The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BANK OF NEW YORK C ircu la r N o . 10837 [ M arch 4 , 1 9 9 6 REGULATION Z — TRUTH IN LENDING — Adequacy of Protection for Consumers Seeking Home-Equity Lines of Credit Comments Requested by April 1 — Annual Adjustment of Dollar Amount that Triggers Certain Requirements of Regulation Z To All Depository Institutions, and Others Concerned, in the Second Federal Resen’e District: Home-Equity Lines of Credit Following is the text of a statem ent issued by the Board o f Governors o f the Federal Reserve System: The Federal Reserve Board is requesting public comment on whether the rules under Truth in Lending provide adequate protection for consumers seeking home-equity lines of credit. Comment should be received by April 1. The comments received will be used by the Board in preparing a report to Congress on this issue as required by the Riegle Community Development and Regulatory Improvement Act of 1994. Printed on the following pages is the text of the B oard’s official notice in this matter, as pub lished in the F ed era l R e g is te r of January 30, 1996. Com m ents thereon should be subm itted by April 1, 1996 and may be sent to the Board, as specified in the notice, or to our Com pliance Exam inations Departm ent. Annual Adjustment Following is the text of a statem ent issued by the Board of Governors o f the Federal Reserve System: The Federal Reserve Board has published an adjustment of the dollar amount that triggers addi tional disclosure requirements under Truth in Lending for mortgage loans that bear fees above a certain amount. The Home Ownership and Equity Protection Act of 1994 bars credit terms such as balloon pay ments and requires additional disclosures when total points and fees payable by the consumer exceed $400 or 8 percent of the total loan amount, whichever is larger. The Board must adjust this amount each year based on the percentage change in the Consumer Price Index as of June 1. The Board has adjusted the dollar amount from $400 to $412. Printed on the last page o f this circular is the text of the B oard’s official notice in this matter, as published in the January 31 F e d e ra l R e g is te r . Q uestions thereon m ay be directed to our C om pliance Exam ination D epartm ent (Tel. No. 212-720-5914). W i l l ia m J. M cD onough, President. 2968 Federal Register / Vol. 61, No. 20 / Tuesday, January 30, 1996 / Proposed Rules to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551. Comments also may be delivered to Room B-2222 of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard station in the Eccles Building courtyard on 20th Street NW. (between Constitution Avenue and C Street) at any time. Comments may be inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board’s rules regarding the availability of information. 1988, require creditors to give consumers extensive disclosures and an educational brochure for home-equity plans at the time an application is provided. For example, creditors must provide information about payment terms, fees imposed under the plans, and, for variable-rate plans, information about the index used to determine the rate and a fifteen-year history of changes in the index values. In addition, the law imposes certain substantive limitations on home-equity plans, such as limiting the right of creditors to terminate a plan and accelerate an outstanding balance or to change the terms of a plan after it has been opened. FOR FURTHER INFORMATION CONTACT: The Board’s Regulation Z (12 CFR Obrea Poindexter, Staff Attorney, part 226) implements the Truth in Division of Consumer and Community Lending Act. Regulation Z requirements Affairs, Board of Governors of the for home-equity lines of credit closely Federal Reserve System, at (202) 452mirror the statutory requirements. As 3667 or 452-2412. For users of Telecommunications Device for the Deaf the statute sets forth specific requirements that are restrictive in (TDD), please contact Dorothea many cases, the rules implementing the Thompson at (202) 452-3544. statute are similarly restrictive. SUPPLEMENTARY INFORMATION: Specific rules on home-equity lines of credit are contained in Regulation Z, I. Background §§226.5b, 226.6(e), 226.9(c)(3), and The Home Ownership and Equity 226.16(d) and its accompanying Protection Act (HOEPA) amendments to commentary. Requirements for homethe Truth in Lending Act, contained in equity lines of credit apply to all openthe Riegle Community Development and end credit plans secured by a FEDERAL RESERVE SYSTEM Regulatory Improvement Act of 1994 consumer’s dwelling. The rules require (RCDRIA) require special disclosures creditors offering home-equity plans 12C FR Part 226 and impose substantive limitations on (and third-parties in some instances) to certain closed-end home equity loans [Regulation Z; Docket No. R-0913] give specific disclosures about costs and with rates or fees above a certain terms and limits how creditors may Truth in Lending percentage or amount. The requirements structure programs. and prohibitions contained in the AGENCY: Board of Governors of the Format and Timing o f Disclosures HOEPA, which became effective in Federal Reserve System. October 1995, do not apply to open-end In most cases, at the time a consumer ACTION: Request for comments. home-secured lines of credit. The is provided w ith an application for a legislative history notes that home-secured line of credit, disclosures SUMMARY: The Board is soliciting congressional hearings on home-equity must be given. These disclosures must comment on whether the Truth in lending practices revealed little be in writing, grouped together, and Lending Act cost disclosure and other evidence of abusive practices in the segregated from all unrelated rules for open-end home-secured lines open-end home-equity credit market. information. Each consumer must also of credit provide adequate consumer The legislative history also states that, if be given an educational pamphlet protections. The Riegle Community the market changes or if the Board Finds prepared by the Board entitled “When Development and Regulatory that open-end credit plans are being Your Home is On the Line: What You Improvement Act of 1994 directs the Should Know About Home Equity Lines Board to submit a report to the Congress used to circumvent the HOEPA, the Board has the authority to address of Credit,” or a similar substitute. regarding this matter. Under present abuses under section 152(d) of the Program-specific initial disclosures law, creditors offering open-end homemust be given in writing before the first equity lending programs have to provide HOEPA. In addition, the RCDRIA directs the transaction is made under the plan. detailed disclosures at the time a Board to conduct a study and submit a consumer applies for a line of credit. Content o f Disclosures report to the Congress, including The law also imposes specific Creditors offering home-equity plans recommendations for legislation, on substantive limitations on how these must provide information to consumers whether existing rules for open-end programs may be structured; however that is required under section 226.5b of home-equity lending programs provide they are not subject to the type of the regulation. This includes, but is not consumers obtaining home equity lines disclosure and restrictions imposed by limited to, the following: of credit with adequate protections. the Home Ownership and Equity Act of (1) The payment terms, including the II. Current Rules for Home-Equity Lines length of the draw and any repayment 1994 for closed-end credit. of Credit DATES: Comments must be received on period, an explanation of how the or before April 1, 1996. The Home Equity Loan Consumer minimum periodic payment will be Protection Act amendments to the Truth determined and the timing of payments, ADDRESSES: Comments should refer to and an example based on a $10,000 in Lending Act, enacted in November Docket No. R-0913, and may be mailed Printed in N e w Y ork, fro m F ederal R egister; Internet ad d ress h ttp ://w w w .a c c e s s .g p o .g o v / Federal Register / Vol. 61, No. 20 / Tuesday, January 30, 1996 / Proposed Rules * * y outstanding balance and a recent annual percentage rate (APR):1 (2) The APR; (3) Fees imposed by the creditor and third parties; (4) A statement that negative amortization may occur and that as a result a consumer’s equity in a home may decrease; and (5) Several statements, including a statement that loss of the home could occur in the event of default. Subsequent Disclosures r * ♦ Subject to certain limitations on changes in terms, creditors are generally required to send the consumer a fifteenday advance notice if a term on the plan is changed. In addition, a notice must also be sent if additional extensions of credit are prohibited or if the credit limit is reduced; this notice must be sent no later than three business days after the action is taken. 12 CFR 226.9(c) Limitations on Home-equity Plans X > Regulation Z prescribes substantive limitations on the changes that a creditor can make in the annual percentage rate, termination of a plan, and any other change in the credit terms that were initially disclosed. For example, a creditor cannot terminate a plan and demand repayment of the entire outstanding balance unless the consumer has engaged in fraud or misrepresentation, failed to meet the repayment terms, or adversely affected the creditor’s security by action or inaction. A creditor generally cannot change a term unless the change was provided for in the initial agreement, the consumer agrees to the change in writing, or the change is insignificant or “unequivocally beneficial” to the 2969 (2) Loan fees that are a percentage of the credit limit, along with an estimate of other plan fees; and (3) The maximum APR that could be imposed in a variable rate plan. If a minimum payment for the homeequity plan is stated, the advertisement must also state if a balloon payment will result. For a variable-rate plan, if the advertisement states a rate other than one based on the contract’s index and margin, the advertisement must also state how long the introductory rate will be in effect. The introductory rate and the fully-indexed rate must be disclosed with equal prominence. In addition, creditors cannot advertise home-equity plans as “free money” (or using a similar term) and cannot discuss the tax consequences of interest deductions in a misleading way. 12 CFR 226.16(d) III. Request for Comments The Board requests comment on whether the existing home-equity lending rules provide adequate protections for consumers and whether any statutory or regulatory changes are warranted to ensure adequate disclosure and other consumer protections in connection with open-end home-equity lines of credit. The Board will submit its report to the Congress in early fall 1996, based on the comments of interested parties and its own analysis. By order of the Board of Governors of the Federal Reserve System, January 24, 1996. William W. Wiles, Secretary of the Board. [FR Doc. 96-1651 Filed 1-29-96; 8:45 am] BILLING CODE 6 21 0-0 1-P consumer throughout the remainder of the plan; and cannot apply a new index and margin unless the original index becomes unavailable. 12 CFR 226.5b(f) Advertising - Creditors generally trigger additional disclosures, in advertisements, if they advertise account-opening disclosures relating to finance charges and other significant charges or repayment terms for a plan. If a home equity plan advertisement contains a trigger term, creditors must also state the following: (1) The periodic rate used to compute the finance charge (expressed as an APR); 1 T h e e x a m p le m u st s h o w th e m in im u m p e r io d ic p a y m e n t a n d th e tim e it w o u ld tak e to re p a y th e $ 1 0 ,0 0 0 b a la n ce if th e c o n s u m e r m a d e o n ly th o se p a y m e n ts a n d o b ta in e d n o a d d itio n a l cr ed it e x te n s io n s . at Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / Rules and Regulations 3177 1 SUPPLEMENTARY INFORMATION: Background The Truth in Lending Act (TILA; 15 U.S.C. 1601 — 1666j) requires creditors to disclose credit terms and the cost of consumer credit as an annual percentage rate. The act requires additional disclosures for loans secured by a consumer’s home, and permits consumers to cancel certain transactions that involve their principal dwelling. The TILA is implemented by the Board’s Regulation Z (12 CFR part 226). On March 24, 1995, the Board published amendments to Regulation Z implementing the Home Ownership and Equity Protection Act of 1994 (HOEPA), contained in the Riegle Community Development and Regulatory Improvement Act of 1994, Public Law 103-325, 108 Stat. 2160 (60 FR 15463). These amendments, which became effective on October 1, 1995, are ■ » contained in § 226.32 of the regulation and impose new disclosure requirements and substantive limitations on certain closed-end mortgage loans bearing rates or fees FEDERAL RESERVE SYSTEM above a certain percentage or amount. Creditors are required to comply with 12 CFR Part 226 the rules in § 226.32 if the total points [Regulation Z; Docket No. R -0 9 1 5 ] and fees payable by the consumer at or before loan consummation exceed the Truth in Lending greater of $400 or 8 percent of the total loan amount. The TILA and AGENCY: Board of Governors of the § 226.32(a)(l)(ii) of Regulation Z provide Federal Reserve System. that the $400 figure shall be adjusted ACTION: Notice of adjustment of dollar annually on January 1 by the annual amount. percentage change in the Consumer SUMMARY: The Board is publishing an Price Index (CPI) that was reported on the preceding June 1. See 15 U.S.C. adjustment to the dollar amount that 1602(aa). triggers certain requirements of Regulation Z (Truth in Lending) for The Bureau of Labor Statistics mortgages bearing fees above a certain publishes consumer-based indices amount. The Home Ownership and monthly, but does not "report” a CPI Equity Protection Act of 1994 sets forth change on June 1; adjustments are rules for creditors offering homereported in the middle of each month. secured loans with total points and fees The CPI-U is based on all urban payable by the consumer at or before consumers and represents loan consummation that exceed the approximately 80 percent of the U.S. greater of $400 or 8 percent of the total population; the CPI-W is based on loan amount. The Board is required to urban wage earners and clerical workers annually adjust the $400 amount based and represents about 30 percent of the on the annual percentage change in the population. The Board believes the Consumer Price Index as reported on index representing the broader June 1. The Board has adjusted the population of U. S. consumers—the dollar amount from $400 to $412. CPI-U—is the appropriate index to use in any adjustment to the $400 dollar EFFECTIVE DATE: January 1, 1996. figure. FOR FURTHER INFORMATION CONTACT: The adjustment to the $400 dollar Michael Hentrel, Staff Attorney, figure reflects the adjustment reported Division of Consumer and Community on May 15 (the rate "in effect” on June Affairs, Board of Governors of the 1) which states the percentage increase Federal Reserve System, at (202) 452from April 1994 to April 1995. During 3667. For the users of Telecommunications Device for the Deaf that period the CPI-U increased by 3.1 percent which would cause an only, please contact Dorothea adjustment of the $400 to $412.40. The Thompson at (202) 452-3544. Board is rounding that number to whole dollars for ease of compliance. •« Adjustment Effective January 1, 1996, under § 226.32(a), a home mortgage loan is covered by §226.32 if the total points and fees payable by the consumer at or before loan consummation exceed the greater of $412 or 8 percent of the total loan amount. The adjustment will be codified in the official staff commentary to Regulation Z. *■ By order of the Board of Governors of the Federal Reserve System, January 25, 1995. William W. Wiles, * Secretary of the Board. ■*» [FR Doc. 96-1859 Filed 1-30-96; 8:45 am] BILLING CODE 6 2 1 0 -0 1 -P f- l t r X *
@FedFRASER