the “points and fees” for purposes of this face amount of the note (not the hypothetical section, compensation paid by a consumer to loan amount of $10,000 required by § 226.19(b)(2)(x)). The creditor must provide a mortgage broker (directly or through the creditor for delivery to the broker) is a maximum payment for each payment included in the calculation whether or not stream, where a payment schedule provides the amount is disclosed as a finance charge. for more than one payment stream and more than one maximum payment amount is Mortgage broker fees that are not paid by the consumer are not infcluded. Broker fees possible. already included in the calculation as finance 32(d) Limitations. charges under § 226.32(b)(l)(i) need not be Paragraph 32(d)(l)(i) Balloon payment. counted again under § 226.32(b)(l)(ii). 1. Regular periodic payments. The 2. Example. Section 226.32(b)(l)(iii) repayment schedule for a § 226.32 mortgage defines “points and fees” to include all items loan with a term of less than five years must listed in § 226.4(c)(7), other than amounts fully amortize the outstanding principal balance through “regular periodic held for future payment of taxes. An item listed in § 226.4(c)(7) may be excluded from payments.” A payment is a “regular periodic the “points and fees” calculation, however, payment” if it is not more than twice the if the charge is reasonable, the creditor amount of other payments. receives no direct or indirect compensation Paragraph 32(d)(2) Negative amortization. from the charge, and the charge is not paid 1. Negative amortization. The prohibition to an affiliate of the creditor. For example, a against negative amortization in a mortgage reasonable fee paid by the consumer to an covered by § 226.32 does not preclude independent, third-party appraiser may be increases in the principal balance that result excluded from the points and fees calculation from events unrelated to the payment (assuming no compensation is paid to the schedule, such as when a consumer fails to creditor). A fee paid by the consumer for an obtain property insurance and the creditor appraisal performed by the creditor must be purchases and adds the premium to the included in the calculation, even though the consumer’s principal balance. fee may be excluded from the finance charge Paragraph 32(d)(4) Increased interest rate. if it is bona fide and reasonable in amount. 1. Variable-rate transactions. The 32(c) Disclosures. limitation on interest rate increases does not 1. Format. The disclosures must be clear apply to rate increases resulting from index and conspicuous but need not be in any changes in a variable-rate transaction, even if particular type size or typeface, nor the increase occurs after default by the presented in any particular manner. For consumer. example, the disclosures need not be a part Paragraph 32(d)(5) Rebates. of the mortgage. 1. Calculation o f refunds. The limitation Paragraph 32(c)(3) Regular payment. applies only to refunds of interest and not to 1. General. The regular payment is the any other charges that are considered finance amount due from the borrower at regular charges under § 226.4 (for example, points intervals, such as monthly, bimonthly, and fees paid at closing). The calculation of quarterly, or annually. There must be at least the refund of interest includes odd-days interest, whether paid at or after two payments, and the payments must be in consummation. an amount and at such intervals that they Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules under § 226.32(a)(1), the transaction is subject to all the requirements of § 226.32, including the limitations concerning balloon payments and negative amortization. Paragraph 33(a)(2). 1. Default. Default is not defined by the regulation, but rather by the legal obligation between the parties and state or other law. 2. Definite term or maturity date. To meet the definition of a reverse mortgage transaction, a creditor cannot require any principal, interest, or shared appreciation or equity to be due and payable (other than in the case of default) until after the consumer’s death, transfer of the dwelling, or the consumer ceases to occupy the dwelling as a principal dwelling. Some state laws require legal obligations secured by a mortgage to specify a definite maturity date or term of repayment in the instrument. Such a provision in an obligation does not violate the definition of a reverse mortgage transaction if the maturity date or term or repayment required by state law would in no case operate to cause maturity prior to the occurrence of any of the events recognized in the regulation. For example, a provision that allows a reverse mortgage loan to become due and payable only after the consumer’s death, transfer, or cessation of occupancy, or after a specified term, but which automatically extends the term for consecutive periods as long as none of the other events has occurred would meet the definition of a reverse mortgage transaction. 33(c) Projected total cost of credit. Paragraph 33(c)(1) Costs to consumer. 1. Costs and charges to consumer—relation to finance charge. All costs and charges to the consumer that are incurred in a reverse mortgage transaction are included in the projected total cost of credit, and thus in the total annual loan cost rates, whether or not the cost or charge is a finance charge under § 226.4 of the regulation. 2. Annuity costs. As part of the credit transaction, some creditors require or permit a consumer to purchase an annuity that immediately—or at some future time— supplements or replaces the creditor’s payments. The amount paid by the consumer for the annuity is a cost to the consumer under this section, regardless of whether the annuity is purchased through the creditor or a third party, or whether the purchase is mandatory or voluntary. 2. Fomiai While the notice of 3. Disposition costs excluded. Disposition potential liability need not be in any costs incurred in connection with the sale or particular format, the notice must be transfer of the property subject to the reverse prominent. Placing it on the face of the mortgage are not included in the costs to the note, such as with a stamp, is one means consumer under this paragraph. (However, see the definition of Valn in appendix K to of satisfying the prominence the regulation to determine the effect certain requirement. disposition costs may have on the total Section 226.33—Requirements for Reverse annual loan cost rates.) Mortgages Paragraph 33(c)(2) Payments to consumer. 1. Payments upon a specified event. The 33(a) Definition. 1. Nonrecourse transaction. A nonrecourseprojected total cost of credit should not reflect contingent payments in which a credit reverse mortgage transaction limits the to the outstanding loan balance or a payment homeowner’s liability to the proceeds of the to the consumer’s estate is made upon the sale of the home (or any lesser amount occurrence of an event (for example, a “death specified in the credit obligation). If a transaction structured as a closed-end reverse benefit” payable if the consumer’s death occurs within a certain period of time). Thus, mortgage transaction allows recourse against the consumer, and the annual percentage rate the table of total annual loan cost rates required under § 226.33(b)(2) would not or the points and fees exceed those specified Paragraph 32(d)(6) Prepayment penalties. 1. State law. If using the actuarial method defined by applicable state law results in a refund that is greater than the refund calculated by using the method described in section 933(d) of the Housing and Community Development Act of 1992, creditors must use the state law definition in determining if a refund is a prepayment penalty under § 226.32(d)(6). 32(d)(7) Prepayment penalty exception. Paragraph 32(d)(7)(iii). 1. Calculating debt-to-income ratio. “Debt” does not include amounts paid by the borrower in cash at closing or amounts from the loan proceeds that directly repay an existing debt. Creditors may consider combined debt-to-income ratios for transactions involving joint applicants. 2. Verification. Verification of employment satisfies the requirement for payment records for employment income. 32(e) Prohibited acts and practices. Paragraph 32(e)(1) Repayment ability. 1. Determining repayment ability. The information provided to the creditor in connection with § 226.32(d)(7) may be used to show that the creditor considered the consumer’s income and obligations before extending the credit. Any expected income can be considered by the creditor, except equity income that the consumer would obtain through the foreclosure of a mortgage covered by § 226.32. For example, a creditor may use information about income other than regular salary or wages such as gifts, expected retirement payments, or income from housecleaning or childcare. The creditor also may use unverified income, so long as the creditor has a reasonable basis for believing that the income exists. Paragraph 32(e)(2) Home-Improvement Contracts. Paragraph 32(e)(2)(i). 1. Joint payees. If a creditor pays a contractor with an instrument jointly payable to the contractor and the consumer, the instrument must name as payee each consumer who is primarily obligated on the note. Paragraph 32(e)(3) Notice to Assignee. 1. Subsequent sellers or assignors. Any person, whether or not the original creditor, that sells or assigns a mortgage subject to this section must furnish the notice of potential liability to the purchaser or assignee. 62771 reflect such payments. At its option, however, a creditor may put an asterisk, footnote, or similar type of notation in the table next to the applicable total annual loan cost rate, and state in the body of the note, apart from the table, the assumption upon which the total annual loan cost is made and any different rate that would apply if the contingent benefit were paid. Paragraph 33(c)(3) Additional creditor compensation. 1. Shared appreciation or equity. Any shared appreciation or equity that the creditor is entitled to receive pursuant to the legal obligation must be included in the total cost of a reverse mortgage loan. For example, if a creditor agrees to a reduced interest rate on the transaction in exchange for a portion of the appreciation or equity that may be realized when the dwelling is sold, that portion is included in the projected total cost of credit. Paragraph 33(c)(4) Limitations on consumer liability. 1. In general. Creditors must include any limitation on the consumer’s liability (such as a nonrecourse limit or an equity conservation agreement) in the projected total cost of credit. These limits and agreements protect a portion of the equity in the dwelling for the consumer or the consumer’s estate. For example, the following contractual provisions are limitations on the consumer’s liability that must be included in the projected total cost of credit: 1. A limit on the consumer’s liability to a certain percentage of the projected value of the home. ii. A limit on the consumer’s liability to the net proceeds from the sale of the property subject to the reverse mortgage. 2. Uniform assumption for “net proceeds” recourse limitations. If the legal obligation between the parties does not specify a percentage for the “net proceeds” liability of the consumer, for purposes of the disclosures required by § 226.33, a creditor must assume that the costs associated with selling the property will equal 7 percent of the projected sale price (see the definition of the Val„ symbol under appendix K(b)(6)).-^ ★ * * * * 10. In Supplement I to Part 226, a new Appendix K—Total Annual Loan Cost Rate Computations for Reverse Mortgage Transactions and a new Appendix L— Assumed Loan Periods for Computations of Total Annual Loan Cost Rates would be added to read as follows: * * * * * ►Appendix K—Total Annual Loan Cost Rate Computations for Reverse Mortgage Transactions 1. General. The calculation of total annual loan cost rates under appendix K is based on the principles set and die estimation or “iteration” procedure used to compute annual percentage rates under appendix J. Rather than restate this iteration process in full, the regulation cross-references the procedures found in appendix J. In other aspects the appendix reflects the special 62772 Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules nature of reverse mortgage transactions. Special definitions and instructions are included where appropriate. (b) Instructions and equations for the total annual loan cost rate. (b)(5) Number of unit-periods between two given dates. 1. Assumption as to when transaction begins. The computation of the total annual loan cost rate is based on the assumption that the reverse mortgage transaction begins on the first day of the month in which consummation is estimated to occur. Therefore, fractional unit-periods (as used under appendix J for calculating annual percentage rates) are not used. (b)(9) Assumption for discretionary cash advances. 1. Amount of credit. Creditors should compute the total annual loan cost rates for transactions involving discretionary cash advances by assuming that 50 percent of the initial amount of the credit available under the transaction is advanced at closing or, in an open-end transaction, when the consumer becomes obligated under the plan. (For the purposes of this assumption, the initial amount of the credit is the principle loan amount less any costs to the consumer under section 226.33(c)(1).) (b)(10) Assumption for variable-rate reverse mortgage transactions. 1. Initial discount or premium rate. Where a variable-rate reverse mortgage transaction includes an initial discount or premium rate, the creditor should apply the same rules for calculating the total annual loan cost rate as are applied when calculating the annual percentage rate for a loan with an initial discount or premium rate (see the commentary to § 226.17(c)). (d) Reverse mortgage model form and sample form. (d)(2) Sample form. 1. General. The “clear and conspicuous” standard for reverse mortgage disclosures does not require disclosures to be printed in any particular type size. Disclosures may be made on more than one page, and use both the front and the reverse sides, so long as the pages constitute an integrated document. Appendix L—Assumed Loan Periods for Computations of Total Annual Loan Cost Rates 1. General. The life expectancy figures used in this appendix are those found in the U.S. Decennial Life Tables for women, as rounded to the nearest whole year and as published by the U. S. Department of Health and Human Services. The figures contained in this appendix must be used by creditors for all consumers (men and women). This appendix will be revised periodically by the Board to incorporate revisions to the figures made in the Decennial Tables.*^ By order of the Board of Governors of the Federal Reserve System, acting through the Secretary of the Board under delegated authority, December 1,1995. Jennifer J. Johnson, Deputy Secretary of the Board. IFR Doc. 95-29711 Filed 12-6-95; 8:45 am] BILLING CODE 6210-01-P
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